S-11/A 1 g24423a4sv11za.htm S-11/A sv11za
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As filed with the Securities and Exchange Commission on November 3, 2011
Registration No. 333-169535
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 4
to
Form S-11
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
 
Cole Real Estate Income Strategy (Daily NAV), Inc.
(Exact Name of Registrant as Specified in its Governing Instruments)
 
 
 
 
2575 East Camelback Road
Suite 500
Phoenix, AZ 85016
(602) 778-8700
(Address, Including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)
 
 
 
 
D. Kirk McAllaster, Jr.
Cole Real Estate Income Strategy (Daily NAV), Inc.
Executive Vice President and Treasurer
2575 East Camelback Road
Suite 500
Phoenix, AZ 85016
(602) 778-8700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
 
 
 
Copies to:
 
Ettore A. Santucci
Goodwin Procter LLP
Exchange Place
53 State Street
Boston, MA 02109
(617) 570-1000
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  þ
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
 
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission and the applicable state securities commissions is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 3, 2011
PROSPECTUS
 
(COLE LOGO)
Cole Real Estate Income Strategy (Daily NAV), Inc.
Maximum Offering of $4,000,000,000 — Minimum Offering of $10,000,000
 
Cole Real Estate Income Strategy (Daily NAV), Inc. is a newly organized corporation formed to invest primarily in single-tenant necessity commercial properties, which are leased to creditworthy tenants under long-term net leases. By utilizing this conservative and disciplined investment approach, we expect to generate a relatively predictable and stable current stream of income for investors, along with the potential for long-term capital appreciation in the value of our real estate. We intend to qualify as a real estate investment trust, or REIT, for federal income tax purposes, and we are externally managed by our advisor, Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC, an affiliate of our sponsor, Cole Real Estate Investments. Our advisor has engaged a sub-advisor to assist in selecting and managing the component of our portfolio consisting of liquid assets.
 
We intend to offer shares of our common stock on a continuous basis and for an indefinite period of time, by filing a new registration statement before the end of each prior offering, subject to regulatory approval. We will initially offer up to $4,000,000,000 in shares of common stock, consisting of up to $3,500,000,000 in shares in our primary offering and up to $500,000,000 in shares pursuant to our distribution reinvestment plan. Until the release of proceeds from escrow, the per share purchase price for shares of our common stock in our primary offering will be $15.00 per share, an amount that was arbitrarily determined by our board of directors. Thereafter, the per share purchase price will vary from day-to-day and, on each day, will equal the sum of our net asset value, or NAV, divided by the number of shares of our common stock outstanding as of the end of business on such day (NAV per share). Our fund accountant will calculate our NAV per share reflecting several components, including (1) estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate based upon individual appraisal reports provided periodically by an independent valuation expert, (2) the price of liquid assets for which third party market quotes are available, (3) accruals of our daily distributions and (4) estimated accruals of our operating revenues and expenses. Although we do not intend to list our common stock for trading on a stock exchange or other trading market, we have adopted a redemption plan designed to provide our stockholders with limited liquidity on a daily basis for their investment in our shares.
 
We intend to distribute our shares principally through registered investment advisors and broker/dealers that charge their clients a fee for their services (typically referred to as wrap or fee based accounts). We will take purchase orders and hold investors’ funds in escrow until we receive purchase orders for at least $10,000,000 in shares and our board of directors authorizes the release of the escrow funds. Purchase orders for shares of our common stock by our directors, officers and other affiliated persons and entities will be included for purposes of determining whether we have received $10,000,000 in purchase orders. Cole Holdings Corporation, an affiliate of our sponsor and our sole stockholder, has expressed its intent to us to purchase $10,000,000 in shares of our common stock in this offering.
 
This investment involves a high degree of risk. You should purchase these securities only if you can afford a significant decline in, or a complete loss of, the value of your investment. See “Risk Factors” beginning on page 27 for risks to consider before buying our shares, including:
 
•  We are a “blind pool.” We have not identified any assets to be purchased with the net proceeds from this offering and have no operating history.
 
•  There is no public market for our shares of common stock, and our charter does not require us to effect a liquidity event at any point in time in the future.
 
•  Our redemption plan will provide stockholders with the opportunity to redeem their shares on a daily basis, but redemptions will be subject to available liquidity and other potential restrictions.
 
•  We may pay distributions and fund redemptions from sources other than cash flow from operations, including borrowings, proceeds from this offering or asset sales, and we have no limits on the amounts we may pay from such other sources.
 
•  The valuation methodologies used by our independent valuation expert in arriving at the estimates of value of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate (one of the components of our NAV) set forth in individual appraisal reports, each of which are prepared in accordance with valuation guidelines reviewed by the advisor and approved by our board of directors, involve subjective judgments and estimates. These estimated values are then reflected by our fund accountant in the calculation of our NAV. As a result, our NAV may not accurately reflect the actual prices at which our commercial real estate assets, related liabilities and notes receivable secured by real estate could be liquidated on any given day.
 
•  There are substantial conflicts of interest between us and our advisor and its affiliates, including our payment of substantial fees to our advisor and its affiliates.
 
•  This is a “best efforts” offering. If we are not able to raise a substantial amount of capital in the near term, we may have difficulties investing in properties and our ability to achieve our investment objectives could be adversely affected.
 
•  We may suffer from delays in identifying suitable investments, which may adversely impact our results of operations and the value of your investment.
 
•  If we fail to qualify as a REIT for federal income tax purposes and no relief provisions apply, our NAV and cash available for distribution to our stockholders could materially decrease.
 
Neither the Securities and Exchange Commission, any state securities commission, nor the Attorney General of the State of New York has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The use of forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from an investment in this program is not permitted.
 
                         
    Per Share     Total Minimum     Total Maximum(1)  
 
Public Offering Price(2)
  $ 15.00     $ 10,000,000     $ 4,000,000,000  
First Year Underwriting Compensation(3)
  $ 0.15     $ 100,000     $ 20,000,000  
Proceeds to Us, Before Expenses
  $ 14.85     $ 9,900,000     $ 3,980,000,000  
                         
 
 
(1) Includes shares of common stock being offered under our distribution reinvestment plan.
 
(2) The price per share shown was arbitrarily determined by our board and will only apply until funds are released to us from the escrow account. Thereafter, our price per share will vary from day-to-day and will be based on our NAV.
 
(3) Investors will not pay upfront selling commissions in connection with the purchase of our shares of common stock. We will pay our dealer manager an asset-based dealer manager fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.55% of our NAV for such day. At our dealer manager’s discretion it may reallow a portion of the dealer manager fee equal to an amount up to 1/365th of 0.20% of our NAV to participating broker dealers. During our first year after the escrow period, we may use up to 1% of our offering proceeds (not to exceed $2,000,000,000, in total, of offering proceeds and excluding shares issued under our distribution reinvestment plan) along with our cash flows from operations, to pay for the costs of distribution and other underwriting compensation. See “Use of Proceeds,” and “Compensation.”
 
The dealer manager of this offering, Cole Capital Corporation, a member firm of the Financial Industry Regulatory Authority, Inc., or FINRA, is an affiliate of our advisor and will offer the shares on a best efforts basis.
 
The date of this prospectus is          , 2011
 
©Cole Capital Advisors, Inc.


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Suitability Standards
 
An investment in our common stock involves risk and is not suitable for all investors. There is no certainty as to the amount of distributions you may receive, liquidity under our redemption program may not be available at all times and the value of your investment may decline significantly.
 
In consideration of these factors, we have established minimum suitability standards for initial stockholders and subsequent purchasers of shares from our stockholders. These minimum suitability standards require that a purchaser of shares have, excluding the value of a purchaser’s home, furnishings and automobiles, either:
 
  •  a net worth of at least $250,000; or
 
  •  a gross annual income of at least $70,000 and a net worth of at least $70,000.
 
Certain states have established suitability requirements in addition to the minimum standards described above. Shares will be sold to investors in these states only if they meet the additional suitability standards set forth below:
 
Alabama:  Investors must have a liquid net worth of at least ten times their investment in us and similar programs.
 
California:  Investors must have either (i) a net worth of at least $250,000, or (ii) a gross annual income of at least $75,000 and a net worth of at least $75,000. In addition, the investment must not exceed ten percent (10%) of the net worth of the investor.
 
Iowa and Ohio:  Investors may not invest, in the aggregate, more than 10% of their liquid net worth in us and all of our affiliates.
 
Kansas:  It is recommended by the office of the Kansas Securities Commissioner that Kansas investors not invest, in the aggregate, more than 10% of their liquid net worth in this and similar direct participation investments. For these purposes, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.
 
Kentucky, Michigan, Oregon, Pennsylvania and Tennessee:  Investors must have a liquid net worth of at least ten times their investment in us.
 
Maine:  Investors must have either (i) a minimum net worth of at least $250,000, or (ii) an annual gross income of at least $70,000 and a minimum net worth of $70,000. In addition, the investment in us (plus any investments in our affiliates) by an investor must not exceed ten percent (10%) of the net worth of the investor.
 
Nebraska:  Investors must have (excluding the value of their home, furnishings and automobiles) either (i) a minimum net worth of $100,000 and an annual income of $70,000, or (ii) a minimum net worth of $350,000. In addition, the investment in us must not exceed 10% of the investor’s net worth.
 
North Dakota:  Investors must have a liquid net worth of at least ten times their investment in us and our affiliates.
 
Texas:  An investor must have had, during the last tax year, or estimate that the investor will have during the current tax year, (a) a minimum net worth of $250,000 and a minimum annual gross income of $65,000, or (b) a minimum net worth of $500,000. The investor’s maximum investment in this offering shall not exceed 10% of the investor’s liquid net worth.
 
Because the minimum offering of our common stock is less than $400,000,000, Pennsylvania investors are cautioned to evaluate carefully our ability to accomplish fully our stated objectives and to inquire as to the current dollar volume of our subscription proceeds.
 
Texas and Tennessee investors are cautioned to carefully evaluate our ability to fully accomplish our stated objectives and to inquire as to the current dollar volume of our subscription proceeds. Further, we must raise at least $15,000,000 in this offering before we make any offers or sales to our Texas or Tennessee investors.


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Our sponsor and affiliated dealer manager are responsible for determining if investors meet our minimum suitability standards and state specific suitability standards for investing in our common stock. In making this determination, our sponsor and affiliated dealer manager will rely on participating broker-dealers and/or information provided by investors and their advisors. In addition to the minimum suitability standards described above, each participating broker-dealer, authorized representative or any other person placing shares on our behalf, and our sponsor and affiliated dealer manager, are required to make every reasonable effort to determine that the purchase of shares is a suitable and appropriate investment for each investor.
 
It shall be the responsibility of your participating broker-dealer, authorized representative or other person placing shares on our behalf to make this determination, based on a review of the information provided by you, including your age, investment objectives, income, net worth, financial situation and other investments held by you, as well as whether you:
 
  •  meet the minimum income and net worth standards established in your state;
 
  •  can reasonably benefit from an investment in our common stock based on your overall investment objectives and portfolio structure;
 
  •  are able to bear the economic risk of the investment based on your overall financial situation; and
 
  •  have an apparent understanding of:
 
  •  the fundamental risks of an investment in our common stock;
 
  •  the risk that you may lose your entire investment;
 
  •  the limited liquidity of our common stock;
 
  •  the restrictions on transferability of our common stock;
 
  •  the background and qualifications of our advisor and sub-advisor; and
 
  •  the tax, including ERISA, consequences of an investment in our common stock.
 
The income and net worth standards set forth above do not apply to participant-directed purchases under a 401(k) or other defined contribution plan where the authorized plan fiduciary has approved our shares of common stock as an available investment option under such plan. In addition, in the case of sales to fiduciary accounts the suitability standards shall be met by the fiduciary account, by the person who directly or indirectly supplied the funds for the purchase of the shares of our common stock or by the beneficiary of the account.
 
IMPORTANT NOTE FOR BROKER-DEALERS:  This prospectus will be supplemented each month after the escrow period with respect to pricing information (NAV per share) and from time to time with respect to other information. All sales literature used in connection with this offering must be accompanied by (1) the current prospectus, (2) all prospectus supplements (other than pricing supplements) and (3) the most recent pricing supplement filed through the close of business on the business day immediately preceding delivery or, if delivered after the close of business, then through the close of business on the day such sales literature is delivered.
 
IMPORTANT NOTE FOR INVESTORS:  Please carefully read the information in this prospectus and any accompanying prospectus supplements, which we refer to collectively as the prospectus. You should rely only on the information contained in this prospectus. Neither we, our advisor, our fund accountant or our independent valuation expert has authorized anyone to provide you with different information. This prospectus may only be used where it is legal to sell these securities. You should not assume that the information contained in this prospectus or the latest prospectus supplement is accurate as of any date later than the date hereof or thereof, as applicable or such other dates as are stated herein or therein or as of the respective dates of any documents or other information incorporated herein or therein by reference.


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IMPORTANT NOTE ABOUT THIS PROSPECTUS: The term “sponsor” refers to Cole Real Estate Investments, our sponsor; the terms “advisor” and “Cole Advisors” refers to Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC, our advisor and an affiliate of our sponsor; and the term “sub-advisor” refers to BlackRock Investment Management, LLC, the sub-advisor to our advisor. In this prospectus, the term “operating partnership” refers to Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP of which Cole Real Estate Income Strategy (Daily NAV), Inc. is the sole general partner. The words “we,” “us,” and “our” refer to Cole Real Estate Income Strategy (Daily NAV), Inc. and our operating partnership, taken together, unless the context requires otherwise.


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Questions and Answers About This Offering
 
Set forth below are some questions (and accompanying answers) we anticipate investors interested in this offering may have. They are not a substitute for disclosures elsewhere in this prospectus and the latest prospectus supplement furnished to you. You are strongly encouraged to read the “Prospectus Summary,” the “Risk Factors” and the remainder of this prospectus in their entirety for more detailed information about this offering before deciding to purchase shares of our common stock.
 
Q: What is a real estate investment trust, or REIT?
 
A: In general, a REIT is a company that:
 
• combines the capital of many investors to acquire or provide financing for the acquisition of real estate;
 
• typically offers the benefit of a diversified real estate portfolio under professional management;
 
• must distribute to investors at least 90% of its annual REIT taxable income; and
 
• is able to qualify as a REIT for U.S. federal income tax purposes and is therefore generally not subject to federal corporate income taxes on its net income that it currently distributes to its stockholders, which substantially eliminates the “double taxation” (i.e., taxation at both the corporate and stockholder levels) that generally results from investments in a corporation.
 
We expect to qualify as a REIT beginning with our taxable year ending December 31 of the year in which the escrow period concludes. We will also use the so-called UPREIT (Umbrella Partnership Real Estate Investment Trust) structure, where a REIT holds all or substantially all of its assets through a partnership the REIT controls as a general partner. We chose this structure principally because it may be attractive to sellers of real estate who wish to defer taxable gain by exchanging their asset for limited partnership interests.
 
Q: Why should I consider an investment in real estate?
 
A: Our goal is to provide a professionally managed, diversified portfolio of institutional quality commercial real estate to investors who generally have had very limited access to such investments in the past. Allocating some portion of your portfolio to a direct investment in institutional quality commercial real estate may provide you with:
 
 • a reasonably predictable and stable level of current income from the investment;
 
 • diversification of your portfolio, by investing in an asset class that historically has not been correlated with the stock market generally; and
 
 • the opportunity for capital appreciation.
 
Q: What is your investment strategy, and what types of properties do you intend to acquire?
 
A: Under our investment strategy, we intend to invest primarily in single-tenant, necessity commercial properties, which are leased to creditworthy tenants, under long-term net leases. Our commercial properties will consist primarily of properties in the retail, office and industrial sectors that meet our investment criteria. Once all of the offering proceeds are invested, our property sector allocations will broadly reflect the composition of the NCREIF Property Index (NPI) with the exception of multi-family and lodging, which will be excluded from our investment universe. The NPI is managed by the National Council of Real Estate Investment Fiduciaries (NCREIF) and is a widely followed benchmark among institutional investors. NCREIF is a not-for-profit trade association that serves its membership, and the academic and investment community’s need for improved commercial real estate data, performance measurement, investment analysis, information standards, education, and peer group interaction. The NPI comprises performance data from retail, office, industrial, multi-family and lodging (hotel) properties. Since our strategy will focus on income producing real estate with long term leases, we will not invest in multi-family or lodging properties that have short duration leases and have historically had


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volatile performance. The actual percentage of our portfolio that is invested in retail, office and industrial property categories may fluctuate due to market conditions and investment opportunities.
 
We believe that our investment approach will allow us to achieve a relatively predictable and stable stream of income for investors in our common stock, along with the potential for long-term appreciation in the value of our real estate assets. For over three decades, our sponsor has developed and utilized this investment approach in acquiring and managing real estate assets primarily in the retail sector. We believe that our sponsor’s experience in the single-tenant, necessity retail sector will provide us with a competitive advantage as we invest across multiple property sectors to create a diversified real estate portfolio. In addition, our sponsor has built an organization of over 275 employees, who are experienced in the various aspects of acquiring, financing, managing and disposing of retail, office, and industrial real estate, and we believe that our access to these resources also will provide us with an advantage.
 
Q: What are “necessity commercial” properties?
 
A: We use the term necessity commercial properties to describe retail properties for companies that provide consumers with products that are important to, and part of, their everyday lives, and to describe office and industrial properties that are essential to the business operations of a corporate tenant.
 
Examples of necessity retail properties include pharmacies, home improvement stores, national superstores, restaurants and regional retailers that provide products considered necessities to that region. Historically, the retail sector of commercial real estate has been able to withstand most market cycles better than other sectors, due to the long-term resilience of consumer spending. By focusing our retail investment strategy on necessity retailers subject to long-term net leases, our objective is to provide our stockholders with a relatively stable stream of current income, while avoiding a significant decline in the value of our real estate portfolio.
 
Necessity office and industrial properties are essential to the business operations of a corporate tenant, typically due to one or more of the following factors:
 
• difficulty of replacement or prohibitive cost to relocate;
 
• sole or major location for its distribution or office operations;
 
• proximity to its distribution, manufacturing, research facilities or customer base;
 
• lower labor, transportation and/or operating costs;
 
• more stable labor force;
 
• optimal access to transportation networks that enable efficient distribution; and/or
 
• significant amount of tenant-funded capital improvements, such as customized computer systems and information technology infrastructure, racking and sorting systems, and cooling or refrigeration systems.
 
For example, distribution facilities, warehouses, manufacturing plants and corporate or regional headquarters are often considered to be necessity office and industrial properties. We believe that necessity office and industrial properties provide a relatively greater level of stability than other office and industrial property types because necessity properties typically involve long-term leases and experience relatively low tenant turnover. We also believe that, as a result of recent and ongoing business developments, such as the role of the internet in the distribution of products, globalization of importing and exporting products and consolidation of businesses requiring office buildings to accommodate a single-tenant, there is, and we expect there will continue to be, increasing demand by commercial tenants for necessity office and industrial properties.
 
Q: What is the experience of your sponsor and advisor in managing commercial real estate?
 
A: Our sponsor, Cole Real Estate Investments, is a group of affiliated entities directly or indirectly controlled by Christopher H. Cole, including Cole Capital Advisors, Inc., Cole Capital Partners, LLC and other affiliates of our advisor. From January 1, 2001 to December 31, 2010, Cole Real Estate Investments sponsored 67 prior commercial real estate programs, including 65 privately offered


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programs and three publicly offered REITs, Cole Credit Property Trust II, Inc. (“Cole Credit Property Trust II”) and its current offerings, Cole Credit Property Trust III, Inc. (“Cole Credit Property Trust III”) and Cole Corporate Income Trust, Inc. (“Cole Corporate Income Trust”). These programs have raised approximately $5.3 billion from over 106,000 investors and have purchased 1,359 properties located in 45 states and the U.S. Virgin Islands at an acquisition cost of $7.3 billion as of December 31, 2010.
 
Our advisor is Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC, an affiliate of our sponsor that was formed solely for the purpose of managing our company. Mr. Cole is the indirect sole owner of our advisor and other key personnel of our advisor have been associated with Cole Real Estate Investments for many years. The members of our advisor’s real estate management team have extensive experience in acquiring, structuring, developing and selling necessity commercial properties. Mr. Roberts, our advisor’s executive vice president and managing director of real estate, and Mr. Kundrak, our advisor’s senior vice president and chief acquisitions officer — single tenant retail, have 24 and 28 years of commercial real estate experience, respectively. For additional information about the key personnel of our advisor, see the section of this prospectus captioned “Management — The Advisor.” Further, our sponsor has built an organization of over 275 employees who are experienced in the various aspects of acquiring, financing, managing and disposing of commercial real estate, and most of these employees will serve as dual employees acting in part, on behalf of our advisor.
 
Q: What is a perpetual-life, publicly offered, non-exchange traded REIT?
 
A: A non-exchange traded REIT is a REIT whose shares are not listed for trading on a stock exchange or other securities market. A public non-exchange traded REIT is registered with the Securities and Exchange Commission (“SEC”) and is required to file with the SEC financial statements and other reports.
 
We use the term “perpetual-life” non-exchange traded REIT to describe an investment vehicle of indefinite duration focused principally on acquiring a portfolio of commercial real estate, where the shares of common stock are continuously available for purchase and redemption on a daily basis at a price equal to net asset value per share (“NAV per share”).
 
Non-exchange traded REITs have traditionally had a finite life with a specified date by which there would be some type of liquidity event for the benefit of all stockholders. In our perpetual-life structure, the investor or his financial advisor will determine when to purchase or liquidate an investment in shares of our common stock and our charter does not require us to effect a liquidity event at any point-in-time in the future. As of the date of this prospectus, we are aware of two perpetual-life, publicly offered, non-exchange traded REIT with an effective registration statement.
 
Q: How is an investment in shares of your common stock different from investing in shares of a listed REIT?
 
A: Investing in REITs whose shares are listed for trading on a national securities exchange is one alternative for investing in commercial real estate. Shares of listed REITs, however, generally fluctuate in price with the stock market as a whole; that is, there is a relatively close relationship or correlation between changes in the price of listed REIT shares and changes in the value of the stock market generally. This close correlation suggests that the value of shares of listed REITs may be based on a variety of factors beyond the value of the listed REITs’ underlying real estate investments, such as the supply of available shares (number of sellers) and the demand for shares (number of buyers), as well as changes in investors’ short- or long-term financial market expectations in general. By comparison, the change in price of a direct investment in commercial real estate, as measured by actual transactions, historically has not been closely correlated, or in direct alignment, with the average value of the stock market generally.
 
Our objective is to offer an alternative for investing in commercial real estate, where the value of your investment will be based on our NAV. Our NAV will reflect several components, one of which will be the estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate contained within individual appraisal reports provided to our fund accountant by our independent valuation expert. These estimates of the values of our commercial real estate properties, which are based on information provided by our advisor, who also reviews them, will not fluctuate


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depending on the number of shares available for purchase in a trading market or on the number of investors looking to sell shares in a trading market. Although the advisor will periodically review and provide input on the estimates of value, our independent valuation expert will be free to accept or reject such input in its discretion. Our shares will be offered for sale on a continuous basis by the Company and redemptions will be based on the NAV per share calculated by our fund accountant, regardless of the volume of redemption requests. Because of these valuation guidelines applicable to our NAV, we expect that changes in the value of our shares will be more closely correlated, or aligned, with changes in prices of direct investments in real estate, as compared to changes in trading prices for the common stock of listed REITs. Since direct investments in real estate are not highly correlated with stock market prices generally, we expect that an investment in our shares will provide a measure of diversification to an investor’s portfolio that otherwise largely consists of stocks traded on a stock exchange.
 
In addition, on average, a direct investment in real estate, as measured by actual transactions, has historically exhibited significantly less volatility, or changes in value, than an investment in listed REITs. Again, since the NAV of our shares will be based on an estimate of the value of the real estate that we own, we expect that an investment in our shares will fluctuate in value, over time, less than an investment in a listed REIT.
 
Investors should bear in mind that investing in our shares differs from investing in listed REITs in significant ways. An investment in our shares has limited liquidity and our redemption program may be limited, modified or suspended. In contrast, an investment in a listed REIT is a liquid investment, as shares can be sold on an exchange at any time. Investing in our shares also differs from investing directly in real estate, including the expenses related to this offering and other fees and expenses that are payable.
 
Q: How is an investment in shares of your common stock different from investing in shares of a traditional non-exchange traded REIT?
 
A: Generally, an investment in shares of our common stock differs from a traditional non-exchange traded REIT because:
 
• Following the escrow period, the per share purchase and redemption price of our common stock will be based on our NAV as calculated by our fund accountant, State Street Bank and Trust Company, and will vary from day to day. Traditional non-exchange traded REITs sell shares at a fixed price throughout the offering period and typically value their common stock at least every eighteen months, thereafter. Daily pricing of our shares at NAV per share will enable investors to calculate a reasonable estimate of the total return on their investments as of any given time.
 
• Contrary to traditional non-exchange traded REITs, which typically limit redemptions to 5% or less of the weighted average number of shares outstanding during the trailing twelve-month period, the goal of our redemption plan is to provide significantly greater liquidity to our stockholders by allowing for net redemptions per quarter of 5% (plus any unused percentage from the previous quarter, subject to certain limitations) times the prior quarter-end’s NAV and by maintaining a liquid reserve available to fund redemptions. There are, however, circumstances under which our redemption program may be limited, modified or suspended.
 
• Most traditional non-exchange traded REITs typically provide for a two to five year offering period and a single liquidity event, such as a listing on a national exchange or liquidation, within 10 years of the end of the offering period. In contrast, we will be a perpetual-life entity with no defined life and we will continuously offer shares for purchase and allow redemptions. This will provide our stockholders with greater flexibility in determining when they want to make or liquidate their investment.
 
• Finally, by targeting investors in wrap or fee based accounts, where the investor pays a fee for the investment services provided by his investment advisor or broker-dealer, we will avoid paying up-front selling commissions. We expect that our costs of distribution will be significantly lower than those of a traditional non-exchange traded REIT, resulting in a greater percentage of investors’ capital being available for investing in real estate and real estate-related investments.


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Q: What is the purchase price for shares of your common stock?
 
A: Our board of directors approved our initial offering price of $15.00, which will be the purchase price of our shares during the escrow period. Thereafter, the per share purchase price will vary from day-to-day and, on each business day, will be equal to our NAV divided by the number of shares outstanding as of the close of business on such day. After the close of business (the close of the New York Stock Exchange; generally, 4:00 p.m. Eastern Time), on each day that the New York Stock Exchange is open (a business day), we will update our website, www.colecapital.com, which will identify the NAV per share for that day. Any purchase orders that we receive prior to the close of business on any business day will be executed at a price equal to our NAV per share for that day, as calculated after the close of business on that day. Purchase orders that we receive after the close of business will be executed at a price equal to our NAV per share as calculated after the close of business on the next business day. Purchase orders placed on a day that is not a business day, and purchase orders pursuant to our systematic investment program that would otherwise occur on a day that is not a business day, will be executed as if they were received prior to the close of business on the immediately following business day. See “Share Purchases and Redemptions — Buying Shares” for more details.
 
Q: How will your NAV per share be calculated?
 
A: Our NAV per share will be calculated daily as of the close of business by our fund accountant using a process that reflects (1) estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by our independent valuation expert in individual appraisal reports, as they may be updated upon certain material events described below, (2) daily updates in the price of liquid assets for which third party market quotes are available, (3) accruals of our daily distributions, and (4) estimates of daily accruals, on a net basis, of our operating revenues, expenses, debt service costs and fees. Our advisor reviews estimated values of commercial real estate assets, related liabilities and notes receivable secured by real estate provided in individual appraisal reports and if a material event in respect of such asset or liability occurs between scheduled quarterly valuations that our advisor believes may materially affect the value thereof, our advisor will inform the independent valuation expert so that, if appropriate, the independent valuation expert can issue an update to its individual appraisal report to adjust the most recent valuations to account for the estimated impact.
 
We have engaged CBRE, Inc. (formerly known as CB Richard Ellis, Inc.), which has expertise in appraising commercial real estate, to act as our independent valuation expert. CBRE will provide our fund accountant with periodic estimates of the values of our commercial real estate assets, related liabilities and notes receivable secured by real estate, all or substantially all of which will be held in our operating partnership. Our assets will consist primarily of a portfolio of commercial real estate as well as notes receivable or marketable securities where the underlying collateral will typically be commercial real estate or security interests therein. We will also invest in liquid assets and hold cash and cash equivalents, which will not be valued by our independent valuation expert. Our commercial real estate-related liabilities to be valued by CBRE will consist primarily of mortgage loans secured by our commercial real estate. Our other liabilities will be estimated by our advisor for use by our fund accountant in determining NAV include accrued operating expenses, accrued dealer manager and advisory fees and accrued distributions to stockholders.
 
Upon purchase, each real estate asset will initially be carried at its purchase price, plus related acquisition costs. On a quarterly basis thereafter, our independent valuation expert will value each of our commercial real estate properties and real estate assets, such that each of these investments will be valued at least once per quarter beginning with the quarter following the first full calendar quarter after we acquire the asset. Based on all information deemed relevant, our independent valuation expert will analyze the cash flow from, and other characteristics of, each commercial real estate property in our portfolio. The independent valuation expert will consider, as appropriate, valuation methodologies, opinions and judgments in compliance with the Uniform Standards of Professional Appraisal Practice and the requirements of the Code of Professional Ethics and Standards of Professional Ethics and


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Standards of Professional Appraisal Practice of the Appraisal Institute. See “Valuation Policies — Our Independent Valuation Expert — Valuation of Commercial Real Estate Properties and Secured Loans.”
 
Between quarterly valuations, our advisor will monitor our commercial real estate assets, related liabilities and notes receivable secured by real estate to determine whether a material event has occurred that our advisor believes may have a material impact on the most recent estimated values thereof as set forth in the relevant appraisal report provided by our independent valuation expert. If, in the opinion of our independent valuation expert, the event identified by the advisor, or in some circumstances an event that becomes known to the independent valuation expert through other means, is likely to have a material impact on previously provided estimated values of the affected commercial real estate assets, related liabilities and notes receivable secured by real estate, the independent valuation expert will recommend valuation adjustments that the fund accountant will then incorporate into our NAV. Any such adjustments will be estimates of the market impact of specific events based on assumptions and judgments that may or may not prove to be correct, and may also be based on limited information, as full and complete information may not be readily available. In addition to providing estimated values of our commercial real estate asset portfolio, our independent valuation expert will also provide, on a quarterly basis beginning with the quarter following the first full calendar quarter after we acquire any notes receivable, an estimate of the value of our notes receivable, primarily relying on a discounted cash flow analysis, and an estimate of the value of our mortgages, primarily by comparing the terms of our mortgages to the terms of mortgages on comparable properties, as seen in the market generally. These quarterly valuations may also be adjusted, between quarters, as described above. Liquid assets and assets that are traded with reasonable frequency will be valued by third party pricing institutions on a daily basis, assuming market quotes are available. The advisor will periodically review and provide input on the estimated value provided by the independent valuation expert set forth in an individual appraisal report for each such asset, but the independent valuation expert will be free to accept or reject such input in its discretion. The board of directors, including a majority of the independent directors, has adopted our valuation guidelines, will be responsible for ensuring that the independent valuation expert discharges its responsibilities in accordance with our valuation guidelines, and will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility.
 
Our fund accountant will calculate our daily NAV at the end of each business day based on the net valuation of our operating partnership’s principal assets and liabilities, based primarily on the individual estimated values provided by the independent valuation expert as described above, together with the other components of NAV described elsewhere in this prospectus. First, the fund accountant will subtract from the net value of the operating partnership the other partnership liabilities, including estimates of accrued fees and expenses attributable to the offering, and estimates of accrued operating revenues, fees and expenses. Our fund accountant will take the resulting amount and multiply that amount by our percentage ownership interest in the operating partnership. Initially, the only limited partner will be our advisor, which will hold a 0.1% interest. Our fund accountant will then add any assets held directly by the REIT, which should be limited to cash and cash equivalents, and subtract an estimate of any accrued liabilities of the REIT, which should be limited to accrued distributions and certain legal, accounting and administrative costs. The result of this calculation will be our NAV as of the end of any business day.
 
Our NAV per share will be determined by dividing our NAV on such day by the number of shares of our common stock outstanding as of the end of such day, prior to giving effect to any share purchases or redemptions to be effected on such day. See “Valuation Policies — Calculation of Our NAV Per Share” for more details about how our NAV will be calculated.
 
Q: Will our independent valuation expert calculate or be responsible for the NAV?
 
A: Our NAV per share will be calculated by our fund accountant. While our independent valuation expert will periodically provide estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate based upon individual appraisal reports, our independent valuation expert will not be responsible for or prepare our daily NAV per share.


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Q: How exact will the calculation of the daily NAV per share be?
 
A: Our goal is to provide a reasonable estimate of the market value of our shares. Our assets will consist principally of commercial real estate assets, the valuation of which by our independent valuation expert is subject to a number of judgments and assumptions that may not prove to be accurate. The use of different judgments or assumptions would likely result in different estimates of the value of our real estate assets. The daily calculation of our NAV per share by the fund accountant may not reflect the precise amount that might be paid for your shares in a market transaction. On any given day, our published NAV per share may not fully reflect certain material events to the extent that they are not known or their financial impact on our portfolio is not immediately quantifiable. Any resulting potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders. See “Valuation Policies — Calculation of Our NAV Per Share.”
 
Q: Will I have the opportunity to redeem my shares of common stock?
 
A: While you should view your investment in our shares as a long-term investment with limited liquidity, we have adopted a redemption plan whereby, on a daily basis, stockholders may request that we redeem all or any portion of their shares. The redemption price per share on any business day will be equal to the purchase price per share for that day (i.e., NAV per share, determined as described above). Subject to limited exceptions, shares redeemed within 365 days of the date of purchase will be subject to a short-term trading fee equal to 2% of the aggregate NAV per share of such shares redeemed. See “Share Purchases and Redemptions — Redemption Plan.”
 
Q: Will there be any limits on my ability to redeem my shares?
 
A: Yes. While we designed our redemption plan to allow stockholders to request redemptions on a daily basis, of all or any portion of their shares, our ability to fulfill redemption requests is subject to a number of limitations. The vast majority of our assets will consist of commercial properties, which cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. However, to fund our redemption plan, we will maintain a number of sources of liquidity including (i) cash, cash equivalents, other liquid investments and liquid securities and (ii) in the discretion of our advisor, a line of credit.
 
In order to maintain a reasonable level of liquidity, our investment guidelines provide that we will target the following aggregate allocation to the above sources of liquidity: (1) 10% of our NAV up to $1 billion and (2) 5% of our NAV in excess of $1 billion. In addition, we may also fund redemptions from any available source of funds, including operating cash flows, borrowings, proceeds from this offering and/or the sale of our assets. Despite these sources of liquidity, we may not always have sufficient liquid resources to satisfy redemption requests and you may not always be able to redeem your shares.
 
Under ordinary circumstances the total amount of net redemptions during a calendar quarter is limited to five percent of our total net assets on the last business day of the preceding quarter. Redemption requests will be satisfied on a first-come, first-served basis. If net redemptions do not reach the five percent limit in a calendar quarter, the unused portion will be carried over to the next quarter, except that the maximum amount of net redemptions during any quarter can never exceed ten percent of our total net assets on the last business day of the preceding quarter. If net redemptions in a calendar quarter reach the five percent limit (plus any carried over amount), after pro-rating redemptions for that day we will be unable to process any redemption requests for the rest of the calendar quarter. We will begin accepting redemption requests again on the first business day of the next calendar quarter, but will apply the five percent quarterly limitation on redemptions on a per-stockholder basis, instead of a first-come, first-served basis. Therefore each stockholder will be able to redeem at any time during that quarter up to five percent of the stockholder’s investment in our shares on the last business day of the preceding quarter, plus any new investment by the stockholder in our shares during that quarter (subject to applicable short-term trading fees). The per-stockholder limit will remain in effect for the following quarter if total net redemptions are more than two and one-half percent of our net assets on the last


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business day of the preceding quarter. Further, to protect our operations and our non-redeeming stockholders, to prevent an undue burden on our liquidity or to preserve our status as a REIT, our board of directors may limit, or suspend our redemption program. See “Share Purchases and Redemptions — Redemption Plan — Redemption Limitations.”
 
Q: How do you intend to distribute your shares?
 
A: We intend to distribute our shares of common stock principally through registered investment advisers and broker-dealers that are paid a fee by their clients for the services provided — typically referred to as wrap or fee based accounts. As a result, we expect that our costs of distribution will be less than the total expenses of a traditional finite-life non-exchange traded REIT.
 
Q: Will I be charged upfront selling commissions?
 
A: No. Investors will not pay upfront selling commissions as part of the price per share of our common stock purchased in our primary offering or issued under our distribution reinvestment plan.
 
We will pay our dealer manager an asset-based dealer manager fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.55% of our NAV for such day. At our dealer manager’s discretion it may reallow a portion of the dealer manager fee equal to an amount up to 1/365th of 0.20% of our NAV to participating broker dealers. See “Plan of Distribution.” We will pay the dealer manager fee until the date at which, in the aggregate, underwriting compensation from all sources, including the dealer manager fee and other underwriting compensation paid by us and our advisor and its affiliates, equals 10% of the gross proceeds from our primary offering (i.e., excluding proceeds from sales pursuant to our distribution reinvestment plan).
 
In addition, our advisor or its affiliates, will pay on our behalf all other costs incurred in connection with our organization and the offering of our shares (excluding the dealer manager fee), including (i) our legal, accounting, printing, mailing and filing fees, charges of our escrow agent, and broker/dealer due diligence expenses; (ii) costs incurred in connection with preparing supplemental sales materials, holding educational conferences and attending retail seminars conducted by broker-dealers; and (iii) reimbursements for our dealer manager’s wholesaling costs, and other marketing and organization costs including payments made to participating broker-dealers. Beginning on the date the offering proceeds are released from escrow, we will start to reimburse our advisor, without interest, for these organization and offering cost incurred both before and after the release of the escrow funds. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.75% of the aggregate gross offering proceeds from this offering, including shares issued in connection with the distribution reinvestment plan. If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.75% limit), calculated on an accumulated basis, until our advisor has been reimbursed in full.
 
Q: What other fees and expenses will you pay to our advisor or any of its affiliates?
 
A: After the escrow period, we will pay our advisor a monthly advisory fee, based on our monthly average NAV, at an annualized rate of 0.90%. After the escrow period, we will also pay our advisor a performance fee calculated on the basis of our total return to stockholders, payable annually in arrears, such that for any calendar year in which our total return on stockholders’ capital exceeds 6% per annum, our advisor will be entitled to 25% of the excess total return but not to exceed 10% of the aggregate total return for such year. We will not pay advisory fees to the sub-advisor, as those fees will be paid by our advisor.
 
Although we will not pay our advisor any acquisition, financing or other similar fees in connection with making investments, we will reimburse our advisor for out-of-pocket expenses in connection with the acquisition of commercial real estate properties, real estate-related assets and other investments.
 
Additionally, we will reimburse our advisor for out-of-pocket expenses in connection with providing services to us, including reasonable salaries and wages, benefits and overhead of all employees directly


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involved in the performance of services to us other than our executive officers, provided that no reimbursement shall be made for costs of such employees of our advisor or its affiliates to the extent that such employees perform services for which our advisor receives a separate fee. The expense reimbursements that we will pay to our advisor include expenses incurred by the sub-advisor on our behalf.
 
The payment of fees and expenses will reduce the cash available for investment and distribution and will directly impact our daily NAV. See “Compensation” for more details regarding the fees that will be paid to our advisor and its affiliates.
 
Q: Will you invest in anything other than commercial properties?
 
A: Yes. Our portfolio also may include other income-producing real estate, as well as real estate-related investments such as mortgage, mezzanine, bridge and other loans and liquid securities. Although this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a high quality investment because it does not precisely fit our presently expected portfolio composition. Thus, to the extent that our advisor presents us with high quality investment opportunities that allow us to meet the REIT requirements under the Internal Revenue Code of 1986, as amended (the “Code”), and that result in an overall real estate portfolio that is consistent with our investment objectives, our portfolio composition may vary from time to time. Our goal is to assemble a portfolio that is diversified by investment type, investment size and investment risk, which generates a relatively predictable and stable stream of income for investors and the potential for long-term capital appreciation in the value of our real estate assets. See the section of this prospectus captioned “Investment Objectives, Strategies and Policies — Acquisition and Investment Policies” for a more detailed discussion of all of the types of investments we may make.
 
Q: Generally, what will be the terms of your leases?
 
A: We will seek to secure leases from creditworthy tenants, before or at the time we acquire a property. We expect that many of our leases will be triple net or double net leases, which means that the tenant will be primarily responsible for the cost of repairs, maintenance, property taxes, utilities, insurance and other operating costs. This helps ensure the predictability and stability of our expenses and, we believe, will result in greater predictability and stability of our cash distributions to stockholders. We intend to enter into leases that have terms of ten or more years, may include renewal options and may also include rental increases over the term of the lease. A number of our leases, however, may have a shorter term. In addition, we expect that a number of our leases will be guaranteed by the corporate parent of the tenant, ensuring that, unless the parent company goes into bankruptcy, the rent on the property will be paid, even if the individual store is closed for any reason.
 
Q: How will you determine whether tenants are creditworthy?
 
A: Our advisor and its affiliates have a well-established underwriting process to determine the creditworthiness of our potential tenants. The underwriting process includes analyzing the financial data and other information about the tenant, such as income statements, balance sheets, net worth, cash flow, business plans, data provided by industry credit rating services, and/or other information our advisor may deem relevant. In addition, we may obtain guarantees of leases by the corporate parent of the tenant, in which case our advisor will analyze the creditworthiness of the guarantor. In some instances, especially in sale-leaseback situations, where we are acquiring a property from a company and simultaneously leasing it back to such company under a long-term lease, we expect that we will meet with the senior management of the company to discuss the company’s business plan and strategy.
 
Q: Will you use leverage?
 
A: Yes, we intend to use leverage. Our targeted leverage, after we have acquired a substantial portfolio, is 50% of the greater of cost (before deducting depreciation or other non cash reserves) or market value of our gross assets. During the period when we are acquiring our initial portfolio, we may employ greater leverage in order to build quickly a diversified portfolio of assets. Please see “Investment Objectives, Strategy and Policies” for more details.


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Q: How often will I receive distributions?
 
A: We expect that our board of directors will declare distributions with a daily record date, and pay distributions monthly in arrears commencing in the first full month after the escrow period concludes. Any distributions we make will be at the discretion of our board of directors, and will be based on, among other factors, our present and reasonably projected future cash flow. We also expect that the board of directors will set the rate of distributions at a level that will be reasonably consistent and sustainable over time. In addition, the board of directors’ discretion as to the payment of distributions will be limited by the REIT distribution requirements, which generally require that we make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income. See “Description of Capital Stock — Distributions” and “Material U.S. Federal Income Tax Considerations.”
 
Any distributions that we make will directly impact our NAV, by reducing the amount of our assets. Our goal is to provide a reasonably predictable and stable level of current income, through monthly distributions, while at the same time maintaining a fair level of consistency in our NAV. Over the course of your investment, your distributions plus the change in NAV per share (either positive or negative) will produce your total return.
 
Q: What will be the source of your distributions?
 
A: We may pay distributions from sources other than cash flow from operations, including from the proceeds of this offering, from borrowings or from the sale of properties or other investments, among others, and we have no limit on the amounts we may pay from such sources. We expect that our cash flow from operations available for distribution will be lower in the initial stages of this offering until we have raised significant capital and made substantial investments. As a result, we expect that during the early stages of our operations, and from time to time thereafter, we may pay distributions from sources other than cash flows from operations. Contrary to traditional non-exchange traded REITs, however, whose shares are typically sold and, on a limited basis, redeemed at, a fixed price that is not necessarily intended to reflect the current value of the shares, our common stock will be sold and redeemed on a daily basis at NAV per share. As a result, distributions that represent a return of capital or exceed our operating cash flow will be reflected in our daily calculation of NAV.
 
Q: Will the distributions I receive be taxable as ordinary income?
 
A: Unless your investment is held in a qualified tax-exempt account or we designate certain distributions as capital gain dividends, distributions that you receive generally will be taxed as ordinary income to the extent they are from current or accumulated earnings and profits. The portion of your distribution in excess of current and accumulated earnings and profits is considered a return of capital for tax purposes and will reduce the tax basis of your investment, rather than result in current tax, until your basis is reduced to zero. This, in effect, defers a portion of your tax until you redeem or sell your shares. Return of capital distributions made to you in excess of your tax basis in our stock will be treated as sales proceeds from the sale of our stock. Distributions we designate as capital gain dividends will generally be taxable at long-term capital gains rates. However, because each investor’s tax considerations are different, we recommend that you consult with your tax advisor. You also should review the section of this prospectus entitled “Material U.S. Federal Income Tax Considerations.”
 
Q: May I reinvest my cash distributions in additional shares?
 
A: Yes. We have adopted a distribution reinvestment plan whereby investors may elect to have their cash distributions automatically reinvested in additional shares of our common stock. The purchase price for shares purchased under our distribution reinvestment plan will be equal to our NAV per share on the date that the distribution is payable, after giving effect to the distribution. Because the dealer manager fee is calculated based on NAV, it reduces NAV with respect to all shares of our common stock, including shares issued under our distribution reinvestment plan. See “Description of Capital Stock — Distribution Reinvestment Plan” for more information regarding reinvestment of distributions you may receive from us.


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Q: Do you expect to acquire properties and loans in transactions with your advisor or its affiliates?
 
A: From time to time our advisor may direct certain of its affiliates to acquire properties that would be suitable investments for us or may create special purpose entities to acquire properties for the specific purpose of selling the properties to us at a later time. Subsequently, we may acquire such properties from such affiliates, but any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of independent directors, not otherwise interested in such transactions as being fair and reasonable to us. In addition our purchase price in any such transaction will be limited to the cost of the property to the affiliate, including acquisition-related expenses. Further, our charter provides that in no event will the purchase price of any asset acquired from an affiliate exceed its current appraised value as determined by an independent appraiser.
 
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors not otherwise interested in such transaction, as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties. Our advisor or its affiliates may pay costs on our behalf, pending our reimbursement, or we may defer payment of fees to our advisor or its affiliates, but neither of these transactions would be considered a loan.
 
Q: Will you acquire properties in joint ventures, including joint ventures with affiliates?
 
A: It is possible that we may acquire properties through one or more joint ventures in order to increase our purchasing power and diversify our portfolio of properties in terms of geographic region, property type and tenant industry group. Increased portfolio diversification reduces the risk to investors as compared to a program with less diversified investments. Our joint ventures may be with affiliates of our advisor or with non-affiliated third parties. Any joint venture with an affiliate of our advisor must be approved by a majority of our independent directors and the cost of our investment must be supported by a current appraisal of the asset. Generally, we will only enter into a joint venture in which we will approve major decisions of the joint venture. If we do enter into joint ventures, we may assume liabilities related to joint ventures that exceed the percentage of our investment in the joint venture.
 
Q: For whom is an investment in your shares appropriate?
 
A: An investment in our shares may be appropriate for you if you:
 
• meet the minimum suitability standards mentioned above under “Suitability Standards;”
 
• seek to diversify your portfolio by allocating a portion of your portfolio to a direct, long-term investment in commercial real estate that is non-correlated to the stock market;
 
• seek to receive current income through our payment of distributions;
 
• wish to obtain the benefits of potential long-term capital appreciation; and
 
• are able to hold your investment in our shares as a long-term investment, as our redemption program may not always be available to redeem your shares.
 
Q: Are there any risks involved in buying our shares?
 
A: Investing in our common stock involves a high degree of risk. If we are unable to effectively manage the impact of these risks, we may not meet our investment objectives, and therefore, you should purchase these securities only if you can afford a complete loss of your investment. Some of the more significant risks relating to this offering and an investment in our shares include:
 
• We are a “blind pool.” We have not identified any assets to be purchased with the net proceeds from this offering and have no operating history.
 
• The valuation methodologies used by our independent valuation expert in arriving at the estimates of value of each of our commercial real estate assets, related liabilities and notes receivable secured by


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real estate (one of the components of our NAV) are set forth in individual appraisal reports prepared in accordance with valuation guidelines approved by our board of directors and involve subjective judgments and estimates. These individual appraisal reports are periodically reviewed by our advisor. These estimated values are then reflected by our fund accountant in the calculation of our NAV. As a result, our NAV may not accurately reflect the actual prices at which our commercial real estate assets, notes receivable secured by real estate or related real estate liabilities could be liquidated on any given day.
 
• There is no public market for our shares of common stock, and our charter does not require us to effect a liquidity event at any point in time in the future.
 
• Our redemption plan will provide stockholders with the opportunity to redeem their shares on a daily basis, but redemptions will be subject to available liquidity and other potential restrictions.
 
• We may pay distributions, and fund redemptions, from sources other than cash flow from operations, including borrowings, proceeds from this offering or asset sales, and we have no limits on the amounts we may pay from such other sources. Payments of distributions from sources other than cash flow from operations may reduce the amount of capital we ultimately invest in real estate, which may negatively impact the value of your investment and directly impact our daily NAV per share.
 
• There are substantial conflicts of interest between us and our advisor and its affiliates, including our payment of substantial fees to our advisor and its affiliates.
 
• This is a “best efforts” offering. If we are not able to raise a substantial amount of capital in the near term, we may have difficulties investing in properties and our ability to achieve our investment objectives could be adversely affected.
 
• We may suffer from delays in identifying suitable investments, which may adversely impact the value of your investment.
 
• If we fail to qualify as a REIT for federal income tax purposes and no relief provisions apply, our NAV and cash available for distribution to our stockholders could materially decrease.
 
Q: How do I buy shares?
 
A: You can buy shares pursuant to this prospectus by working with your financial advisor to (1) complete the required documentation and (2) pay for the shares at the time your purchase order is settled. Please see “Share Purchases and Redemptions — Buying Shares” for more information about how to purchase shares.
 
Q: May I make an investment through my IRA or other tax-deferred retirement account?
 
A: Yes. You may make an investment through your IRA or other tax-deferred retirement account. In making these investment decisions, you should consider, at a minimum, (1) whether the investment is in accordance with the documents and instruments governing your IRA, plan or other retirement account, (2) whether the investment would constitute a prohibited transaction under applicable law, (3) whether the investment satisfies the fiduciary requirements associated with your IRA, plan or other retirement account, (4) whether the investment will generate unrelated business taxable income (“UBTI”) to your IRA, plan or other retirement account, and (5) whether there is sufficient liquidity for such investment under your IRA, plan or other retirement account. You should note that an investment in shares of our common stock will not, in itself, create a retirement plan and that, in order to create a retirement plan, you must comply with all applicable provisions of the Code.
 
Q: Is there any minimum investment required?
 
A: Subject to limited exceptions, the minimum initial investment in shares of our common stock is $2,500.
 
Q: At what point will the offering proceeds be released from escrow?
 
A: We will take purchase orders and hold investors’ funds in an interest-bearing escrow account until we receive aggregate purchase orders for at least $10,000,000 in shares of our common stock and our board


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of directors authorizes release of the escrowed funds so that we can commence our operations. Purchase orders for shares of our common stock by our directors, officers and other affiliated persons and entities will be included for purposes of determining whether we have received $10,000,000 in purchase orders. The released escrow funds will only be used for the purposes set forth in this prospectus and in a manner approved by our board of directors, who acts as a fiduciary to our stockholders. If we do not raise the minimum amount and commence our operations within 180 days following the initial offering date, this offering will be terminated and our escrow agent will promptly send you a full refund of your investment with interest and without deduction for escrow expenses. Notwithstanding the foregoing, you may elect to withdraw your purchase order and request a full refund of your investment with interest and without deduction for escrow expenses at any time before the escrowed funds are released to us. You will not receive interest on your subscription payment unless we fail to sell the minimum number of shares or you elect to withdraw your purchase order during the escrow period, in which case we will return your subscription payment to you with accrued interest. Cole Holdings Corporation, an affiliate of our sponsor and our sole stockholder, has expressed its intent to us to purchase $10,000,000 in shares of our common stock in this offering shortly after the SEC has declared our registration statement effective, which will be the date of this prospectus shown on the cover page. If this investment occurs, we anticipate that our board of directors will authorize release of the escrowed funds promptly thereafter, which will permit us to commence our operations.
 
Q: What is the term or expected life of this offering?
 
A: We have registered $3,500,000,000 in shares of our common stock to be sold in our primary offering and up to $500,000,000 in shares to be sold pursuant to our distribution reinvestment plan. It is our intent, however, to conduct a continuous offering for an indefinite period of time, by filing for additional offerings of our shares, subject to regulatory approval and continued compliance with the rules and regulations of the SEC and applicable state laws.
 
We will endeavor to take all reasonable actions to avoid interruptions in the continuous offering of our shares of common stock, including filing an amendment to the registration statement with the SEC on or before such time as the most recent offering price per share represents a 20% change from the $15.00 per share price set forth in the registration statement as originally declared effective by the SEC or the price per share set forth in the latest amendment thereto filed with the SEC. There can be no assurance, however, that we will not need to suspend our continuous offering while the SEC and, where required, state securities regulators, review such amendment until it is declared effective, if at all.
 
This is a “best efforts” offering, which means that our dealer manager and the participating brokers are only required to use their best efforts to sell the shares.
 
Q: Will I be notified of how my investment is doing?
 
A: Yes. We will provide you with periodic updates on the performance of your investment with us, including:
 
• three quarterly financial reports;
 
• an annual report;
 
• in the case of certain U.S. stockholders, an annual Internal Revenue Service, or IRS, Form 1099-DIV and/or Form 1099-B, if required, and, in the case of non-U.S. stockholders, an annual IRS Form 1042-S;
 
• confirmation statements (after transactions affecting your balance, except reinvestment of distributions in us and certain transactions through the distribution reinvestment plan);
 
• notification to our Maryland stockholders regarding the sources of payments made to them that are not entirely from our funds from operations, which will be sent via U.S. mail with every third monthly distribution statement and/or check, as applicable; and
 
• if you participate in our distribution reinvestment plan, an annual statement providing all material information regarding the plan and your participation in it, including the tax consequences thereof.


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Depending on legal requirements, we will provide this information to you via one or more of the following methods:
 
• U.S. mail or other courier;
 
• facsimile;
 
• electronic delivery; and
 
• posting on our website, www.colecapital.com.
 
In general, the above materials will be provided to you via U.S. mail unless you affirmatively elect to receive them via electronic delivery. Except for an annual report and any other reports required to be physically delivered to stockholders, we will not mail stockholders periodic or other reports we file with the SEC that are available to you on the SEC’s website at www.sec.gov.
 
In addition, on each business day after the escrow period, our current NAV per share will be posted on our website and made publicly available on our toll-free, automated information line after it has been calculated at the end of each business day.
 
Q: When will I get my detailed tax information?
 
A: In the case of certain U.S. stockholders, your Form 1099-DIV and/or Form 1099-B tax information, if required, will be mailed by January 31 and February 15 respectively of each year (or by February 15 if the forms are consolidated). In the case of non-U.S. stockholders, Form 1042-S will be mailed by March 15 of each year.
 
Q: Who can help answer my questions?
 
A: If you have more questions about this offering or if you would like additional copies of this prospectus, you should contact your financial advisor or:
 
Cole Capital Corporation
2575 E. Camelback Road, Suite 500
Phoenix, AZ 85016
(866) 341-2653
Attn: Investor Services
www.colecapital.com
 


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Prospectus Summary
 
This summary highlights some of the most significant information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that may be important to you. To understand this offering fully, you should read the entire prospectus carefully, including, without limitation, the information discussed under the caption “Risk Factors” before making a decision to invest in our shares.
 
Cole Real Estate Income Strategy (Daily NAV), Inc.
 
Cole Real Estate Income Strategy (Daily NAV), Inc. is a Maryland corporation formed on July 27, 2010 to invest primarily in commercial properties, which are leased to creditworthy companies, under long-term net leases. Our commercial properties will consist of properties in the retail, office and industrial sectors that meet our investment criteria. Once all of the offering proceeds are invested, our property sector allocations will broadly reflect the composition of the NCREIF Property Index (NPI) with the exception of multi-family and lodging, which will be excluded from our investment universe. Since our strategy will focus on income producing real estate with long term leases, we will not invest in multi-family or lodging properties due to their short duration leases and historically volatile performance. The actual percentage of our portfolio that is invested in retail, office and industrial property categories may fluctuate due to market conditions and investment opportunities. We believe that our investment approach will allow us to achieve a relatively predictable and stable current stream of income for investors, along with the potential for long-term capital appreciation in the value of our real estate. In addition, an investment in our common stock will provide investors with exposure to a major asset class (commercial real estate) that historically has not been correlated with the stock market, has demonstrated less volatility than listed stocks over time and may provide diversification as part of an investment portfolio.
 
We will be structured as a perpetual-life, non-exchange traded REIT. This means that, subject to regulatory approval of our filing for additional offerings, we will be selling shares of our common stock on a continuous basis and for an indefinite period of time. In addition, after the escrow period, we will sell our shares at a price based on the daily net asset value, or NAV, of our underlying assets, as calculated by our fund accountant. Although our common stock will not be listed for trading on a stock market or other trading exchange, we expect to provide our investors with limited liquidity through a redemption program that will permit investors to request redemption of all or a portion of their shares on any business day, at the daily NAV per share, subject to certain limitations described in this prospectus. As a perpetual-life, non-exchange traded REIT, our investment strategy will not be restricted by the need to provide, and our charter does not require that we provide our stockholders with, liquidity through a single terminal “liquidity event.”
 
We intend to distribute our shares principally through registered investment advisors and broker/dealers that charge their clients a fee for their services, typically referred to as wrap or fee based accounts. As a result, we will not pay any upfront selling commissions and we expect that our costs of distribution will be less than the total expenses paid by a traditional defined life non-exchange traded REIT. Our advisor will pay all costs incurred in connection with our organization and offering (other than the dealer manager fee) and we will reimburse our advisor. Beginning on the date the offering proceeds are released from escrow, we will start to reimburse our advisor, without interest, for these organization and offering costs incurred both before and after the release of the escrow funds. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.75% of the aggregate gross offering proceeds from this offering, including shares issued in connection with the distribution reinvestment plan. If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.75% limit), calculated on an accumulated basis, until our advisor has been reimbursed in full. See “Plan of Distribution.” In addition, during our first year after escrow, we may use up to 1% of our gross offering proceeds (not to exceed $2,000,000,000, in total, of offering proceeds and excluding shares issued under our distribution reinvestment plan) along with our cash from operations, to pay for the costs of distribution and other underwriting compensation, while we assemble our portfolio of real estate and real estate-related assets. Through this approach, we expect that approximately 99% of our aggregate gross offering proceeds will be


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available for investment in real estate and real estate-related assets. See “Compensation” for more details regarding the fees that will be paid to our dealer manager and our advisor.
 
We will take purchase orders and hold investors’ funds in an interest-bearing escrow account until we receive purchase orders for at least $10,000,000 in shares of our common stock and our board of directors has authorized the release of funds in the escrow account, at which time we will commence our operations. Purchase orders for shares of our common stock by our directors, officers and other affiliated persons and entities will be included for purposes of determining whether we have received $10,000,000 in purchase orders. Cole Holdings Corporation, an affiliate of our sponsor and our sole stockholder, has expressed its intent to us to purchase $10,000,000 in shares of our common stock in this offering shortly after the SEC has declared our registration statement effective, which will be the date of this prospectus shown on the cover page. If this investment occurs, we anticipate that our board of directors will authorize release of the escrowed funds promptly thereafter, which will permit us to commence our operations. If Cole Holdings Corporation purchases shares of our common stock in the primary offering, we will not allow it to redeem such shares until we have raised $100,000,000 in offering proceeds in our primary offering. Redemption requests made by Cole Holdings Corporation will only be accepted (1) on the last business day of a calendar quarter, (2) after all redemption requests from all other stockholders for such quarter have been accepted and (3) to the extent that Cole Holdings Corporation’s redemptions do not cause net redemptions to exceed 5% of our total NAV as of the end of the immediately preceding quarter. Redemption requests by Cole Holdings Corporation will otherwise be subject to the same limitations as other stockholder redemption requests as described under “Share Purchases and Redemptions — Redemption Plan.” Investors’ funds will not be subject to any fees until we commence operations. If we do not raise the minimum offering amount and commence operations before          , 2011 (180 days following the first date in which our shares are offered for sale to the public), this offering will be terminated and our escrow agent will promptly send you a full refund of your investment with interest and without a deduction for escrow expenses. Notwithstanding the foregoing, you may elect to withdraw your purchase order and request a full refund of your investment with interest and without deduction for escrow expenses at any time before the escrowed funds are released to us.
 
We intend to qualify as a REIT for federal income tax purposes beginning with our taxable year ending December 31 of the year in which the escrow period concludes. We intend to hold all of our investments through our operating partnership, of which we are the sole general partner. We are not a mutual fund and do not intend to register as an investment company under the Investment Company Act of 1940, of the Investment Company Act.
 
Our offices are located at 2575 East Camelback Road, Suite 500, Phoenix, Arizona 85016. Our telephone number is 866-907-2653. Our fax number is 888-805-1070, and the e-mail address of our investor relations department is investorservices@colecapital.com. We maintain a toll-free, automated information line at 866-907-2653, where you may obtain the daily determination of our NAV and the most recent offering price per share. You may find additional information about us at our website, www.colecapital.com. The contents of that website are not incorporated by reference in, and are not otherwise a part of, this prospectus.
 
Summary Risk Factors
 
An investment in our common stock involves risk and is not suitable for all investors. There is no certainty as to the amount of distributions you may receive, the value of your investment may decline and liquidity under our redemption program may not be available at all times. Some of the more significant risks relating to an investment in shares of our common stock include those listed below.
 
  •  We have no prior operating history and there is no assurance that we will achieve our investment objectives. In addition, because we have not yet identified any assets to be purchased with the net proceeds from this offering, this is a “blind pool” offering and you will not be able to evaluate our assets prior to the time of purchase.


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  •  The purchase and redemption price for shares of our common stock will be based on our NAV per share each business day, as calculated by our fund accountant. One component of that calculation will be estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate determined periodically by our independent valuation expert pursuant to individual appraisal reports, which may be adjusted upon the occurrence of material events, all in accordance with the valuation guidelines approved by our board of directors. The appraisal reports are based on information provided by our advisor; who also reviews them. The valuation methodologies used to determine the real estate component of our NAV involve subjective judgments and estimates, and may not accurately reflect the actual price at which our net real estate and real estate related assets could be liquidated on any given day. The resulting potential disparity in our NAV may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.
 
  •  There is no public market for our shares of common stock, we do not expect that a public market will develop and our charter does not require us to effect a liquidity event at any time in the future. Our goal is to provide stockholders with limited liquidity through redemptions at our NAV per share; however, we will be investing primarily in commercial real estate properties that cannot generally be readily liquidated. This means that there may be times during which we do not have sufficient liquid resources to satisfy all redemption requests. Further, to protect our operations and our non-redeeming stockholders, our board of directors may modify our redemption program, and under certain circumstances, our advisor may modify, limit or suspend our redemption program. As a result, our shares should be considered a potentially long-term investment with limited liquidity.
 
  •  Our sponsor has used our investment strategy, of focusing on necessity retail, office and industrial single-tenant properties, subject to long-term net leases to creditworthy tenants, in past and current real estate programs, and, as a result, we expect that we will compete with these other programs for properties and tenants.
 
  •  We may pay distributions and fund redemptions from sources other than cash flows from operations, including borrowings, proceeds from the sale of our common stock and proceeds from the sale of our assets, and we have no limits on the amounts we may pay from such other sources. Payments of distributions from sources other than cash flow from operations may reduce the amount of capital we ultimately invest in real estate, which may negatively impact the value of your investment and directly impact our daily NAV per share.
 
  •  We are dependent on our advisor and its affiliates to conduct our business and to distribute our shares. There are substantial conflicts of interest between us and our advisor and its affiliates, including with respect to allocation of investment and borrowing opportunities and allocation of their time and resources. Further, we will pay substantial fees to our advisor and its affiliates, including fees based on our daily NAV.
 
  •  This is a “best efforts” offering. If we are not able to raise a substantial amount of capital in the near term, we may have difficulties investing in properties and our ability to achieve our investment objectives, including diversification of our portfolio by property type and location, could be adversely affected.
 
  •  We may suffer from delays if our advisor is not able to locate suitable investments, which could adversely affect our ability to pay distributions and to achieve our investment objectives.
 
  •  Our board of directors may change certain of our investment policies without stockholder approval, which could alter the nature of your investment.
 
  •  If we fail to qualify as a REIT for federal income tax purposes and no relief provisions apply, our NAV and cash available for distribution to our stockholders could materially decrease.


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Our Board of Directors
 
We operate under the direction of our board of directors, the members of which are accountable to us and to our stockholders as fiduciaries. We have a three-member board of directors, consisting of Christopher H. Cole and our two independent directors, George N. Fugelsang and Roger D. Snell. Our charter requires that, upon and after the commencement of this offering, a majority of our directors be independent of our advisor. Among its other responsibilities, our board of directors (including the independent directors) has adopted our valuation guidelines for establishing our NAV on each business day and our valuation guidelines pertaining to the valuation of our commercial real estate assets, related liabilities and notes receivable secured by real estate, and will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility. Our charter provides that our independent directors will also be responsible for reviewing the performance of our advisor and sub-advisor, overseeing the investments made by our advisor and sub-advisor and approving the compensation paid to our advisor and its affiliates. Our directors will be elected on an annual basis by our stockholders. See the “Conflicts of Interest — Certain Conflict Resolution Procedures” section of this prospectus.
 
Our Sponsor and Advisor
 
Our sponsor is Cole Real Estate Investments, a trade name we use to refer to a group of affiliated entities directly or indirectly controlled by Christopher H. Cole. Our sponsor has been involved in acquiring, managing and disposing of commercial real estate for over three decades. During that time, our sponsor developed and refined its investment strategy of purchasing primarily single-tenant necessity properties that are leased to brand-name creditworthy tenants, subject to long-term net leases.
 
Our advisor, a Delaware limited liability company, is an affiliate of our sponsor and was formed solely for the purpose of managing our affairs on a day-to-day basis. Our chairman, chief executive officer and president, Christopher H. Cole, is the indirect sole owner of our advisor. In addition, a significant number of our sponsor’s executives and employees also serve as executives and employees of our advisor. See “— Summary of Prior Offerings” below.
 
Our advisor is obligated to use its best efforts, subject to the oversight of our board of directors, to, among other things, manage our portfolio and provide information to our independent valuation expert concerning our portfolio. Management of our portfolio will include activities such as determining the allocation of our portfolio among retail, office and industrial real estate properties, real estate properties in other sectors and real estate-related assets. Further, portfolio management will include making decisions about the active management of our portfolio, including decisions to acquire or dispose of real estate assets. Our board of directors has delegated to our advisor broad authority to manage our business in accordance with our investment objectives, strategy, guidelines, policies and limitations. The advisor’s role in the portfolio valuation process includes providing information about our commercial real estate assets, related liabilities and notes receivables secured by real estate to our independent valuation expert and estimating our accrued revenues and expenses. The advisor also has the right to review estimated values set forth in individual appraisal reports prepared by our independent valuation expert prior to finalization. The independent valuation expert will be free to accept or reject the advisor’s input in its discretion. Our fund accountant will perform the administrative tasks necessary to calculate our daily NAV. Our advisor will perform its duties and responsibilities under an advisory agreement as our fiduciary. See “Management — The Advisor.”
 
The Sub-Advisor
 
Our advisor has engaged BlackRock Investment Management, LLC to serve as its sub-advisor and perform the functions related to selecting and managing our liquid assets (cash, cash equivalents, other short-term investments, U.S. government securities, agency securities, corporate debt, liquid real estate-related, equity or debt securities and other investments for which there is reasonable liquidity). We refer to BlackRock Investment Management, LLC as the sub-advisor.
 
The sub-advisor will provide services related to the acquisition, management and disposition of our liquid assets, in accordance with our investment objectives, strategy, guidelines, policies and limitations. The fees


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paid to the sub-advisor will not be paid by us, but will instead be paid by our advisor out of the management fee that we pay to our advisor. The sub-advisor will perform its duties and will serve as a fiduciary under a sub-advisory agreement with our advisor, and the sub-advisor will have no contractual relationship with us. If our sub-advisor does not adequately perform its duties or fails to dedicate sufficient time to us our only recourse will be against our advisor.
 
Our Dealer Manager
 
Cole Capital Corporation, which we refer to as our dealer manager, is an affiliate of our sponsor and a member of the Financial Industry Regulatory Authority, or FINRA. Our dealer manager has distributed shares of many of our sponsor’s prior real estate programs, and has built relationships with a large number of broker-dealers throughout the country, which participated in some or all of those prior offerings. Our dealer manager will distribute the shares of our common stock on a best efforts basis, and will advise us regarding this offering, manage our relationships with participating broker-dealers and financial advisors and provide assistance in connection with compliance matters relating to the offering, including compliance regarding any sales literature that we may prepare.
 
Our Operating Partnership
 
We intend to own all or substantially all of our investments through Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP, our operating partnership, in order to be organized as an UPREIT. UPREIT stands for “Umbrella Partnership Real Estate Investment Trust.” An UPREIT is a REIT that holds all or substantially all of its assets through a partnership that the REIT controls as general partner. We have elected to use an UPREIT structure primarily to facilitate acquisitions of retail, office and industrial real estate properties, as well as other types of real estate and to facilitate investments in us by certain institutional investors. A sale of property directly to a REIT is generally a taxable transaction to the selling property owner. In an UPREIT structure, a seller of appreciated property who desires to defer taxable gain on the transfer of such property may transfer the property to our operating partnership in exchange for limited partnership interests. Such exchange could be made on a tax-free basis. Being able to offer a seller the opportunity to defer taxation of gain until the seller redeems its interests in our operating partnership for cash may give us a competitive advantage in acquiring desired properties or investments relative to buyers who cannot offer this opportunity. In addition, investing in our operating partnership, rather than in shares of our common stock, may be more attractive to certain institutional or other investors due to their business or tax structure. We are the sole general partner of our operating partnership and have contributed $900 to our operating partnership in exchange for our general partner interest. Initially, the only limited partner will be our advisor, and our advisor will hold a 0.1% interest. See “Our Structure and Formation” for a chart showing our ownership structure.
 
Investment Objectives
 
Our primary investment objectives are:
 
  •  to acquire commercial properties, leased under long-term net leases to creditworthy tenants, which provide current operating cash flow;
 
  •  to maintain a level of liquid assets as a source of funds to meet redemption requests;
 
  •  to provide reasonably stable, current income for you through the payment of distributions; and
 
  •  to provide the opportunity to participate in capital appreciation in the value of our investments.
 
Pursuant to our charter, these investment objectives may not be changed without the approval of our stockholders. See the “Investment Objectives, Strategy and Policies” section of this prospectus for a more complete description of our investment objectives and policies, as well as our investment restrictions. We may not achieve our investment objectives. See “Risk Factors” below.


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Investment Strategy
 
Our investment strategy is to invest primarily in a diversified portfolio of (1) necessity commercial properties in the retail, office and industrial sectors that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States and U.S. protectorates, (2) notes receivable and other investments secured by commercial real estate, including the origination of loans, and (3) U.S. government securities, agency securities, corporate debt and other investments for which there is reasonable liquidity. See “Investment Objectives, Strategy and Policies” for more details regarding our investment strategy. We believe that our organization as a perpetual-life REIT will allow us to acquire and manage our investment portfolio in a more active and flexible manner, as we will not be limited by a pre-determined operational period and the need to provide a “liquidity event” at the end of that period.
 
Investment Policies
 
Our independent members of our board of directors have adopted our investment policies. Our directors will formally review, at a duly called meeting, our investment policies on an annual basis and our real estate portfolio on a quarterly basis or, in each case, more often as they deem appropriate. Our board of directors, including a majority of our independent directors, must approve any changes to our investment policies. Under our investment policies, our advisor is delegated broad authority to execute real estate property and real estate related investment acquisitions and dispositions. Our board of directors will at all times have ultimate oversight over our investments and may change from time to time the scope of authority delegated to our advisor which in turn will modify the scope of authority of the sub-advisor, with respect to acquisition and disposition transactions. See “Investment Objectives, Strategy and Policies” for more details regarding our investment policies.
 
Valuation Policies
 
We have engaged an independent valuation expert, CBRE, Inc., which has expertise in appraising commercial real estate assets, related liabilities and notes receivable secured by real estate, to provide, on a rolling quarterly basis, valuations of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate to be set forth in individual appraisal reports, and to adjust those valuations for events known to the independent valuation expert that it believes are likely to have a material impact on previously provided estimates of the value of the affected commercial real estate assets, notes receivable secured by real estate or related real estate liabilities. All or substantially all of our commercial real estate assets, related liabilities and notes receivable secured by real estate will be held in our operating partnership. Our real estate assets will consist primarily of a portfolio of commercial real estate, as well as notes receivable, where the underlying collateral will typically be commercial real estate. Our commercial real estate related liabilities will consist primarily of mortgage loans secured by our commercial real estate. In addition, our assets will include liquid assets, which will be priced daily by third party pricing sources, and cash and cash equivalents. Our liabilities will include accrued fees and operating expenses, accrued debt service costs, accrued distributions payable; accrued dealer manager fees and advisory fees, which will be estimated by our advisor. Our board of directors will be responsible for ensuring that the valuation expert discharges its responsibilities in accordance with our valuation guidelines, and will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility, at regularly scheduled board of director meetings. See “Valuation Policies — Valuation.”
 
At the end of each business day, our fund accountant will calculate our NAV per share using a process that reflects (1) estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by our independent valuation expert in individual appraisal reports, as they may be updated upon certain material events described below, (2) daily updates in the price of liquid assets for which third party market quotes are available, (3) accruals of our daily distributions, and (4) estimates of daily accruals, on a net basis, of our operating revenues, expenses, debt service costs and fees. If a material event occurs between scheduled quarterly valuations that our advisor believes may materially affect the value of any of our commercial real estate assets, related liabilities or notes receivable secured by real estate, our advisor will inform the independent valuation expert so that, if


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appropriate, the independent valuation expert can adjust the most recent valuations provided in the applicable appraisal report to account for the estimated impact. Our fund accountant will determine our NAV per share by dividing our NAV on such day by the number of shares of our common stock outstanding as of the end of such day, prior to giving effect to any share purchases or redemptions to be effected on such day.
 
Our goal is to provide a reasonable estimate of the market value of our shares. However, the majority of our assets will consist of commercial real estate assets and, as with any commercial real estate valuation protocol, the conclusions reached by our independent valuation expert will be based on a number of judgments, assumptions and opinions about future events that may or may not prove to be correct. The use of different judgments, assumptions or opinions would likely result in different estimates of the value of our commercial real estate investments. In addition, on any given day, our published NAV per share may not fully reflect certain material events, to the extent that the financial impact of such events on our portfolio is not immediately quantifiable. As a result, the daily calculation of our NAV per share may not reflect the precise amount that might be paid for your shares in a market transaction, and any potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.
 
Daily Purchases of Shares at NAV
 
Our board of directors approved our initial offering price of $15.00, which will be the purchase price of our shares during the escrow period. Thereafter, the per share purchase price will vary from day-to-day and, on each business day, will be equal to our NAV per share as of the end of business on such day, in each case prior to giving effect to any share purchases or redemptions to be effected on such day.
 
After the end of the escrow period, we will file with the SEC after the close of business on a monthly basis a prospectus supplement disclosing the daily determination of our NAV per share for each business day in that month, which we refer to as the pricing supplement. Each business day, we will also post that business day’s NAV on our public website www.colecapital.com. The website will also contain this prospectus, including any supplements and amendments. You may also obtain the daily determination of our NAV per share by calling our toll-free, automated information line at 866-907-2653. As disclosed in “Share Purchases and Redemptions — Buying Shares,” we will disclose, on a quarterly basis in our periodic reports filed with the SEC, the principal valuation components of our NAV.
 
Any purchase orders that we receive prior to the close of the New York Stock Exchange (generally, 4:00 p.m. Eastern time) on any day the New York Stock Exchange is open for trading (a business day) will be executed at a price equal to our NAV per share for that day, as calculated after the close of business on that day. Purchase orders that we receive after the close of the New York Stock Exchange (generally, 4:00 p.m. Eastern time) will be executed at a price equal to our NAV per share as calculated after the close of business on the next business day. Purchase orders placed on a day that is not a business day, and purchase orders pursuant to our systematic investment program that would otherwise occur on a day that is not a business day, will be executed as if they were received prior to the close of business on the immediately following business day. See “Share Purchases and Redemptions — Buying Shares” for more details.
 
Daily Redemption of Shares at NAV
 
While you should view your investment as long-term, we have adopted a redemption plan, whereby on any business day, stockholders may request that we redeem all or any portion of their shares. Redemption requests received before the close of business (generally, 4:00 p.m. Eastern time) will be effected at a redemption price equal to our NAV per share calculated at the close of business on that day (that is, at the same price as any purchase orders received that day). Redemption requests received after the close of business (generally, 4:00 p.m. Eastern time) on any business day, or received on a day other than a business day, will be effected at our NAV per share calculated at the close of business on the next business day. Subject to limited exceptions, shares redeemed within 365 days of the date of purchase will be subject to a short-term trading fee equal to 2% of the aggregate NAV per share of such shares redeemed, which will inure indirectly to the benefit of our remaining stockholders. We also have the right to monitor the trading patterns of


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stockholders or their financial advisors and we reserve the right to reject any purchase or redemption transaction at any time based on what we deem to be a pattern of excessive, abusive or short-term trading. Requests for redemption will be settled promptly, subject to the limitations set forth below. We expect that there will be no regular secondary trading market for shares of our common stock.
 
Although the vast majority of our assets will consist of commercial real estate properties which cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition, we will maintain a number of sources of liquidity including (i) cash equivalents, other short-term investments, U.S. government securities, agency securities, corporate debt and liquid real estate-related securities and (ii) in the discretion of our advisor, a line of credit. In order to maintain a reasonable level of liquidity, our investment guidelines provide that we will target the following aggregate allocation to the above sources of liquidity: (1) 10% of our NAV up to $1 billion and (2) 5% of our NAV in excess of $1 billion. In addition, we may also fund redemptions from any available source of funds, including operating cash flows, borrowings, proceeds from this offering and/or sales of our assets. Despite these sources of liquidity, we may not always have sufficient liquid resources to satisfy redemption requests and you may not always be able to redeem your shares under the plan.
 
Under ordinary circumstances the total amount of net redemptions during a calendar quarter is limited to five percent of our total net assets on the last business day of the preceding quarter. Redemption requests will be satisfied on a first-come, first-served basis. If net redemptions do not reach the five percent limit in a calendar quarter, the unused portion will be carried over to the next quarter, except that the maximum amount of net redemptions during any quarter can never exceed ten percent of our total net assets on the last business day of the preceding quarter. If net redemptions in a calendar quarter reach the five percent limit (plus any carried over amount), after pro-rating redemptions for that day we will be unable to process any redemption requests for the rest of the calendar quarter. We will begin accepting redemption requests again on the first business day of the next calendar quarter, but will apply the five percent quarterly limitation on redemptions on a per-stockholder basis, instead of a first-come, first-served basis. Therefore each stockholder will be able to redeem at any time during that quarter up to five percent of the stockholder’s investment in our shares on the last business day of the preceding quarter, plus any new investment by the stockholder in our shares during that quarter (subject to applicable short-term trading fees). The per-stockholder limit will remain in effect for the following quarter if total net redemptions are more than two and one-half percent of our net assets on the last business day of the preceding quarter. Subject to these limits, our goal is to provide our stockholders uninterrupted access to liquidity for their investment to the maximum extent possible. Our board of directors, including a majority of independent directors, acting in accordance with their fiduciary duties to all stockholders, may modify or suspend our redemption plan in its discretion if it believes that such action is in the best interests of our stockholders. See “Shares Purchases and Redemptions — Redemption Plan — Redemption Limitations.”
 
Distributions
 
In order to qualify as a REIT, we are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income. For these purposes, REIT taxable income is computed without regard to the dividends-paid deduction and excludes net capital gain. Further, REIT taxable income does not necessarily equal net income as calculated in accordance with generally accepted accounting principles in the United States, or GAAP. Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board may deem relevant. We have not established a minimum distribution level. We may pay distributions from sources other than cash flow from operations, including from the proceeds of this offering, from borrowings or from the sale of properties or other investments, among others, and we have no limit on the amounts we may pay from such sources.
 
We expect that our cash flow from operations available for distribution will be lower in the initial stages of this offering until we have raised significant capital and made substantial investments. As a result, we expect that during the early stages of our operations, and from time to time thereafter, we may declare distributions in anticipation of cash flow that we expect to receive during a later period and these distributions


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would be paid from proceeds of this offering, borrowings or any other source available to the Company. Contrary to traditional non-exchange traded REITs, however, whose shares are typically sold and, on a limited basis, redeemed at, a fixed price that is not intended to reflect the value of the shares, our common stock will be sold and redeemed on a daily basis at NAV per share. As a result, distributions that exceed our operating cash flow will be reflected in our daily calculation of NAV.
 
We have adopted a distribution reinvestment plan, whereby stockholders will be able to elect to have their cash distributions automatically reinvested in additional shares of common stock. The per share purchase price for shares purchased pursuant to the distribution reinvestment plan will be equal to our NAV per share on the distribution date, after giving effect to all distributions. No selling commissions will be charged with respect to shares purchased pursuant to the distribution reinvestment plan. See “Description of Capital Stock — Distribution Reinvestment Plan.”
 
Leverage
 
We intend to use leverage to provide additional funds to support our investment activities. Our target leverage after we have acquired an initial substantial portfolio of diversified investments is 50% of the greater of cost (before deducting depreciation or other non cash reserves) or market value of our gross assets. During the period when we are beginning our operations and growing our portfolio, we may employ greater leverage in order to quickly build a diversified portfolio of assets. Our board of directors may from time to time modify our leverage policy in light of then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general conditions in the market for debt and equity securities, growth and acquisition opportunities or other factors. Our charter generally restricts the amount of indebtedness that we may incur to 300% of our net assets, which generally approximates 75% of the cost of our investments, but does not restrict the form of indebtedness we may incur. Notwithstanding the foregoing, our aggregate indebtedness may exceed such limit, but only if such excess is approved by a majority of our independent directors. See “Investment Objectives, Strategy and Policies” for more details regarding our leverage policies.
 
Our Status Under the Investment Company Act
 
We do not believe that we are required, and we do not intend to, register as an investment company under the Investment Company Act. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that would restrict our activities and significantly increase our operating expenses. See “Risk Factors — Risks Related to our Corporate Structure.”
 
Summary of Prior Offerings
 
The “Prior Performance Summary” section of this prospectus contains a discussion of the programs previously offered by our sponsor, Cole Real Estate Investments, from January 1, 2001 through December 31, 2010. Certain financial results and other information relating to such programs with investment objectives similar to ours are also provided in the “Prior Performance Tables” included as Appendix A to this prospectus. The prior performance of the programs previously sponsored by Cole Real Estate Investments is not necessarily indicative of the results that we will achieve. For example, most of the prior programs were privately offered and did not bear the additional costs associated with being a publicly held entity. At the same time, we expect that our total expenses, including the costs of distributing our shares, will be lower than the total expenses of our prior public programs.
 
Fees and Expenses
 
We will pay our dealer-manager and our advisor the fees and reimbursements described below in connection with performing services for us. We will not pay our advisor or its affiliates any separate fees for property acquisitions or dispositions, financings, property management or leasing.


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Type of Compensation — Recipient
 
Method of Compensation
 
Estimated Amount
 
    Organization and Offering Stage    
Upfront Selling Commission
  We will not pay any upfront selling commissions.   None
Dealer Manager Fee 
Our Dealer Manager
  We will pay our dealer manager an asset-based dealer manager fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.55% of our NAV for such day. At our dealer manager’s discretion it may reallow a portion of the dealer manager fee equal to an amount up to 1/365th of 0.20% of our NAV to participating broker dealers. Because the dealer manager fee is calculated based on NAV, it reduces NAV with respect to all shares of our common stock, including shares issued under our distribution reinvestment plan.   The actual amount will depend on the number of shares sold, the dates on which the shares are sold, the daily NAV per share and the period of time that the investor continues to hold the shares. Assuming that (i) one-half of all $3,500,000,000 of shares registered for sale in our primary offering are sold as of the first day after the end of the escrow period, and the other half are sold one year after the end of the escrow period; (ii) all of the shares are held until the end of the two-year offering period; and (iii) our NAV per share remains at $15.00 at all times, then we estimate that the dealer manager fee will equal approximately $9,625,000 in year one after the escrow period and $19,250,000 in year two. After year two, assuming all of the shares sold continue to be held and our NAV per share remains at $15.00, the dealer manager fee will equal approximately $19,250,000 per annum. In the aggregate, underwriting compensation from all sources, including the dealer manager fee and other underwriting compensation paid to participating broker-dealers by us or by our advisor and its affiliates, will not exceed 10% of the gross proceeds from our primary offering.


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Type of Compensation — Recipient
 
Method of Compensation
 
Estimated Amount
 
Organization and Offering Expense Reimbursement 
Our Advisor
  Our advisor has agreed to fund on our behalf all costs of our organization and offering (other than the dealer manager fee). Beginning on the date the offering proceeds are released from escrow, we will start to reimburse our advisor, without interest, for these organization and offering cost incurred both before and after the release of the escrow funds. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.75% of the aggregate gross offering proceeds from this offering, including shares issued in connection with the distribution reinvestment plan. If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.75% limit) calculated on an accumulated basis, until our advisor has been reimbursed in full.   The timing and amount of reimbursements are dependent on the actual expenses incurred, the gross proceeds of shares sold, and the dates on which the shares are sold. Assuming that (i) one-half of all $4,000,000,000 of shares registered for sale in our primary offering, including shares issued under our distribution reinvestment plan, are sold as of the first day after the end of the escrow period, and the other half are sold one year after the end of the escrow period; and (ii) our NAV per share remains at $15.00 at all times, then the maximum amount of organization and offering expenses that can be reimbursed to our advisor will equal approximately $15,000,000 in year one after the escrow period and $15,000,000 in year two.
Operational Stage
Advisory Fee —
Our Advisor
  We will pay our advisor an advisory fee that will be payable in arrears on a monthly basis and accrue daily in an amount equal to 1/365th of 0.90% of our NAV for each day.   The annualized management fee, and the actual dollar amounts, are dependent upon our monthly average NAV and, therefore, cannot be determined at the present time. Based on the following assumed levels of our monthly average NAV, our annualized management fee will be as follows:
 
                 
            Total
 
         Monthly
  Annualized
 
         Average
  Advisory
 
       
  NAV
  Fee ($)  
 
        $1 billion   $ 9,000,000  
        $2 billion   $ 18,000,000  
        $4 billion   $ 36,000,000  
 


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Type of Compensation — Recipient
 
Method of Compensation
 
Estimated Amount
 
         
Acquisition Expense Reimbursement —
Our Advisor
  We will not pay our advisor any acquisition, financing or other similar fees in connection with making investments. We will reimburse our advisor for out-of-pocket expenses in connection with the acquisition of commercial real estate properties, real estate-related assets and other investments, including reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of acquisition services to us other than our executive officers, provided that no reimbursement shall be made for costs of such employees of our advisor or its affiliates to the extent that such employees perform services for which our advisor receives a separate acquisition fee.   The actual amount will depend upon actual expenses incurred and, therefore, cannot be determined at this time.
         
Operating Expense Reimbursement —
Our Advisor
  We will reimburse our advisor for out-of-pocket expenses in connection with providing services to us, including reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of services to us other than our executive officers, provided that no reimbursement shall be made for costs of such employees of our advisor or its affiliates to the extent that such employees perform services for which our advisor receives a separate fee. The expense reimbursements that we will pay to our advisor include expenses incurred by the sub-advisor on our behalf.   Actual amounts are dependent upon actual expenses incurred and, therefore, cannot be determined at this time.
         
Performance Fee —
Our Advisor
  We will pay our advisor a performance fee calculated on the basis of our total return to stockholders, payable annually in arrears, such that for any year in which our total return on stockholders’ capital exceeds 6% per annum on a calendar year basis, our advisor will be entitled to 25% of the excess total return but not to exceed 10% of the aggregate total return for such year.   The actual amount will depend on our performance, as well as on the number of shares sold, the daily NAV per share and the period of time that the investor continues to hold the shares and, therefore, can not be determined at this time.
 
Our Structure
 
The organizational chart in the section “Our Structure and Formation” shows our ownership structure and our relationship with our advisor, the sub-advisor, our dealer manager and Cole Holdings Corporation upon consummation of the formation transactions. Our operating partnership will own our investments in commercial properties and other assets, directly or indirectly, generally through special purpose entities.
 
Conflicts of Interest
 
Our advisor, our dealer manager, and their respective affiliates, officers and directors will experience conflicts of interests in connection with the management of our business, including those listed below.
 
  •  Our advisor, our dealer manager and their affiliates will receive substantial fees in connection with the services provided to us, which will create potential conflicts of interest. While those fees must be

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  approved on an annual basis by our independent directors, the approval process may be constrained, to some extent, because the independent directors are likely to consider, among other factors, our stockholders’ expectation that affiliates of Cole Real Estate Investments sponsored and will serve in the roles of our advisor and dealer manager.
 
  •  The advisory fee and performance fee that we pay to our advisor are based upon our NAV, and our advisor will be involved in estimating certain accrued fees and expenses that are part of our NAV and performing the administrative calculation of our daily NAV.
 
  •  We will rely on the personnel of our advisor and its respective affiliates to manage our assets and daily operations. Our officers and our non-independent director are also officers of our advisor and are affiliated with other Cole-sponsored programs and therefore will have conflicts of interest in allocating their time and resources.
 
  •  The management personnel of our advisor, each of whom also makes investment decisions for other Cole-sponsored programs, must determine which investment opportunities to recommend to us or another Cole-sponsored program or joint venture, some of which have investment objectives similar to ours.
 
  •  Our dealer manager is an affiliate of our advisor and therefore is not in a position to make an independent review of us or this offering.
 
Our charter contains provisions, and our independent directors have adopted policies and procedures, that are designed to mitigate many of the various conflicts of interest.
 
In addition, our executive officers and the chairman of our board of directors will face conflicts similar to those described above because of their affiliation with our advisor and other Cole-sponsored programs. See “Conflicts of Interest.”


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Risk Factors
 
An investment in shares of our common stock involves substantial risks. You should carefully consider the following risk factors in addition to the other information contained in this prospectus before purchasing shares. The occurrence of any of the following risks might cause you to lose a significant part of your investment. The risks and uncertainties discussed below are not the only ones we face, but do represent those risks and uncertainties that we believe are most significant to our business, operating results, prospects and financial condition. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Statements Regarding Forward-Looking Information.”
 
Risks Related to an Investment in Cole Real Estate Income Strategy (Daily NAV), Inc.
 
We have no prior operating history and there is no assurance that we will achieve our investment objectives. Further, this is a “blind pool,” as we currently own no properties and have not identified any specific properties for purchase. For this and other reasons, an investment in our shares is speculative.
 
We are a newly formed entity with no operating history. As of the date of this prospectus, we have not made any investments in real estate or otherwise and do not own any properties or have any operations or financing from sources other than affiliates of our advisor. Since we currently own no properties, and have not identified any specific properties for purchase, this is a “blind pool.” You will not be able to evaluate the economic merit of our investments until after the investments have been made. As a result, an investment in our shares is speculative.
 
You should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that are, like us, in their early stage of development. To be successful in this market, we and our advisor must, among other things:
 
  •  identify and acquire investments that further our investment objectives;
 
  •  increase awareness of the Cole Real Estate Income Strategy (Daily NAV), Inc. name within the investment products market;
 
  •  expand and maintain our network of licensed broker-dealers and others who sell shares on our behalf and other agents;
 
  •  rely on our advisor, who will engage and rely on its sub-advisor, and its affiliates to attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
 
  •  respond to competition for our targeted real estate and other investments as well as for potential investors;
 
  •  rely on our advisor and its affiliates to continue to build and expand our operations structure to support our business; and
 
  •  rely on our advisor, who will engage and rely on its sub-advisor, and its affiliates and our board of directors to be continuously aware of, and interpret, marketing trends and conditions.
 
We may not succeed in achieving these goals, and our failure to do so could cause you to lose a significant portion of your investment. For a more detailed discussion of our investment policies, see the “Investment Objectives, Strategy and Policies — Acquisition and Investment Policies” section of this prospectus.
 
Your purchase and redemption of our shares will be based on our NAV per share, and the daily determination of our NAV per share will be based upon subjective judgments, assumptions and opinions about future events, that may or may not turn out to be correct. As a result, our daily NAV per share may not reflect the precise amount that might be paid to for your shares in a market transaction.
 
The purchase and redemption price for shares of our common stock will be based on our NAV per share each business day, which will require an estimate of the value of our assets and liabilities — consisting


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principally of illiquid commercial real estate and illiquid commercial real estate mortgages. Although quarterly valuations of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate will be performed by our independent valuation expert, the advisor will also monitor our commercial real estate investments for events that may be expected to have a material impact on the most recent estimated values provided by our independent valuation expert. The valuation methodologies used to estimate the value of our commercial real estate assets, related liabilities and notes receivable secured by real estate involve subjective judgments, assumptions and opinions about future events, which may or may not turn out to be correct. Any resulting potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders. See “Valuation Policies — Calculation of Our NAV Per Share” for more details about how our NAV will be calculated.
 
It may be difficult to reflect, fully and accurately, material events that may impact our daily NAV between quarterly valuations.
 
Since our fund accountant’s determination of our daily NAV per share will be based in part on quarterly estimates of the values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by the independent valuation expert in individual appraisal reports in accordance with valuation guidelines approved by our board of directors, our published NAV per share on any given day may not fully reflect any or all changes in value that may have occurred since the most recent quarterly valuation. Our advisor will review appraisal reports and monitor our commercial real estate and notes receivable assets and liabilities, but it may be difficult to reflect fully and accurately rapidly changing market conditions or material events that may impact the value of our commercial real estate assets, notes receivable secured by real estate or related real estate liabilities between periodic valuations, or to obtain quickly complete information regarding any such events. For example, an unexpected termination or renewal of a material lease, a material change in vacancies or an unanticipated structural or environmental event at a property may cause the value of a commercial real estate asset to change materially, yet obtaining sufficient relevant information after the occurrence has come to light and/or analyzing fully the financial impact of such an event may be difficult to do and may require some time. As a result, the NAV per share may not reflect a material event until such time as sufficient information is available and analyzed, and the financial impact is fully evaluated, such that our NAV may be appropriately adjusted in accordance with our valuation guidelines. Depending on the circumstance, the resulting potential disparity in our NAV may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.
 
NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.
 
The method for calculating our NAV, including the components that will be used in calculating our NAV, is not prescribed by rules of the SEC or any state securities regulatory agency. Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV will not be audited by our independent registered public accounting firm. We will calculate and publish NAV solely for purposes of establishing the daily price at which we will sell and redeem shares of our common stock after the close of the escrow period, and you should not view our NAV as a measure of our historical or future financial condition or performance. The components and methodology that will be used by our fund accountant in calculating our NAV may differ from those used by other companies now or in the future.
 
In addition, our NAV calculations, to the extent that they incorporate valuations of our assets and liabilities, are not prepared in accordance with United States generally accepted accounting principles, also known as GAAP. These valuations, which are based on market values that assume a willing buyer and seller, may differ from liquidation values that could be realized in the event that we were forced to sell assets.
 
You should carefully review the disclosure of our valuation policies and how NAV will be calculated, including the illustrative hypothetical calculation of NAV, under “Valuation Policies.”


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An investment in shares of our common stock will have limited liquidity. There is no public market for our shares of common stock and our limited redemption program may not have sufficient liquidity at all times to redeem your shares. As a result, you should purchase your shares as a long-term investment.
 
There is no current public market for shares of our common stock, we do not expect that a public market will ever develop and our charter does not require a liquidity event at a fixed time in the future. Therefore, redemption of shares by us will likely be the only way for you to dispose of your shares. While we designed our redemption plan to allow stockholders to request redemptions, on a daily basis, of all or any portion of their shares, our ability to fulfill redemption requests is subject to a number of limitations. Most significantly, the vast majority of our assets will consist of commercial real estate properties, which cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. Further, the redemption program is subject to quarterly redemption limits and to protect our operations, our status as a REIT, and our non-redeeming stockholders, our board of directors may modify or suspend our redemption program or limit stockholder redemptions. Additionally, subject to limited exceptions, shares of our common stock redeemed within 365 days of the date of purchase may be subject to a short-term trading fee of 2% of the aggregate NAV per share of such shares redeemed. As a result, your ability to have your shares redeemed by us may be limited, and our shares should be considered a potentially long-term investment with limited liquidity. See “Share Purchases and Redemptions — Redemption Plan — Redemption Limitations.”
 
Economic events that may cause our stockholders to seek to redeem their shares may materially adversely affect our cash flow and our ability to achieve our investment objectives.
 
Economic events affecting the U.S. economy, such as the general negative performance of the real estate sector or the negative performance of the U.S. economy as a whole, could cause our stockholders to seek to redeem their shares. Even if we are able to satisfy all resulting redemption requests, our cash flow could be materially adversely affected. In addition, if we elect to sell valuable assets to satisfy redemption requests, our ability to achieve our investment objectives, including, without limitation, diversification of our real estate property portfolio by property type and location, moderate financial leverage, conservative operating risk and an attractive level of current income, could be materially adversely affected.
 
We may fund redemptions from sources other than cash flow from operations, including borrowings by the REIT, proceeds from this offering or proceeds from asset sales, which may reduce the amount of capital we ultimately invest and negatively impact the value of your investment.
 
To the extent that cash flow from operations is insufficient to fund all requests for redemptions, we may fund all or some of the redemptions from borrowings by the REIT, proceeds from this offering or proceeds from the sale of assets, and we have no limits on the amounts we may pay from such other sources. The payment of redemptions from sources other than cash flow from operations may reduce the amount of capital we have available to invest in real estate, negatively impact the value of your investment and reduce your overall return. We expect that, especially during the early stages of our development, as well as from time to time thereafter, we may fund redemptions from sources other than cash flow.
 
We expect to utilize our sponsor’s investment strategy, which historically has been applied primarily in the retail sector, to acquire corporate office and industrial properties as well. As a result, the prior performance of the other Cole-sponsored real estate programs may not be indicative of our future results.
 
The public real estate programs previously sponsored by Cole Real Estate Investments, our sponsor, had a principal focus on acquiring single-tenant properties, subject to long-term net leases to creditworthy tenants, in the retail sector. Our sponsor also utilized this same approach to a more limited extent in the corporate office and industrial sector. It is our expectation that, in managing our investments, our sponsor and its affiliated advisor will continue to use this same investment strategy for the properties we purchase in the corporate office and industrial sector as well. As a result, the prior performance of other Cole-sponsored real estate programs may not be indicative of our future results.


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This is our sponsor’s and affiliated advisor’s first real estate program structured as a “perpetual-life” REIT.
 
This will be our sponsor’s first program structured as a “perpetual-life” REIT, or an investment vehicle of indefinite duration focused principally on acquiring a portfolio of real estate that has no target date for sale of the portfolio or other liquidity event. While the officers and other key personnel of our advisor and its affiliates have significant experience acquiring and managing real estate for defined life non-exchange traded REITs, and, to a more limited extent, listed REITs of indefinite duration, this will be our sponsor’s first program structured as a non-exchange traded REIT with an indefinite life. Acquiring and managing a portfolio of commercial real estate that has no target liquidation event may present challenges that are different than acquiring and managing a portfolio of real estate that is expected to be owned for a limited and specified investment period. For this and other reasons, the prior performance of other Cole-sponsored REITs may not be indicative of our future results.
 
The amount and source of distributions we may make to our stockholders is uncertain and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future.
 
We have not established a minimum distribution payment level, and our ability to make distributions to our stockholders may be adversely affected by a number of factors, including the risk factors described in this prospectus. Because we currently have no properties and will commence operations only upon the conclusion of the escrow period, we may not generate sufficient income to make distributions to our stockholders. Our board of directors will make determinations regarding distributions based upon, among other factors, our financial performance, our debt service obligations, our debt covenants, and capital expenditure requirements. Among the factors that could impair our ability to make distributions to our stockholders are:
 
  •  the limited size of our real estate portfolio, in the early stages of our development;
 
  •  our inability to invest, on a timely basis and in attractive commercial properties, the proceeds from sales of our shares;
 
  •  our inability to realize attractive risk-adjusted returns on our investments;
 
  •  unanticipated expenses or reduced revenues that reduce our cash flow or non-cash earnings;
 
  •  defaults in our investment portfolio or decreases in the value of our properties; and
 
  •  the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
 
As a result, we may not be able to make distributions to our stockholders at any time in the future, and the level of any distributions we do make to our stockholders may not increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.
 
We may suffer adverse tax consequences if the amount of distributions do not comply with certain tax requirements, and we expect that a substantial portion of our distributions will be taxed as ordinary income to our stockholders.
 
To qualify for taxation as a REIT, we will be required to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code.
 
In addition, dividends that we pay to our stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains


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to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital distribution is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock, until the distribution exceeds the stockholder’s basis. Return of capital distributions in excess of a stockholder’s tax basis in our shares will be treated as gain from the sale of shares.
 
We may pay some or all of our distributions, and fund some or all redemptions, from sources other than cash flow from operations, including borrowings by the REIT, proceeds from this offering or proceeds from asset sales, which may reduce the amount of capital we ultimately invest and negatively impact the value of your investment.
 
To the extent that cash flow from operations is insufficient to pay distributions to you or to fund redemptions, we may pay all or some of our distributions and fund all or some of our redemptions from borrowings by the REIT, proceeds from the sale of our common stock in this offering or proceeds from the sale of assets, and we have no limits on the amounts we may pay from such other sources. The payment of distributions and redemptions from sources other than cash flow from operations may reduce the amount of capital we have available to invest in real estate, negatively impact the value of your investment and reduce your overall return. We expect that, especially during the early stages of our development, as well as from time to time thereafter, we may declare distributions and/or fund redemptions that exceed our cash flows from operations and in anticipation of future cash flows.
 
If we do not meet the minimum offering requirements for this offering, you may earn a lower rate of return on your escrowed funds than could have been achieved from an alternative investment.
 
We will take purchase orders and hold investors’ funds in an interest-bearing escrow account until we receive purchase orders for at least $10,000,000 in shares of our common stock and our board of directors determines it is in our best interest to cause such proceeds to be released to us and authorizes our escrow agent to do so, but in no event longer than 180 days following the initial offering date. If we do not receive purchase orders for the minimum offering amount within such 180 day period, this offering will terminate and any funds that you deposited into escrow will be returned to you, along with interest earned thereon. The interest rate on the funds delivered into escrow may be less than the rate of return you could have achieved from an alternative investment. For a more detailed discussion of our investment policies, see the “Investment Objectives, Strategy and Policies — Change in Investment Policies” section of this prospectus.
 
Purchases of common stock by our directors, officers and other affiliates in this offering should not influence investment decisions of independent, unaffiliated investors.
 
Directors, officers and other affiliates of ours may purchase shares of our common stock, and these purchases will be included in determining whether we have received at least $10,000,000 in shares of our common stock. There are no written or other binding commitments with respect to the acquisition of shares by these parties, and there can be no assurance as to the amount, if any, of shares of common stock these parties may acquire in the offering. Any shares purchased by our directors, officers and other affiliates will be purchased for investment purposes only. However, the investment decisions made by directors, officers and other affiliates who make such purchases should not influence your decision to invest in shares of our common stock, and you should make your own independent investment decision concerning the risks and benefits of an investment in our shares of common stock.
 
This is a “best efforts” offering. If we are not able to raise a substantial amount of capital in the near term, we may have difficulties investing in properties and our ability to achieve our investment objectives, including diversification of our portfolio by property type and location, could be adversely affected.
 
This offering is being made on a “best efforts” basis, which means that the dealer manager and the broker-dealers participating in this offering are only required to use their best efforts to sell the shares and have no firm commitment or obligation to purchase any of the shares. As a result, we may not be able to raise


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a substantial amount of capital in the near term. If we are not able to accomplish this goal, we may have difficulty in identifying and purchasing suitable properties on attractive terms in order to meet our investment objectives. Therefore, there could be a delay between the time we receive net proceeds from the sale of shares of our common stock in this offering and the time we invest the net proceeds. This could cause a substantial delay in the time it takes for your investment to realize its full potential return and could adversely affect our ability to pay regular distributions of cash flow from operations to you. If we fail to timely invest the net proceeds of this offering, our ability to achieve our investment objectives, including diversification of our portfolio by property type and location, could be adversely affected. In addition, subject to our investment policies, we are not limited in the number or size of our investments or the percentage of net proceeds that we may dedicate to a single investment. If we use all or substantially all of the proceeds from this offering to acquire one or a few investments, the likelihood of our profitability being affected by the performance of any one of our investments will increase, and an investment in our shares will be subject to greater risk.
 
If we raise substantially less than the maximum offering amount, we may not be able to construct a diverse portfolio of real estate and real estate-related investments, and the value of your investment may fluctuate more widely with the performance of specific investments.
 
We are dependent upon the proceeds to be received from this offering to conduct our proposed investment activities. This offering is being made on a “best efforts” basis, whereby our dealer manager and the broker/dealers that participate in the offering are only required to use their best efforts to sell shares of our common stock and have no firm commitment or obligation to purchase any of the shares of our common stock. As a result, we do not know the amount of proceeds that will be raised in this offering or that we will achieve sales of the maximum offering amount. If we are unable to raise substantially more than the minimum offering amount, we may not be able to invest in a diverse portfolio in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we make. Your investment in shares of our common stock would be subject to greater risk to the extent that we lack a diversified portfolio of investments. In addition, our fixed operating expenses, as a percentage of gross income, would be higher, and our financial condition and ability to pay distributions could be adversely affected if we are unable to raise substantial funds in this offering.
 
We may suffer from delays if our advisor is not able to locate suitable investments, which could adversely affect our ability to pay distributions and to achieve our investment objectives.
 
If we are able to raise capital quickly during this offering, we may have difficulty in identifying and purchasing suitable commercial real estate properties in a timely and efficient fashion. This may impact the value of your investment in our common stock and our ability to pay distributions to you.
 
Our board of directors may change certain of our investment policies without stockholder approval, which could alter the nature of your investment.
 
Except for changes to the investment objectives and investment restrictions contained in our charter, which require stockholder consent to amend, our board of directors, a majority of whom are independent, may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the types of investments described in this prospectus. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.


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Our participation in a co-ownership arrangement may subject us to risks that otherwise may not be present in other real estate investments.
 
We may enter in co-ownership arrangements with respect to a portion of the properties we acquire. Co-ownership arrangements involve risks generally not otherwise present with an investment in real estate, such as the following:
 
  •  the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
 
  •  the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies, objectives or status as a REIT;
 
  •  the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;
 
  •  the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
 
  •  the risk that a co-owner could breach agreements related to the property, which may cause a default, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities law, result in a foreclosure or otherwise adversely affect the property and the co-ownership arrangement;
 
  •  the risk that a default by any co-tenant would constitute a default under the applicable mortgage loan financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-tenants;
 
  •  the risk that we could have limited control and rights, with management decisions made entirely by a third-party; and
 
  •  the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.
 
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
 
We may want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright, we may not be able to sell our interest in a property at the time we would like to sell.
 
Risks Related to Our Relationship with Our Advisor and Its Affiliates
 
Our advisor and its affiliates, including our dealer manager, will face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
 
Our advisor and its affiliates, including our dealer manager, are entitled to substantial fees from us under the terms of the advisory agreement and the dealer manager agreement. These fees could influence the


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judgment of our advisor and its affiliates in performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
 
  •  the continuation, renewal or enforcement of our agreements with our advisor and its affiliates;
 
  •  the advisor’s role in estimating accruals of expenses for our fund accountant’s calculation of our daily NAV, as the fees of our advisor and its affiliates are based on our NAV, however, any intentionally inaccurate estimation of the Company’s daily net operating revenues, expenses and fees by the Advisor could constitute a breach of its fiduciary duty to the Company and its stockholders, and may subject the Advisor to significant liability; and
 
  •  the amount of fees paid to our advisor and its affiliates. While the fees must be approved on an annual basis by our independent directors, the approval process may be constrained, to some extent, because the independent directors are likely to consider, among other factors, our stockholders’ expectation that affiliates of Cole Real Estate Investments sponsored and will serve in the roles of our advisor and our dealer manager.
 
Our advisor will be responsible for estimating amounts of certain liabilities that will affect calculation of our NAV
 
Our advisor will be responsible for estimating the amounts of certain liabilities that will be used by our independent fund accountant to determine our daily NAV per share. These estimated amounts will include estimates of accrued fees and expenses attributable to this offering, accrued operating fees and expenses and accrued distributions. To the extent that these liabilities are based on estimates, this could lead to conflicts of interest with our advisor because the advisor’s fee is based on a percentage of our NAV, although any intentionally inaccurate estimation of the Company’s daily net operating revenues, expenses and fees by the advisor could constitute a breach of its fiduciary duty to the Company and its stockholders, and may subject the advisor to significant liability.
 
Our advisor has engaged its sub-advisor to select and manage our liquid investments. The advisor will rely on the performance of its sub-advisor in implementing the liquid investments portion of our investment strategy.
 
Our advisor has engaged its sub-advisor to select liquid investments pursuant to a sub-advisory agreement between our advisor and its sub-advisor. We do not have a direct contractual relationship with the sub-advisor. The sub-advisor will have substantial discretion, within our investment guidelines, to make decisions related to the acquisition, management and disposition of our liquid assets. If the sub-advisor does not succeed in implementing the liquid investments portion of our investment strategy, our performance will suffer. In addition, even though our advisor will have the ability to terminate the sub-advisor with 60 days’ prior written notice it may be difficult and costly to terminate and replace the sub-advisor.
 
Payment of fees to our advisor and our dealer manager will reduce the cash available for investment and distribution and will increase the risk that you will not be able to recover the amount of your investment in our shares.
 
Our advisor and its affiliated dealer manager will perform services for us in connection with the distribution of our shares, the selection and acquisition of our investments, and the management of our assets. We will pay our advisor and our dealer manager fees for these services, which will reduce the amount of cash available for investments or distributions to our stockholders. The fees we pay to our advisor and its affiliates decrease the value of our portfolio and increase the risk that stockholders may receive a lower price when they request redemption of their shares than the purchase price they initially paid for their shares.


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Our advisor faces conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
 
Pursuant to the terms of our advisory agreement, our advisor is entitled to fees that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. For example, the advisory fee is based on our NAV, and not on the costs or book value of our investments, and our advisor is entitled to an incentive fee, based on the annual performance of our stock. Nevertheless, our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance that would entitle our advisor to incentive compensation.
 
Our advisor will face conflicts of interest with respect to the allocation of investment opportunities between us and other real estate programs that our managed by affiliates of our advisor.
 
We will rely on our advisor to identify and select potential real estate investment opportunities on our behalf. At the same time, our advisor’s affiliates and our advisor’s officers manage other Cole-sponsored real estate programs that may have investment objectives and investment strategies that are similar to our objectives and strategies. As a result, our advisor could face conflicts of interest in allocating real estate acquisition opportunities as they become available. While the Cole-sponsored programs have allocation procedures in place, there is a risk that our advisor’s allocation of investment properties may result in our acquiring a property that provides lower returns to us than a property purchased by another Cole-sponsored program. In addition, we may acquire properties in geographic areas where other Cole-sponsored programs own properties. If one of the other Cole-sponsored programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. Similar conflicts of interest may arise if our advisor recommends that we make or purchase mortgage loans or participations in mortgage loans, since other Cole-sponsored programs may be competing with us for these investments. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making your investment.
 
Our officers face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to implement successfully our business strategy and to generate returns to you.
 
Each of our executive officers, including Mr. Cole, who also serves as the chairman of our board of directors, also has an interest in our advisor and our dealer manager. In addition, our executive officers serve as officers of one or more entities affiliated with our advisor that provide investment management advice to other Cole-sponsored real estate programs, as well as executive officers and/or board members of these other real estate programs. As a result, these individuals owe fiduciary duties to these other entities and their stockholders, members and limited partners. These additional fiduciary duties may create conflicts with the duties that they owe to us and to our stockholders. There is a risk that their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our investment strategy and our investment and leasing opportunities. Conflicts between the best interests of our business and the best interests of these other entities are most likely to arise from involvement in activities related to (i) allocation of new acquisition opportunities, (ii) allocation of their time, (iii) allocation of tenants, (iv) allocation of opportunities to sell assets, and (v) allocation of our dealer manager’s time. If these individuals were to act or fail to act in a manner that was detrimental to our business, or favor one entity over another, they could be subject to liability for breach of their fiduciary duty to us and our stockholders. If these potential conflicts are not appropriately managed, we may not be able to implement our investment strategy in a successful manner, generate cash needed to pay distributions to you and maintain or increase the value of our assets.
 
We depend on our advisor, and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement.
 
We depend on our advisor, and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement. Our ability to make distributions and achieve our investment objectives is


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dependent upon the performance of our advisor in the acquisition of real estate properties and other real estate-related assets, the management of our portfolio, the selection of tenants for our properties and the determination of any financing arrangements. If our advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, our advisor may be unable to allocate sufficient time and resources to our operations. If our advisor is unable to allocate sufficient resources to oversee and perform our operations for any reason, we may be unable to achieve our investment objectives or pay distributions to our stockholders. See “Conflicts of Interest — Potential Conflicts Arising From Other Activities of Our Advisor and its Affiliates.”
 
If our advisor loses or is unable to obtain key personnel, including in the event another Cole-sponsored program internalizes its advisor, our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to you and the value of your investment.
 
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our advisor, as listed beginning on page 90 of this prospectus, each of whom would be difficult to replace. Our advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or our advisor. If any of our key personnel were to cease their affiliation with our advisor, our operating results could suffer. This could occur, among other ways, if another Cole-sponsored program internalizes its advisor. If that occurs, key personnel of our advisor, who also are key personnel of the internalized advisors, might become employees of the other program and would no longer be available to our advisor. Further, we do not intend to separately maintain key person life insurance on Mr. Cole or any other person. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.
 
The termination or replacement of our advisor could trigger a repayment event under our mortgage loans for some of our properties and the credit agreement governing for any line of credit we obtain.
 
Lenders for certain of our properties may request provisions in the mortgage loan documentation that would make the termination or replacement of our advisor an event requiring the immediate repayment of the full outstanding balance of the loan. If we elect to obtain a line of credit and are able to do so, the termination or replacement of our advisor could trigger repayment of outstanding amounts under the credit agreement governing our line of credit. If a repayment event occurs with respect to any of our properties, our ability to achieve our investment objectives could be materially adversely affected.
 
Our board of directors will not approve, in advance, the investment decisions made by our advisor.
 
Our board of directors has approved investment guidelines that delegate to our advisor the authority to execute (1) real estate property acquisitions and dispositions and (2) investments in other real estate-related assets, and to (3) contract with a sub-advisor to purchase and sell liquid assets, liquid real estate-related securities, cash and cash equivalents, in each case so long as such investments are consistent with our investment guidelines. As a result, our advisor will have substantial latitude within these broad parameters in determining the types of assets that are proper investments for us. Our directors will not review, in advance, the investment decisions made by our advisor or sub-advisor. Instead, the directors will review our investment guidelines on an annual basis and our investment portfolio on a quarterly basis or, in each case, as often as they deem appropriate. In conducting these periodic reviews, our directors will rely primarily on information provided to them by our advisor. Furthermore, transactions entered into on our behalf by our advisor may be costly, difficult or impossible to unwind when they are subsequently reviewed by our board of directors.


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The dealer manager is an affiliate of our advisor, and, therefore you will not have the benefit of an independent review of the prospectus or of us that customarily is performed in underwritten offerings.
 
The dealer manager, Cole Capital Corporation, is an affiliate of our advisor and, as a result, is not in a position to make an independent review of us or of this offering. Accordingly, you will have to rely on your own broker-dealer or financial advisor to make an independent review of the terms of this offering. If your broker-dealer or financial advisor conducts an independent review of this offering, and/or engages an independent due diligence reviewer to do so on its behalf, we expect that we will pay or reimburse the expenses associated with such review, which may create conflicts of interest. If your broker-dealer or financial advisor does not conduct such a review, you will not have the benefit of an independent review of the terms of this offering.
 
Our dealer manager may compensate its registered employees who market and sell this investment more than it compensates them to market and sell other Cole-sponsored investments.
 
Our dealer manager may have a compensation program for its registered employees who market and sell this investment that may be different from the compensation program it has for the marketing and sale of other Cole-sponsored investments. This compensation program may result in Cole Capital Corporation’s registered employees receiving more or less compensation for the marketing and sale of this investment than for the marketing and sale of other programs. Such a compensation program may create a conflict of interest, by motivating our dealer manager’s registered employees to promote one investment over another Cole-sponsored investment. You and your participating broker dealer must determine if this investment is appropriate for you.
 
Our charter permits us to acquire assets and borrow funds from affiliates of our advisor, and any such transaction could result in conflicts of interest.
 
Our charter permits us to acquire assets and borrow funds from affiliates of our advisor on a limited basis as set forth below, and any such transaction could result in a conflict of interest.
 
Our advisor may create special purpose entities to acquire properties for the specific purpose of selling the properties to us, and we may acquire such properties at cost, including acquisition-related expenses. Any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction, as being fair and reasonable to us and at a price to us that is no greater than the cost of the property to the affiliate of our advisor. Further, we will not acquire a property from an affiliate of our advisor if the cost to us would exceed the property’s current appraised value as determined by an independent appraiser.
 
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction as fair and reasonable to us. Finally, we may defer payment of fees to our advisor or its affiliates, which would not be considered a loan under our charter.
 
Our advisor faces conflicts of interest relating to joint ventures or other co-ownership arrangements that we enter into with other Cole-sponsored programs, which could result in a disproportionate benefit to another Cole-sponsored program.
 
We may enter into joint ventures with other Cole-sponsored programs for the acquisition, development or improvement of properties, as well as the acquisition of real estate-related investments. Officers and key persons of our advisor also are officers and key persons of other Cole-sponsored REITs and their advisors, the general partners of other Cole-sponsored partnerships and/or the advisors or fiduciaries of other Cole-sponsored programs. These officers and key persons will face conflicts of interest in determining which Cole-sponsored program should enter into any particular joint venture or co-ownership arrangement. These persons


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also may have a conflict in structuring the terms of the relationship between us and the Cole-affiliated co-venturer or co-owner, as well as conflicts of interests in managing the joint venture.
 
In the event we enter into joint venture or other co-ownership arrangements with another Cole-sponsored program, our advisor and its affiliates may have a conflict of interest when determining when and whether to buy or sell a particular property, or to make or dispose of another real estate-related investment. In addition, if a Cole-affiliated co-venturer or co-owner becomes listed for trading on a national securities exchange, that entity may develop more divergent goals and objectives than ours, since we do not expect to be listed for trading. In the event we enter into a joint venture or other co-ownership arrangement with a Cole-sponsored program that has a defined life, the joint venture may be required to sell its properties earlier than we may desire to sell the properties. Even if the terms of any joint venture or other co-ownership agreement between us and another Cole-sponsored program grant us the right of first refusal to buy such properties, we may not have sufficient funds or borrowing capacity to exercise our right of first refusal under these circumstances.
 
Since Mr. Cole and his affiliates control our advisor and other Cole-sponsored programs, agreements and transactions between or among the parties with respect to any joint venture or other co-ownership arrangement will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers or co-owners, which may result in the co-venturer or co-owner receiving benefits greater than the benefits that we receive. We have adopted certain procedures for dealing with potential conflicts of interest as described in the section of this prospectus captioned “Conflicts of Interest — Certain Conflict Resolution Procedures.”
 
Risks Related to Investments in Real Estate
 
Our properties may depend upon a single tenant, or a limited number of major tenants, for all or a majority of its rental income; therefore, our financial condition and ability to make distributions to you may be adversely affected by the bankruptcy or insolvency, a downturn in the business or a lease termination, of a single tenant.
 
Our properties may be occupied by only one tenant or derive a majority of its rental income from a limited number of major tenants and, therefore, the success of those properties will be materially dependent on the financial stability of such tenants. Lease payment defaults by such tenants could cause us to reduce the amount of distributions we pay. A default of a single or major tenant on its lease payments to us would cause us to lose revenue from the property and force us to find an alternative source of revenue to meet any expenses associated with the property and prevent a foreclosure if the property is subject to a mortgage. In the event of a default by a single or major tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated, we may not be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a single or major tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease to such a tenant, or such tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions to you.
 
In addition, any of our major tenants, or any guarantor of one of our major tenant’s lease obligations, could be subject to bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. The bankruptcy of such a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant lease, and could ultimately preclude full collection of these sums. Such an event also could cause a decrease or cessation of current rental payments, reducing our operating cash flows and the amount available for distributions to you. In the event a major tenant or lease guarantor declares bankruptcy, the tenant or its trustee may not assume our lease or its guaranty. If a given lease or guaranty is not assumed, our operating cash flows and the amounts available for distributions to you may be adversely affected. Accordingly, the bankruptcy of a major tenant could have a material adverse effect on our ability to pay distributions to you.


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To the extent we acquire industrial properties, the demand for and profitability of our industrial properties may be adversely affected by fluctuations in manufacturing activity in the United States.
 
We may invest in industrial properties that share some of the same core characteristics as our other commercial properties. To the extent we acquire industrial properties, such properties may be adversely affected if manufacturing activity decreases in the United States. Trade agreements with foreign countries have given employers the option to utilize less expensive non-US manufacturing workers. The outsourcing of manufacturing functions could lower the demand for our industrial properties. Moreover, an increase in the cost of raw materials or decrease in the demand of housing could cause a slowdown in manufacturing activity, such as furniture, textiles, machinery and chemical products, and our profitability may be adversely affected.
 
If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could have a material adverse effect on our financial condition and ability to pay distributions to you.
 
We may experience concentration in one or more tenants. Any of our tenants, or any guarantor of one of our tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant lease, and could ultimately preclude full collection of these sums. Such an event also could cause a decrease or cessation of current rental payments, reducing our operating cash flows and the amount available for distributions to you. In the event a tenant or lease guarantor declares bankruptcy, the tenant or its trustee may not assume our lease or its guaranty. If a given lease or guaranty is not assumed, our operating cash flows and the amounts available for distributions to you may be adversely affected. Accordingly, the bankruptcy of a major tenant could have a material adverse effect on our ability to pay distributions to you.
 
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
 
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely impact our financial condition, cash flow and the amount available for distributions to you.
 
If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and we would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, we could be treated as co-venturer with the lessee with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
 
Our real estate investments may include special use single-tenant properties that may be difficult to sell or re-lease upon lease terminations.
 
We intend to invest in necessity single-tenant commercial properties, a number of which may include special use single-tenant properties. If the leases on these properties are terminated or not renewed, we may have difficulty re-leasing or selling these properties to a party other than the tenant due to the special purpose for which the property may have been designed. Therefore, we may be required to expend substantial funds to renovate the property or make rent concessions in order to lease the property to another tenant or sell the


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property. These and other limitations may adversely impact the cash flows from, or lead to a decline in value of, these special use single-tenant properties.
 
A high concentration of our properties in a particular geographic area, or with tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
 
In the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately impacts that geographic area would have a magnified adverse impact on our portfolio. Similarly, if tenants of our properties become concentrated in a certain industry or industries, any adverse impact on that industry generally would have a disproportionately adverse impact on our portfolio.
 
We anticipate that our properties will include retail properties. Our performance, therefore, is linked to the market for retail space generally and a downturn in the retail market could have an adverse effect on the value of your investment.
 
The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to these stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center. A reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.
 
Our operating results will be affected by economic and regulatory changes that impact the real estate market in general.
 
We will be subject to risks generally attributable to the ownership of real property, including:
 
  •  changes in global, national, regional or local economic, demographic or capital market conditions;
 
  •  current and future adverse national real estate trends, including increasing vacancy rates, which may negatively impact resale value, declining rental rates and general deterioration of market conditions;
 
  •  changes in supply of or demand for similar properties in a given market or metropolitan area that will result in changes in market rental rates or occupancy levels;
 
  •  increased competition for real property investments targeted by our investment strategy;
 
  •  bankruptcies, financial difficulties or lease defaults by our tenants;
 
  •  changes in interest rates and availability of financing; and
 
  •  changes in government rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws.
 
All of these factors are beyond our control. Any negative changes in these factors could affect our ability to meet our obligations and make distributions to stockholders.
 
We face risks associated with property acquisitions, which may adversely impact our ability to pay distributions and the value of your investment in our common stock.
 
We intend to acquire properties and portfolios of properties, including large portfolios that will increase our size and result in changes to our capital structure. Our acquisition activities and their success are subject to the following risks:
 
  •  we may be unable to complete an acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs;


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  •  we may be unable to obtain financing for acquisitions on favorable terms or at all;
 
  •  acquired properties may fail to perform as expected;
 
  •  the actual costs of repositioning or redeveloping acquired properties may be greater than our estimates;
 
  •  acquired properties may be located in new markets in which we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and
 
  •  we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations.
 
These acquisition risks may reduce our ability to pay distributions and may negatively impact the value of your investment in our common stock.
 
We expect that many of our assets will be public places such as shopping centers. Because these assets will be public places, crimes, violence and other incidents beyond our control may occur, which could result in a reduction of business traffic at our properties and could expose us to civil liability.
 
Because many of our assets will be open to the public, they are exposed to a number of incidents that may take place within their premises and that are beyond our control or our ability to prevent, which may harm our consumers and visitors. Some of our assets may be located in large urban areas, which can be subject to elevated levels of crime and urban violence. If violence escalates, we may lose tenants or be forced to close our assets for some time. If any of these incidents were to occur, the relevant asset could face material damage to its image and the property could experience a reduction of business traffic due to lack of confidence in the premises’ security. In addition, we may be exposed to civil liability and be required to indemnify the victims, which could adversely affect us. Should any of our assets be involved in incidents of this kind, our business, financial condition and results of operations could be adversely affected.
 
Increased competition from alternative retail channels could adversely impact our retail tenants’ profitability and ability to make timely lease payments to us.
 
Traditional retailers face increasing competition from alternative retail channels, including factory outlet centers, wholesale clubs, mail order catalogs, television shopping networks and various forms of e-commerce. The increasing competition from such alternative retail channels could adversely impact our retail tenants’ profitability and ability to make timely lease payments to us. If our retail tenants are unable to make timely lease payments to us, our operating cash flows could be adversely affected.
 
The current market environment may adversely affect our operating results, financial condition and our ability to pay distributions.
 
The global financial markets have undergone pervasive and fundamental disruptions since mid-2007. The disruptions in the global financial markets had an adverse impact on the availability of credit to businesses generally. The continuing impact of the recent global economic recession has the potential to materially affect the value of our properties and other investments we make, the availability or the terms of financing that we may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due, and/or, for our leased properties, the ability of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. The current market environment also could affect our operating results and financial condition as follows:
 
  •  Debt Markets — The real estate debt markets are currently experiencing volatility as a result of certain factors, including the tightening of underwriting standards by lenders and credit rating agencies. Should overall borrowing costs increase, either by increases in the index rates or by increases in lender spreads, our operations may generate lower returns. In addition, the recent dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which, in turn: (1) limits the ability of real estate investors to make new acquisitions and to potentially benefit from reduced real


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  estate values or to realize enhanced returns on real estate investments; (2) has slowed real estate transaction activity; and (3) may result in an inability to refinance debt as it becomes due. In addition, the state of the debt markets could have a material impact on the overall amount of capital being invested in real estate, which may result in price or value decreases of real estate assets and impact our ability to raise equity capital.
 
  •  Real Estate Markets — The recent global economic recession has caused commercial real estate values to decline substantially. As a result, there may be uncertainty in the valuation, or in the stability of the value, of the properties we acquire that could result in a substantial decrease in the value of our properties after we purchase them. Consequently, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge or record a loss on sale in earnings.
 
  •  Government Intervention — The disruptions in the global financial markets have led to extensive and unprecedented government intervention. It is impossible to predict the actual effect of the government intervention and what effect, if any, additional interim or permanent governmental intervention may have on the global financial markets and/or the effect of such intervention on the US economy.
 
The insurance we carry on our real estate may be insufficient to pay for all potential losses or damage to our properties.
 
Generally, we expect our tenants will be responsible for insuring their goods and premises and, in some circumstances, may be required to reimburse us for a share of the cost of acquiring comprehensive insurance for the property, including comprehensive liability, fire, extended coverage, business interruption and rental loss insurance. The advisor will select policy specifications and insured limits that it believes to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. Insurance policies on our properties may include some coverage for losses that are generally catastrophic in nature, such as losses due to terrorism, earthquakes and floods, but we cannot assure you that it will be adequate to cover all losses and some of our policies will be insured subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. If we or one or more of our tenants experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
 
We may be unable to obtain funds for future tenant improvements, which could adversely impact our ability to pay cash distributions to you, the value of our properties and our ability to attract new tenants.
 
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs and other expenses, we may be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain funds from available sources, if any, including operating cash flows, borrowings sales from this offering, or property sales. The use of cash from these sources may reduce the amount of capital we have available to invest in real estate, negatively impact the value of your investment and reduce your overall return. If additional capital is not available, this may adversely impact the value of the properties and our ability to attract new tenants.
 
We will face significant competition for tenants for our properties, which may impact our ability to attract and retain tenants at reasonable rent levels.
 
We will face significant competition from owners, operators and developers of retail real estate properties. Substantially all of our properties will face competition from similar properties in the same market. This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge.


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These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lease available space at lower prices than the space in our properties. Due to such competition, the terms and conditions of any lease that we enter into with our tenants may vary substantially from those we describe in this prospectus.
 
We may face potential difficulties or delays renewing leases or re-leasing space, which could adversely impact our cash flows and our ability to pay distributions.
 
We will derive a significant portion of our net income from rent received from our tenants. We will seek to lease the rentable square feet at our real estate properties to creditworthy tenants. However, if a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay distributions to stockholders could be materially adversely affected. In addition, the presence of hazardous or toxic substances on our real estate properties may adversely affect our ability to lease such property.
 
We are exposed to inflation risk as income from long-term leases will be the primary source of our cash flows from operations.
 
We are exposed to inflation risk, as income from long-term leases will be the primary source of our cash flows from operations. Leases of long-term duration or which include renewal options that specify a maximum rate increase may result in below-market lease rates over time if we do not accurately estimate inflation or market lease rates. Provisions of our leases designed to mitigate the risk of inflation and unexpected increases in market lease rates, such as periodic rental increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates. If we are subject to below-market lease rates on a significant number of our properties pursuant to long-term leases, our cash flow from operations and financial position may be adversely affected.
 
We may have difficulty selling our real estate properties, which may limit our flexibility and ability to pay distributions.
 
Because real estate investments are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. In addition, federal tax laws that impose a 100% excise tax on gains from sales of dealer property by a REIT (generally, property held for sale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our stockholders. These restrictions could adversely affect our ability to achieve our investment objectives.
 
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
 
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance and exist in order to protect the yield expectations of investors. We expect that many of our properties will be subject to lock-out provisions. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties when we may desire to do so. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could he in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that


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could result in a disposition of our assets or a change in control even though that disposition or change in control might he in the best interests of our stockholders.
 
In the event we obtain options to acquire real estate properties, we may lose the amount paid for such options whether or not the underlying property is purchased.
 
We may obtain options to acquire certain real estate properties. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is purchased. Any unreturned option payments will reduce the amount of cash available for further investments or distributions to our stockholders.
 
We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
 
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property.
 
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
 
We may co-invest in the future with third parties through partnerships or other entities, which we collectively refer to as joint ventures, acquiring non-controlling interests in or sharing responsibility for managing the affairs of the joint venture. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
 
Costs of complying with governmental laws and regulations may reduce our net income and the cash available for distributions to our stockholders.
 
Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns.
 
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield an attractive risk-adjusted return. In such an instance, we will estimate the costs of environmental investigation, clean-up and monitoring into the amount we will pay


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for such properties. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
 
Our properties may be subject to the Americans with Disabilities Act of 1990, as amended, or the ADA. Under the ADA, all places of public accommodation must meet federal requirements related to access and use by persons with disabilities. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. Additional or new federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate properties. We will attempt to acquire properties that comply with the ADA and other similar legislation or place the burden on the seller or other third party, such as a tenant, to ensure compliance with such legislation. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, or if changes to the ADA mandate further changes to our properties, then our funds used for ADA compliance may reduce cash available for distributions and the amount of distributions to you.
 
In some instances, our advisor may rely on third party property managers to operate our properties and leasing agents to lease vacancies in our properties.
 
Under our advisory agreement, our advisor is obligated to manage our properties and find tenants to lease our vacant properties. We expect that, in some instances, our advisor will rely on third party property managers and leasing agents. The third party property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not supervise any of the property managers or leasing agents or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in part on the ability of our third party property managers to manage the day-to-day operations and the ability of our leasing agents to lease vacancies in our properties. Any adversity experienced by our property managers or leasing agents could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives, including, without limitation, diversification of our real estate properties portfolio by property type and location, moderate financial leverage, conservative levels of operating risk and an attractive level of current income.
 
Risks Related to Investments in Real Estate-Related Assets
 
The real estate-related equity securities in which we may invest are subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities.
 
We may invest in equity securities of both publicly traded and private real estate companies, which involves a higher degree of risk than debt securities due to a variety of factors, including that such investments are subordinate to creditors and are not secured by the issuer’s property. Our investments in real estate-related equity securities will involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related equity securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate discussed in this prospectus, including risks relating to rising interest rates.
 
The value of the real estate-related securities that we may invest in may be volatile.
 
The value of real estate-related securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Different parts of the market and different types of equity securities can react differently to these developments and they can affect a single issuer, multiple issuers within an industry or economic sector or geographic region or the market as a whole. The real estate industry is sensitive to economic downturns. The value of securities of companies engaged in real estate activities can be affected by changes in real estate values and rental income, property taxes, interest rates and tax and regulatory requirements.


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Commercial mortgage-backed securities, or CMBS, in which we may invest are subject to several types of risks that may adversely impact our performance.
 
CMBS are bonds that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the mortgage-backed securities we invest in are subject to all the risks of the underlying mortgage loans, including the risks of prepayment or default.
 
In a rising interest rate environment, the value of CMBS may be adversely affected when repayments on underlying mortgage loans do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated assets but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying CMBS to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities. The value of CMBS also may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets as a whole. In addition, CMBS are subject to the credit risk associated with the performance of the underlying mortgage properties.
 
CMBS are also subject to several risks created through the securitization process. Certain subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate CMBS will not be fully paid. Subordinate securities of CMBS are also subject to greater risk than those CMBS that are more highly rated.
 
The mortgage instruments in which we may invest may be impacted by unfavorable real estate market conditions, which could result in losses to us.
 
If we make investments in mortgage loans or mortgage-backed securities, we will be at risk of loss on those investments, including losses as a result of defaults on mortgage loans. These losses may be caused by many conditions beyond our control, including general prevailing local, national and global economic conditions, economic conditions affecting real estate values, tenant defaults and lease expirations, interest rate levels and the other economic and liability risks associated with real estate described above under the heading “— Risks Related to Investments in Real Estate,” as well as, among other things:
 
  •  competition from comparable types of properties;
 
  •  success of tenant businesses;
 
  •  property management decisions;
 
  •  changes in use of property;
 
  •  shift of business processes and functions offshore;
 
  •  property location and condition;
 
  •  changes in specific industry segments;
 
  •  declines in regional or local real estate values, or rental or occupancy rates; and
 
  •  increases in interest rates, real estate tax rates and other operating expenses.
 
If we acquire a property by foreclosure following defaults under our mortgage loan investments, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our ability to achieve our investment objectives. We do not know whether the values of the property securing any of our real estate securities investments will remain at the levels existing on the dates we initially make the related


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investment. If the values of the underlying properties drop, our risk will increase and the values of our interests may decrease.
 
Delays in liquidating defaulted mortgage loan investments could reduce our investment returns.
 
If there are defaults under our mortgage loan investments, we may not be able to foreclose on or obtain a suitable remedy with respect to such investments. Specifically, we may not be able to repossess and sell the underlying properties quickly, which could reduce the value of our investment. For example, an action to foreclose on a property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of lawsuits if the defendant raises defenses or counterclaims. Additionally, in the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
 
The mezzanine loans in which we may invest will involve greater risks of loss than senior loans secured by income-producing real properties, which may result in losses to us.
 
We may invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior first-lien mortgage loans secured by income producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
 
Interest rate and related risks may cause the value of our real estate-related assets to be reduced.
 
Interest rate risk is the risk that fixed income securities such as preferred and debt securities, and to a lesser extent dividend paying common stocks, will decline in value because of changes in market interest rates. Generally, when market interest rates rise, the market value of such securities will decline, and vice versa. Our investment in such securities means that the net asset value of our shares may tend to decline if market interest rates rise.
 
During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below-market interest rate, increase the security’s duration and reduce the value of the security. This is known as extension risk. During periods of declining interest rates, an issuer may be able to exercise an option to prepay principal earlier than scheduled, which is generally known as “call risk” or “prepayment risk.” If this occurs, we may be forced to reinvest in lower yielding securities. This is known as “reinvestment risk.” Preferred and debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. These risks may reduce the value of our real estate-related securities investments.
 
A proposed change in U.S. accounting standards for leases could reduce the overall demand to lease our properties.
 
The existing accounting standards for leases require lessees to classify their leases as either capital or operating leases. Under a capital lease, both the leased asset, which represents the tenant’s right to use the property, and the contractual lease obligation are recorded on the tenant’s balance sheet if one of the following criteria are met: (i) the lease transfers ownership of the property to the lessee by the end of the lease term;


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(ii) the lease contains a bargain purchase option; (iii) the non-cancellable lease term is more than 75% of the useful life of the asset; or (iv) if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value. If the terms of the lease do not meet these criteria, the lease is considered an operating lease, and no leased asset or contractual lease obligation is recorded by the tenant.
 
In order to address concerns raised by the SEC regarding the transparency of contractual lease obligations under the existing accounting standards for operating leases, the U.S. Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) initiated a joint project to develop new guidelines to lease accounting. The FASB and IASB (collectively the “Boards”) issued exposure drafts on August 17, 2010, which propose substantial changes to the current lease accounting standards, primarily by eliminating the concept of operating lease accounting. As a result, a lease asset and obligation will be recorded on the tenant’s balance sheet for all lease arrangements. In addition, the proposed standards will impact the method in which contractual lease payments will be recorded. In order to mitigate the financial statement impact of the proposed lease accounting, tenants may seek to negotiate certain terms within new lease arrangements or modify terms in existing lease arrangements, such as shorter lease terms or fewer extension options, which would generally have less impact on tenant balance sheets. Also, tenants may reassess their lease-versus-buy strategies. This could result in a greater renewal risk, a delay in investing our offering proceeds, or shorter lease terms, all of which may negatively impact the Company’s operations and ability to pay its dividend.
 
The exposure drafts do not include a proposed effective date; however, the Boards plan to issue final standards regarding lease accounting in 2012.
 
Risks Associated with Debt Financing
 
Poor credit market conditions could impair our ability to access debt financing, which could materially affect our ability to achieve our investment objectives.
 
We intend to finance a portion of the purchase price of our real estate properties by borrowing funds. Severe dislocations and liquidity disruptions in the U.S. credit markets could significantly harm our ability to access capital. In the future, we may not be able to access debt capital with favorable terms in a cost efficient manner, or at all, which could materially affect our ability to achieve our investment objectives.
 
We will incur mortgage indebtedness and other borrowings, which may increase our business risks, could hinder our ability to make distributions and could decrease the value of your investment.
 
We intend to finance a portion of the purchase price of properties by borrowing funds. Under our charter, we have a limitation on borrowing which precludes us from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation or other non-cash reserves, less total liabilities. Generally speaking, the preceding calculation is expected to approximate 75% of the cost of our properties before non-cash reserves and depreciation. Our board of directors, including our independent directors has adopted a policy limiting our borrowing to 60%, absent special approval by a majority or our independent directors. During the period of this offering, we expect to seek and receive approval of our independent directors to exceed this limit because we will then be in the process of raising our equity capital to acquire our portfolio.
 
In addition, we may incur mortgage debt and pledge some or all of our properties as security for that debt to obtain funds to acquire additional properties or for working capital. We may also obtain a line of credit to provide a flexible borrowing source which generally will allow us borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. Furthermore, we may borrow under a line of credit if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes or avoid taxes on undistributed income.
 
High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If there is a shortfall between the cash flow


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from a property and the cash flow needed to service mortgage debt on that property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure on any of our properties will be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we will recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgage contains cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected.
 
If we draw on a line of credit to fund redemptions or for any other reason, our leverage will increase.
 
We may seek to obtain a line of credit in an effort to provide for a ready source of liquidity to fund redemptions of shares of our common stock, in the event that redemption requests exceed our operating cash flows, liquid assets and net proceeds from our continuous offering. There can be no assurances that we will be able to obtain a line of credit on reasonable terms given the recent volatility in the capital markets. In addition, we may not be able to obtain a line of credit of an appropriate size for our business until such time as we have a substantial portfolio, or at all. If we borrow under a line of credit to fund redemptions of shares of our common stock, our leverage will increase until we receive additional net proceeds from our continuous offering, additional operating cash flows or sell some of our assets to repay outstanding indebtedness.
 
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
 
Interest we pay on our debt obligations will reduce cash available for distributions. If we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flows and our ability to make distributions to you. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.
 
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
 
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage. In addition, loan documents may limit our ability to replace the property manager or terminate certain operating or lease agreements related to the property. These or other limitations may adversely affect our flexibility and our ability to achieve our investment objectives.
 
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions to our stockholders.
 
Some of our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the particular property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the particular property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets.


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Failure to hedge effectively against interest rate changes may materially adversely affect our ability to achieve our investment objectives.
 
Subject to any limitations required to maintain qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap or collar agreements and interest rate swap agreements. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and that these arrangements may not be effective in reducing our exposure to interest rate changes. These interest rate hedging arrangements may create additional assets and/or liabilities from time to time that may be held or liquidated separately from the underlying property or loan for which they were originally established. We have adopted a policy relating to the use of derivative financial instruments to hedge interest rate risks related to our borrowings. This policy governs our use of derivative financial instruments to manage the interest rates on our variable rate borrowings. See “Investment Objectives, Strategy and Policies — Acquisition and Investment Policies.” Hedging may reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes may materially adversely affect our ability to achieve our investment objectives.
 
If we sell properties by providing financing to purchasers, defaults by the purchasers could adversely affect our cash flow from operations.
 
In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default on its obligations under the financing, which could negatively impact cash flow from operations. Even in the absence of a purchaser default, the distribution of sale proceeds, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to you.
 
Risks Related to Our Corporate Structure
 
Your interest in us will be diluted if we issue additional shares.
 
Our stockholders will not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 500,000,000 shares of capital stock, of which 490,000,000 shares are designated as common stock and 10,000,000 shares are designated as preferred stock. Our board of directors may increase the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. After you purchase shares of our common stock in this offering, our board of directors may elect, without stockholder approval, to: (1) sell additional shares in this or future public offerings; (2) issue equity interests in private offerings; (3) issue shares upon the exercise of the options we may grant to our independent directors or future employees; (4) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation; or (5) issue shares to sellers of properties we acquire in connection with an exchange of limited partnership interests of our operating partnership. To the extent we issue additional shares after your purchase in this offering, you will not experience dilution in the value of your shares given that our common stock is valued daily based on our NAV. However, to the extent we issue additional shares after your purchase in this offering, your percentage ownership interest will be diluted.
 
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
 
Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may beneficially or constructively own more than 9.8% in value of our outstanding capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding common stock.


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A person that did not acquire beneficially or constructively more than 9.8% of our shares may become subject to our charter restrictions if redemptions by other stockholders cause such person’s holdings to exceed 9.8% of our outstanding shares. Our 9.8% ownership limitation may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders.
 
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our common stock or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
 
Subject to its fiduciary duties to stockholders, our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption of any such stock without stockholder approval. Thus, our board of directors in the exercise of its business judgment could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our common stock.
 
Our rights and the rights of our stockholders to recover claims against our directors and officers are limited, which could reduce your and our recovery against them if they cause us to incur losses.
 
Maryland law provides that a director will not have any liability as a director so long as he or she performs his or her duties in accordance with the applicable standard of conduct. In addition, subject to any limitations required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (which we refer to as the NASAA REIT Guidelines), Maryland law and our charter provide that no director or officer shall be liable to us or our stockholders for monetary damages unless the director or officer (1) actually received an improper benefit or profit in money, property or services or (2) was actively and deliberately dishonest as established by a final judgment. Moreover, our charter requires us to indemnify our directors and officers, subject to any limitations required by the NASAA REIT Guidelines and Maryland law. As a result, you and we may have more limited rights against our directors or officers than might otherwise exist under common law, which could reduce your and our recovery from these persons if they act in a manner that causes us to incur losses. See “Indemnification and Limitation of Liability.”
 
Certain provisions of Maryland law could inhibit transactions or changes of control under circumstances that could otherwise provide stockholders with the opportunity to realize a premium.
 
Certain provisions of the Maryland General Corporation Law applicable to us prohibit business combinations with:
 
  •  any person who beneficially owns 10% or more of the voting power of our common stock, which we refer to as an “interested stockholder;”
 
  •  an affiliate of ours who, at any time within the two-year period prior to the date in question, was an interested stockholder; or
 
  •  an affiliate of an interested stockholder.
 
These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder or an affiliate of the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding shares of our common stock, and two-thirds of the votes entitled to be cast by holders of our shares other than shares held by the interested stockholder. These requirements could have the effect of inhibiting a change in control even


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if a change in control were in our stockholders’ best interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder.
 
Our UPREIT structure may result in potential conflicts of interest with limited partners in our operating partnership whose interests may not be aligned with those of our stockholders.
 
Our directors and officers have duties to our corporation and our stockholders under Maryland law in connection with their management of the corporation. At the same time, we, as general partner, will have fiduciary duties under Delaware law to our operating partnership and to the limited partners in connection with the management of our operating partnership. Our duties as general partner of our operating partnership and its partners may come into conflict with the duties of our directors and officers to the corporation and our stockholders. Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our operating partnership provides that, for so long as we own a controlling interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders.
 
Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees, will not be liable or accountable to our operating partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. In addition, our operating partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from and against any and all claims arising from operations of our operating partnership, unless it is established that: (1) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful.
 
The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
 
If we internalize our management functions, we may be unable to obtain key personnel, which could adversely affect our operations and the value of your investment.
 
We do not expect to engage in an internalization transaction and become self-managed at any time in the future. However, if we were to internalize our management functions, certain key employees of the advisor may not become our employees, but may instead remain employees of our advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring additional costs, including potentially significant litigation costs; or experiencing operational issues that could divert our management’s attention from management of our investments and negatively impact the value of your investment.
 
Your investment return may be reduced if we are deemed to be an investment company under the Investment Company Act.
 
We do not intend, or expect to be required, to register as an investment company under the Investment Company Act. Rule 3a-1 under the Investment Company Act generally provides that an issuer will not be deemed to be an “investment company” provided that (i) it does not hold itself out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting or trading securities and (ii) no more than 45% of the value of its assets (exclusive of government securities and cash items) and no more than 45% of its net income after taxes (for the past four fiscal quarters combined) is derived from securities other than


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government securities, securities issued by employees’ securities companies, securities issued by certain majority owned subsidiaries of such company and securities issued by certain companies that are controlled primarily by such company. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
 
  •  limitations on capital structure;
 
  •  restrictions on specified investments;
 
  •  requirements that we add directors who are independent of us, our advisor and its affiliates;
 
  •  restrictions or prohibitions on retaining earnings;
 
  •  restrictions on leverage or senior securities;
 
  •  restrictions on unsecured borrowings;
 
  •  requirements that our income be derived from certain types of assets;
 
  •  prohibitions on transactions with affiliates; and
 
  •  compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.
 
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
 
Registration with the SEC as an investment company would be costly, would subject our company to a host of complex regulations, and would divert the attention of management from the conduct of our business. In addition, the purchase of real estate that does not fit our investment guidelines and the purchase or sale of investment securities or other assets to preserve our status as a company not required to register as an investment company could materially adversely affect our NAV, the amount of funds available for investment, and our ability to pay distributions to our stockholders.
 
Risks Related to Our Status as a REIT
 
Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
 
We believe that our organization and proposed ownership and method of operation will enable us to meet the requirements for qualification and taxation as a REIT. However, we cannot assure you that we will qualify as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.
 
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
 
  •  we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;
 
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  •  unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
 
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. See “Material U.S. Federal Income Tax Considerations” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.
 
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
 
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. For example, to the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. Further, any taxable REIT subsidiary (“TRS”) we establish will be subject to regular corporate U.S. federal, state and local taxes. Any of these taxes would decrease cash available for distribution to stockholders.
 
REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.
 
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT.
 
The opinion of our tax counsel regarding our status as a REIT does not guarantee our ability to remain a REIT.
 
We have received an opinion of Goodwin Procter LLP to the effect that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code and our prior, current and proposed ownership organization and method of operations, as represented by us to Goodwin Procter LLP, will allow us to satisfy the requirements for qualification and taxation as a REIT under the Code, commencing with our taxable year ending December 31 of the year in which the escrow period concludes. The opinion of Goodwin Procter LLP is based on various assumptions and on our representations to Goodwin Procter LLP concerning our current and continuing organization, our prior, current and proposed ownership and operations, and other matters relating to our ability to qualify as a REIT. The opinion is expressly conditioned upon the accuracy of such assumptions and representations, which Goodwin Procter LLP will not verify, including an assumption to the effect that we are successful in avoiding “dividend equivalent” redemptions (as discussed below in “Material U.S. Federal Income Tax Considerations — Taxation of U.S. Stockholders — Redemptions of Common Stock.”). Moreover, our qualification and taxation as a REIT will depend upon our ability to meet, through actual annual operating results, distribution levels, diversity of share ownership, and the various and complex REIT qualification tests imposed under the Code, the results of which will not be reviewed or verified by Goodwin Procter LLP. Accordingly, no assurance can be given that we will in fact satisfy such requirements. The opinion of Goodwin Procter LLP is based upon current law, which is subject to change either prospectively or retroactively. Opinions of counsel impose no obligation on counsel to advise us or the holders of our common stock of any subsequent change in the


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matters stated, represented or assumed, or of any subsequent change in the applicable law. Changes in applicable law could modify the conclusions expressed in the opinion. Unlike a ruling from the IRS, an opinion of Goodwin Procter LLP is not binding on the IRS, and no assurance can be given that the IRS could not successfully challenge our qualification as a REIT.
 
If we fail to invest a sufficient amount of the net proceeds from selling our stock in real estate assets within one year from the receipt of the proceeds, we could fail to qualify as a REIT.
 
Temporary investment of the net proceeds from sales of our stock in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from sales of our stock in qualifying real estate assets within such one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT. See “Material U.S. Federal Income Tax Considerations.”
 
If we form a taxable REIT subsidiary (TRS), our overall tax liability could increase.
 
Any TRS we form will be subject to U.S. federal, state and local income tax on its taxable income. Accordingly, although our ownership of any TRSs may allow us to participate in the operating income from certain activities that our REIT could not participate in, that operating income will be fully subject to income tax. The after-tax net income of any TRS would be available for distribution to us, however any dividends received by our REIT from its TRSs will only be qualifying income for the 95% REIT income test, not the 75% REIT income test. If we have any non-U.S. TRSs, then they may be subject to tax in jurisdictions where they operate and under special rules dealing with foreign subsidiaries, they may generate income that is nonqualifying for either of the REIT income tests.
 
If we form a TRS, our ownership of such TRS would be subject to limitations and our transactions with any such TRS would cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
 
Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We will monitor the value of our respective investments in any TRSs we may form for the purpose of ensuring compliance with TRS ownership limitations and intend to structure our transactions with any such TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% TRS limitation or to avoid application of the 100% excise tax.
 
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.
 
Our operating partnership currently is a disregarded entity. Upon the conclusion of the escrow period and the issuance of our shares to investors, we expect that it will be treated as a partnership for U.S. federal tax purposes. As a partnership, our operating partnership would not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us, would be required to take into account on its allocable share of the operating partnership’s income. No assurance can be provided, however, that the IRS would not challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, our operating partnership would


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become subject to U.S. federal, state and local income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
 
Dividends payable by REITs generally do not qualify for reduced tax rates under current law.
 
The maximum U.S. federal income tax rate for certain dividends payable to individual U.S. stockholders, as defined in “Material U.S. Federal Income Tax Considerations” below, is currently 15% through 2012. Dividends payable by REITs, however, are generally not eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends under current law could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
 
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive investments.
 
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
 
In addition, if we fail to comply with certain asset ownership tests described under “Material U.S. Federal Income Tax Considerations,” below, at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
 
Our ability to dispose of some of our properties may be constrained by their tax attributes.
 
Federal tax laws may limit our ability to sell properties and this may affect our ability to sell properties without adversely affecting returns to our stockholders. These restrictions may reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.
 
Our ability to dispose of some of our properties is constrained by their tax attributes. Properties which we own for a significant period of time or which we acquire through tax deferred contribution transactions in exchange for partnership interests in our operating partnership often have low tax bases. If we dispose of low-basis properties outright in taxable transactions, we may recognize a significant amount of taxable gain that we must distribute to our stockholders in order to avoid tax, and potentially in order to meet the minimum distribution requirements of the Code for REITs, which in turn would impact our cash flow. In some cases, without incurring additional costs we may be restricted from disposing of properties contributed in exchange for our partnership interests under tax protection agreements with contributors. To dispose of low basis or tax-protected properties efficiently we may use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants).
 
You may be restricted from acquiring or transferring certain amounts of our common stock.
 
In order to maintain our REIT qualification, among other requirements, no more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code to include certain kinds of entities, during the last half of any taxable year, other than the first year for which a REIT election is made. To assist us in qualifying as a REIT, our charter contains an aggregate stock ownership limit and a common stock ownership limit. Generally, any shares of our stock owned by affiliated owners will be added together for purposes of the aggregate stock ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common stock ownership limit.


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If anyone attempts to transfer or own shares in a way that would violate the aggregate stock ownership limit or the common stock ownership limit (or would prevent us from continuing to qualify as a REIT), unless such ownership limits have been waived by our board of directors, those shares instead will be deemed transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate stock ownership limit or the common stock ownership limit and will not prevent us from qualifying as a REIT. If this transfer to a trust fails to prevent such a violation or our disqualification as a REIT, then the initial intended transfer or ownership will be null and void from the outset. Anyone who acquires or owns shares in violation of the aggregate stock ownership limit or the common stock ownership limit, unless such ownership limit or limits have been waived by our board of directors, or the other restrictions on transfer or ownership in our charter bears the risk of a financial loss when the shares are redeemed or sold if the NAV of our stock falls between the date of purchase and the date of redemption or sale.
 
The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.
 
We may acquire mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans may not be real estate assets and could adversely affect our REIT status.
 
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
 
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Generally, income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% or 95% gross income tests, provided certain circumstances are satisfied. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on income or gains resulting from hedges entered into by it or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward for use against future taxable income in the TRSs.
 
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
 
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates, which may have adverse consequences on our total return to our stockholders.
 
Investments outside the U.S. could present additional complications to our ability to satisfy the REIT qualification requirements and may subject us to additional taxes.
 
Operating in functional currencies other than the U.S. dollar and in environments in which real estate transactions are customarily structured differently than they are in the U.S. or are subject to different legal rules may complicate our ability to structure non-U.S. investments in a manner that enables us to satisfy the REIT qualification requirements. In addition, non-U.S. investments may subject us to various non-U.S. tax liabilities, including withholding taxes.


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The IRS may take the position that gains from sales of property are subject to a 100% prohibited transaction tax.
 
We may have to sell assets from time to time to fund redemption requests, to satisfy our REIT distribution requirements, to satisfy other REIT requirements, or for other purposes. It is possible that the IRS may take the position that one or more sales of our properties may be a prohibited transaction, which is a sale of property held by us primarily for sale in the ordinary course of our trade or business. If we are deemed to have engaged in a prohibited transaction, our gain from such sale would be subject to a 100% tax. The Code sets forth a safe harbor under which a REIT may, under certain circumstances, sell property without risking the imposition of the 100% tax, but there is no assurance that we will be able to qualify for the safe harbor. We do not intend to hold property for sale in the ordinary course of business, but there is no assurance that the IRS will not challenge our position, especially if we make frequent sales or sales of property in which we have short holding periods.
 
You may have current tax liability on distributions you elect to reinvest in our common stock.
 
If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the reinvested distributions.
 
Possible legislative or other actions affecting REITs could adversely affect our stockholders and us.
 
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect our stockholders or us. We cannot predict whether, when, in what forms, or with what effective dates, the tax laws applicable to our stockholders or us will be changed.
 
We may be subject to adverse tax consequences if certain sale-leaseback transactions are not characterized by the IRS as “true leases.”
 
We may purchase investments in real estate properties and lease them back to the sellers of such properties. In the event the IRS does not characterize such leases as “true leases,” we could be subject to certain adverse tax consequences, including an inability to deduct depreciation expense and cost recovery relating to such property, and under certain circumstances, we could fail to qualify as a REIT as a result.
 
Risks Related to Employee Benefit Plans and Individual Retirement Accounts
 
In some cases, if you fail to meet the fiduciary and other standards under ERISA, the Code or common law as a result of an investment in our stock, you could be subject to liability for losses as well as civil penalties.
 
There are special considerations that apply to investing in our shares on behalf of pension, profit sharing or 401(k) plans, health or welfare plans, individual retirement accounts or Keogh plans. If you are investing the assets of any of the entities identified in the prior sentence in our common stock, you should satisfy yourself that:
 
  •  your investment is consistent with your fiduciary obligations under applicable law, including common law, ERISA and the Code;
 
  •  your investment is made in accordance with the documents and instruments governing the trust, plan or IRA, including a plan’s investment policy;
 
  •  your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if applicable, and other applicable provisions of ERISA and the Code;
 
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  •  your investment will not produce “unrelated business taxable income” for the plan or IRA;
 
  •  you will be able to value the assets of the plan annually in accordance with ERISA requirements and applicable provisions of the applicable trust, plan or IRA document; and
 
  •  your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
 
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA, the Code, or other applicable statutory or common law may result in the imposition of civil penalties, and can subject the fiduciary to liability for any resulting losses as well as equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under the Code, the “disqualified person” that engaged in the transaction may be subject to the imposition of excise taxes with respect to the amount invested.


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Statements Regarding Forward-Looking Information
 
We make statements in this prospectus that are forward-looking statements within the meaning of the federal securities laws. The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “may,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this prospectus or in the information incorporated by reference into this prospectus.
 
The forward-looking statements included in this prospectus are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
 
  •  our ability to effectively deploy the proceeds raised in this offering;
 
  •  changes in economic conditions generally and the real estate and securities markets specifically;
 
  •  legislative or regulatory changes (including changes to the laws governing the taxation of REITs);
 
  •  the effect of financial leverage, including changes in interest rates, availability of credit, loss of flexibility due to negative and affirmative covenants, refinancing risk at maturity and generally the increased risk of loss if our investments fail to perform as expected;
 
  •  our ability to access sources of liquidity when we have the need to fund redemptions of common stock in excess of the proceeds from the sales of shares of our common stock in our continuous offering and the consequential risk that we may not have the resources to satisfy redemption requests; and
 
  •  changes to GAAP.
 
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this prospectus. All forward-looking statements are made as of the date of this prospectus and the risk that actual results will differ materially from the expectations expressed in this prospectus will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this prospectus, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, including, without limitation, the risks described under “Risk Factors,” the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this prospectus will be achieved.


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Use of Proceeds
 
We have established a minimum offering of $10,000,000 in shares of our common stock and a maximum offering of $4,000,000,000 in shares of our common stock, including up to $500,000,000 shares pursuant to our distribution reinvestment plan. During the escrow period, we will offer our shares at a per share purchase price of $15.00. Thereafter, we will sell shares of our common stock at a price that will vary from day-to-day and, on any given day, will be equal to our NAV per share.
 
We will not pay any upfront commissions on sales of shares of our common stock and our advisor has agreed to fund on our behalf all costs of our organization and this offering (other than the dealer manager fee). During our first year after the escrow period, we may use up to 1% of our offering proceeds (not to exceed $2,000,000,000, in total, of offering proceeds over such period and excluding shares issued under our distribution re-investment plan) along with our cash from operations, to pay for the costs of distribution and other underwriting compensation, while we grow our portfolio of real estate and real estate-related assets. After the first year, we expect that all distribution costs will be paid from our operating cash flow. As a result, we expect that approximately 99% of our aggregate gross offering proceeds will be available for investment in the purchase of real estate, real estate-related and other assets.
 
The table sets forth estimated figures assuming the sale of shares of our common stock representing (i) the minimum offering amount of $10,000,000 and no shares issued under our distribution reinvestment plan and (ii) the maximum offering amount of $4,000,000,000, excluding all of the $500,000,000 in shares under our distribution reinvestment plan. We may reallocate the shares of our common stock we are offering between the primary offering and our distribution reinvestment plan. We will only use the proceeds raised in this offering for the purposes set forth in this prospectus and in a manner approved by our board of directors, who serve as fiduciaries to our stockholders. Because amounts in this table are estimates, they may not accurately reflect the actual receipt or use of the offering proceeds.
 
                                 
    Minimum Offering of
    Maximum Offering of
 
    $10,000,000
    $3,500,000,000
 
    (Excluding Distribution
    (Excluding Distribution
 
    Reinvestment Plan)     Reinvestment Plan)  
    Amounts     Percent     Amounts     Percent  
 
Gross Offering Proceeds(1)
  $ 10,000,000       100.00%     $ 3,500,000,000       100.00%  
Less:
                               
First Year Underwriting Compensation(2)
    100,000       1.00%       20,000,000       0.57%  
                                 
Net Proceeds
  $ 9,900,000       99.00%     $ 3,480,000,000       99.43%  
                                 
 
 
(1) We intend to conduct a continuous offering of an unlimited number of shares of our common stock over an unlimited time period by filing a new registration statement prior to the end of the three-year period described in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”); however, in certain states this offering is subject to annual extensions.
 
(2) During our first year after our escrow period, we anticipate that we may use up to the lesser of 1% of our offering proceeds (or $20,000,000 which corresponds to 1% of total offering proceeds of $2,000,000,000), excluding shares issued under our distribution reinvestment plan, along with our cash flows from operations, to pay for items included within the definition of “underwriting compensation,” even though they do not constitute upfront selling commissions, while we grow our portfolio of real estate assets. The dollar amounts in the table are based on the assumption that our NAV remains at $15.00 throughout the offering period and that $2,000,000,000 of shares are sold during that first year. See “Plan of Distribution — Selling Commissions and Asset-Based Dealer Manager Fee.”
 
We intend to contribute the proceeds from this offering to our operating partnership. Our operating partnership will use the proceeds received from us: (1) to make investments in accordance with our investment strategy and policies; (2) to reduce borrowings and repay indebtedness incurred under various financing instruments into which it may enter, and (3) to fund redemption activity.


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The advisor will pursue opportunities to purchase various investments with the objective of providing us with the ability to acquire an initial portfolio of investments with a degree of diversification as soon as proceeds from the escrow account are released to us in this offering, as we commence our operations. We may enter into purchase options to allow us to acquire properties on future dates following the receipt of sufficient proceeds from this offering to make the investments. In light of the continuous nature of this offering, the identification and disclosure of actual property acquisitions will be an ongoing process. At any given point in time we will be actively pursuing multiple investment opportunities, with due diligence and negotiations at different stages of advancement. See “Risk Factors — Risks Related to an Investment in Cole Real Estate Income Strategy (Daily NAV), Inc.”
 
Our advisor, directly or through an affiliate, has agreed to fund organizational expenses and expenses incurred in connection with the offering (other than the dealer manager fee), including: (i) our legal, accounting, printing, mailing and filing fees, due diligence expenses that are included in a detailed and itemized invoice (such as expenses related to a review of this offering by one or more independent due diligence reviewers engaged by broker-dealers participating in this offering); (ii) amounts incurred in connection with holding our own educational conferences and sponsoring and/or attending conferences conducted by our participating broker-dealers for performing these services; and (iii) other marketing and organization costs, including payments made to participating broker-dealers. We estimate that such expenses paid to, or on behalf of, our dealer manager or participating broker-dealers will equal approximately 1.92% of the maximum gross offering proceeds, excluding shares issued under our distribution reinvestment plan. See “Plan of Distribution.”
 
Beginning on the date the offering proceeds are released from escrow, we will start to reimburse our advisor, without interest, for the organization and offering costs incurred both before and after the release of the escrow funds. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.75% of the aggregate gross offering proceeds from this offering, including shares issued in connection with the distribution reinvestment plan. If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.75% limit), calculated on an accumulated basis, until our advisor has been reimbursed in full. See “Compensation.”
 
We will also pay our dealer manager an asset-based dealer manager fee that is payable in arrears on a monthly basis and accrues daily based on our NAV until the date at which, in the aggregate, underwriting compensation from all sources, including the dealer manager fee and other underwriting compensation paid by us and our advisor and its affiliates, equals 10% of the gross proceeds from our primary offering. See “Compensation” for more details regarding this and other amounts payable to our advisor and its affiliates.
 
We may pay distributions from proceeds raised in this offering in anticipation of future cash flows, and we have not placed a limit on the amount of such proceeds we may use to pay distributions or redemptions. To the extent that our operating cash flow is insufficient to cover organization and offering expenses, costs of distribution and amounts payable to the advisor and its affiliates, we may use funds from any source for such purposes, including borrowings, asset sales and proceeds from this offering. See “Our Structure and Formation” and “Compensation.”


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Investment Objectives, Strategy and Policies
 
Investment Objectives
 
Our primary investment objectives are:
 
  •  to acquire commercial properties, leased under long-term net leases to creditworthy tenants, which provide current operating cash flow;
 
  •  to maintain a level of liquid assets as a source of funds to meet redemption requests;
 
  •  to provide reasonably stable, current income for you through the payment of distributions; and
 
  •  to provide the opportunity to participate in capital appreciation in the value of our investments.
 
Pursuant to our charter, these investment objectives may not be changed without the approval of our stockholders. We may not achieve any of these objectives. See the “Risk Factors” section of this prospectus.
 
Our Competitive Strengths
 
We believe that we will be able to distinguish ourselves from other owners, operators, acquirers and developers of commercial properties. We believe our long-term success will be supported through the following competitive strengths:
 
  •  Cole’s Disciplined Investment Approach.  Our advisor intends to utilize a disciplined investment approach developed and utilized by our sponsor over the last 30 years. Our sponsor’s investment approach focuses on acquiring necessity commercial and other income-producing properties, many of which share certain core characteristics, including a principal, creditworthy tenant in a long-term net lease and a strategic location. In addition, our sponsor’s investment strategy targets properties that typically have high occupancy rates (greater than 90%) and low to moderate leverage (0% to 50% loan to value). Our sponsor and its affiliates developed and refined this investment approach over a period of several decades, and throughout a variety of market conditions. While our sponsor historically applied their investment approach principally in the retail sector, our sponsor has utilized this investment approach in the corporate sector as well. Through this disciplined investment approach, we expect to achieve a relatively predictable and stable stream of income, which will provide a principal source of return for our investors in our common stock, plus the potential for capital appreciation in the value of our real estate assets.
 
  •  Experienced Advisor.  Mr. Cole, our chief executive officer and president, Mr. Roberts, our advisor’s executive vice president and managing director of real estate, and Mr. Kundrak, our advisor’s senior vice president and chief acquisitions officer — single tenant retail, have 31, 24 and 28 years of commercial real estate experience, respectively. Additionally, our advisor’s executive management team has extensive real estate and public company operating experience. Further, our sponsor has built an organization of over 275 employees who are experienced in the various aspects of acquiring, financing, managing and disposing of commercial real estate, and most of these employees will serve as dual employees acting in part, on behalf of our advisor.
 
  •  Successful Credit Underwriting Experience.  Cole Real Estate Investments has demonstrated an ability to successfully underwrite the tenants that occupy the real estate assets of Cole-sponsored real estate programs. The combined portfolios of Cole Credit Property Trust I, Cole Credit Property Trust II and Cole Credit Property Trust III have a 97% occupancy rate, as of December 31, 2010.
 
  •  Strong Industry Relationships.  We believe that our extensive network of industry relationships with the real estate brokerage, development and investor communities will enable us to successfully execute our acquisition and investment strategies. These relationships augment our ability to source acquisitions in off-market transactions outside of competitive marketing processes, capitalize on development opportunities and capture repeat business and transaction activity. Our strong relationships with the tenant and leasing brokerage communities aid in attracting and retaining tenants.


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  •  Ability to Purchase Properties for Cash.  We expect that one of our competitive advantages will be our ability to purchase properties for cash and to close transactions quickly. We believe our ability to purchase properties for cash will expedite our acquisition process and make us an attractive purchaser to potential sellers of properties, particularly those sellers motivated by time constraints. While we have not yet raised any substantial capital, Cole Capital Corporation, the broker-dealer affiliate of our sponsor, has successfully raised capital for our sponsor’s affiliated real estate portfolios, and we expect that, through their well-developed distribution capabilities and relationships with other broker-dealers, Cole Capital Corporation will be successful in selling shares on our behalf.
 
Investment Strategy
 
Our investment strategy is to invest primarily in a diversified portfolio of (1) necessity commercial properties in the retail, office and industrial sectors that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States and U.S. protectorates, (2) notes receivable secured by commercial real estate, including the origination of loans, and (3) U.S. government securities, agency securities and corporate debt and other investments for which there is reasonable liquidity. Our investment in commercial properties will be limited to the retail, office and industrial sectors that meet our investment criteria. Our property sector allocations will vary according to market conditions and availability of investment opportunities but will broadly reflect the composition of the NCREIF Property Index (NPI). The NPI is managed by the National Council of Real Estate Investment Fiduciaries (NCREIF) and is a widely followed benchmark amongst institutional investors. NCREIF is a not-for-profit trade association that serves its membership, and the academic and investment community’s need for improved commercial real estate data, performance measurement, investment analysis, information standards, education, and peer group interaction. The NPI comprises performance data from retail, office, industrial, multi-family and lodging (hotel) properties. Since our strategy will focus on income producing real estate with long term leases, we will not invest in multi-family or lodging properties that have short duration leases and have historically had volatile performance. For these and other reasons, we do not intend for our performance to be consistent with the performance of the NPI. The actual percentage of our portfolio that is invested in retail, office and industrial property categories may fluctuate due to market conditions and investment opportunities. We believe that our organization a perpetual-life REIT will allow us to acquire and manage our investment portfolio in a more active and flexible manner, as we will not be limited by a pre-determined operational period and the need to provide a “liquidity event” at the end of that period.
 
Acquisition and Investment Policies
 
Our board of directors, including our independent directors, have adopted investment policies. Our directors will formally review at a duly called meeting our investment policies on an annual basis and our portfolio on a quarterly basis or, in each case, more often as they deem appropriate. Changes to our investment policies must be approved by our board of directors, including a majority of our independent directors. Our board of directors may revise our investment policies, which we describe in more detail below, without the concurrence of our stockholders. However, our board of directors will not amend our charter, including any investment policies that are provided in our charter, without the concurrence of a majority of the outstanding shares, except for amendments that do not adversely affect the rights, preferences and privileges of our stockholders.
 
Our investment policies delegate to our advisor broad authority to execute real estate property acquisitions and dispositions. Our board of directors will at all times have ultimate oversight over our investments and may change from time to time the scope of authority delegated to our advisor with respect to acquisition and disposition transactions.
 
Commercial Real Estate Properties
 
Our commercial real estate investments will primarily consist of single-tenant, necessity commercial properties, which are leased to creditworthy tenants under long-term net leases and provide current operating cash flow. We use the term necessity commercial properties to describe retail properties that are important to customers and office and industrial properties that are essential to the business operations of a corporate


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tenant. Necessity retail describes companies that provide consumers with products that are important to, and part of, their everyday lives. Examples of necessity retail properties include pharmacies, home improvement stores, national superstores, restaurants and regional retailers that provide products considered necessities to that region. Historically, the retail sector of commercial real estate has been able to withstand most market cycles better than other sectors, due to the long-term resilience of consumer spending. By focusing our retail investment strategy on necessity retailers subject to long-term net leases, our objective is to provide our stockholders with a relatively stable stream of current income, while avoiding a significant decline in the value of our real estate portfolio. Once all of the offering proceeds are invested, our property sector allocations will broadly reflect the composition of the NPI with the exception of multi-family and lodging, which will be excluded from our investment universe. The actual percentage of our portfolio that is invested in the retail, office and industrial property categories may fluctuate due to market conditions and investment opportunities.
 
Necessity office and industrial properties are essential to the business operations of a corporate tenant, typically due to one or more of the following factors:
 
  •  difficulty of replacement or prohibitive cost to relocate;
 
  •  sole or major location for its distribution or office operations;
 
  •  proximity to its distribution, manufacturing, research facilities or customer base;
 
  •  lower labor, transportation and/or operating costs;
 
  •  more stable labor force;
 
  •  optimal access to transportation networks that enable efficient distribution; and/or
 
  •  significant amount of tenant-funded capital improvements, such as customized computer systems and information technology infrastructure, racking and sorting systems, and cooling or refrigeration systems.
 
For example, distribution facilities, warehouses, manufacturing plants and corporate or regional headquarters are often considered to be necessity office and industrial properties. We believe that necessity office and industrial properties provide a relatively greater level of stability than other office and industrial property types because necessity properties typically involve long-term leases and experience relatively low tenant turnover. We also believe that, as a result of recent and ongoing business developments, such as the role of the internet in the distribution of products, globalization of importing and exporting products and consolidation of businesses requiring office buildings to accommodate a single-tenant, there is, and we expect there will continue to be, increasing demand by commercial tenants for necessity office and industrial properties.
 
For over three decades, our sponsor has developed and utilized this investment approach in acquiring and managing real estate assets. We believe that our sponsor’s experience will provide us with a competitive advantage. In addition, our sponsor has built an organization of over 275 employees, who are experienced in the various aspects of acquiring, financing, managing and selling commercial real estate, and we believe that our access to these resources also will provide us with an advantage.
 
Our goal is to acquire a portfolio of commercial properties that are diversified by way of location and industry, in order to minimize the potential adverse impact of economic slow-downs or downturns in local markets or a specific industry. There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of this offering that may be invested in a single property. The number and mix of properties comprising our portfolio will depend upon real estate market conditions and other circumstances existing at the time we acquire properties, and the amount of proceeds we raise in this offering. We are not restricted to investments in commercial properties and we will not forego a high quality investment because it does not precisely fit our expected portfolio composition.
 
We intend to incur debt to acquire properties where our advisor determines that incurring such debt is in our best interests. In addition, from time to time, we may acquire some properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We


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will use the proceeds from these loans to acquire additional properties and maintain liquidity. See “— Borrowing Policies” below for a more detailed description of our borrowing intentions and limitations.
 
Retail Real Estate Properties  We expect the portion of our portfolio allocated to retail real estate properties will focus on regional or national name brand retail businesses with creditworthy and established track records. It is our present intention to hold substantially all of the retail properties that we acquire for a period in excess of five years. We will also pursue properties leased to tenants representing a variety of retail industries to avoid concentration in any one industry. These industries include all types of retail establishments, such as big box retailers, convenience stores, drug stores and restaurant properties. We expect that some of these investments will provide long-term value by virtue of their size, location, quality and condition, and lease characteristics. We currently expect that substantially all of our retail properties acquisitions will be in the United States, including U.S. protectorates.
 
We believe that focusing on the acquisition of single-tenant and multi-tenant necessity retail properties net leased to creditworthy tenants presents lower investment risks and greater stability than many other sectors of today’s commercial real estate market. By acquiring a large number of single-tenant and multi-tenant retail properties, we believe that lower than expected results of operations from one or a few investments will not necessarily preclude our ability to realize our investment objective of cash flow from our overall portfolio. We believe this approach can result in less risk to investors than an investment approach that targets other asset classes. In addition, we believe that retail properties under long-term triple net and double net leases offer a distinct investment advantage since these properties generally require less management and operating capital, have less recurring tenant turnover and, with respect to single-tenant properties, often offer superior locations that are less dependent on the financial stability of adjoining tenants. In addition, since we intend to acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic slow downs or downturns in local markets.
 
Many retail companies today are entering into sale-leaseback arrangements as a strategy for applying capital that would otherwise be applied to their real estate holdings to their core operating businesses. We believe that our investment strategy will enable us to take advantage of the increased emphasis on retailers’ core business operations in today’s competitive corporate environment as many retailers attempt to divest from real estate assets.
 
Office and Industrial Real Estate Properties  We expect that our office properties will include recently constructed, high quality, low, mid- or high-rise office buildings that are necessary to a principal tenant, subject to a long-term net lease, and used for purposes such as a corporate, regional or product-specific headquarters. We also expect that our industrial property portfolio will include recently constructed, high quality industrial properties that are necessary to a single principal tenant, subject to a long-term net lease, and used for purposes such as warehousing, distribution, light manufacturing, research and development, or industrial flex facilities. It is our present intention to hold substantially all of the office and industrial properties that we acquire for a period of more than seven years.
 
We expect that some of our office and industrial properties will be multi-tenant properties, anchored by one or more principal tenants, who are creditworthy and subject to long-term net leases. We expect that, from time to time, we may invest in corporate development projects, designed to construct an income producing office or industrial property to serve one or more creditworthy tenants.
 
Real Estate Underwriting Process.  In evaluating potential property acquisitions consistent with our investment objectives, our advisor will apply its well-established underwriting process to determine the creditworthiness of potential tenants. Similarly, our advisor will apply its credit underwriting criteria to possible new tenants when we are re-leasing properties in our portfolio. Our advisor’s underwriting process includes analyzing the financial data and other available information about the tenant, such as income statements, balance sheets, net worth, cash flow, business plans, data provided by industry credit rating services, and/or other information our advisor may deem relevant. Generally, these tenants must have a proven track record in order to meet the credit tests applied by our advisor. In addition, we may obtain guarantees of leases by the corporate parent of the tenant, in which case our advisor will analyze the creditworthiness of the guarantor. In many instances, especially in sale-leaseback situations, where we are acquiring a property from a


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company and simultaneously leasing it back to the company under a long-term lease, we will meet with the senior management to discuss the company’s business plan and strategy.
 
When using debt rating agencies, a tenant typically will be considered creditworthy when the tenant has an “investment grade” debt rating by Moody’s of Baa3 or better, credit rating by Standard & Poor’s of BBB– or better, or its payments are guaranteed by a company with such rating. Changes in tenant credit ratings, coupled with future acquisition and disposition activity, may increase or decrease our concentration of creditworthy tenants in the future.
 
Moody’s ratings are opinions of future relative creditworthiness based on an evaluation of franchise value, financial statement analysis and management quality. The rating given to a debt obligation describes the level of risk associated with receiving full and timely payment of principal and interest on that specific debt obligation and how that risk compares with that of all other debt obligations. The rating, therefore, provides one measure of the ability of a company to generate cash in the future.
 
A Moody’s debt rating of Baa3, which is the lowest investment grade rating given by Moody’s, is assigned to companies which, in Moody’s opinion, have adequate financial security. However, certain protective elements may be lacking or may be unreliable over any given period of time. A Moody’s debt rating of AAA, which is the highest investment grade rating given by Moody’s, is assigned to companies which, in Moody’s opinion, have exceptional financial security. Thus, investment grade tenants will be judged by Moody’s to have at least adequate financial security, and will in some cases have exceptional financial security.
 
Standard & Poor’s assigns a credit rating to companies and to each issuance or class of debt issued by a rated company. A Standard & Poor’s credit rating of BBB–, which is the lowest investment grade rating given by Standard & Poor’s, is assigned to companies that, in Standard & Poor’s opinion, exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial commitments. A Standard & Poor’s credit rating of AAA+, which is the highest investment grade rating given by Standard & Poor’s, is assigned to companies that, in the opinion of Standard & Poor’s, have extremely strong capacities to meet their financial commitments. Thus, investment grade tenants will be judged by Standard & Poor’s to have at least adequate protection parameters, and will in some cases have extremely strong financial positions.
 
While we will utilize ratings by Moody’s and Standard & Poor’s, when available, as one factor in determining whether a tenant is creditworthy, our advisor will also consider other factors in determining whether a tenant is creditworthy, for the purpose of meeting our investment objective. For example, our advisor’s underwriting process will look at other debt agencies, such as Dun & Bradstreet, along with our advisor’s own analysis of the financial condition of the tenant and/or the guarantor, the operating history of the property with the tenant, the tenant’s market share and track record within the tenant’s industry segment, the general health and outlook of the tenant’s industry segment, the strength of the tenant’s management team and/or the terms and length of the lease at the time of the acquisition.
 
Description of Leases.  We expect, in most instances, to acquire tenant properties with existing double net or triple net leases. A triple net lease typically requires tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, maintenance, insurance and building repairs related to the property, in addition to the lease payments. A double net lease typically requires tenants to pay for property taxes and insurance, in addition to the lease payments. Not all of our leases will be net leases. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into net leases.
 
Typically, we expect to enter into leases that have terms of ten years or more. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of


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base rent payable at points during the lease term. We expect that many of our leases will contain periodic rent increases. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. Tenants will be required to provide proof of insurance by furnishing a certificate of insurance to our advisor on an annual basis. The insurance certificates will be tracked and reviewed for compliance by our advisor’s property and risk management departments.
 
As a precautionary measure, we may obtain, to the extent available, secondary liability insurance, as well as loss of rents insurance that covers one year of annual rent in the event of a rental loss. In addition, some leases require that we procure insurance for both commercial general liability and property damage; however, generally the premiums are fully reimbursable from the tenant. In such instances, the policy will list us as the named insured and the tenant as the additional insured.
 
We may purchase properties and lease them back to the sellers of such properties. While we intend to use our best efforts to structure any such sale-leaseback transaction (as well as other leases) so that the lease will be characterized as a “true lease” and so that we are treated as the owner of the property for federal income tax purposes, the IRS could challenge this characterization. In the event that any sale-leaseback transaction (or other leases) is re-characterized as a financing transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed and in certain circumstances we could lose our REIT status. See the “Material U.S. Federal Income Tax Considerations — Sale-Leaseback Transactions” section of this prospectus.
 
Other Possible Commercial Real Estate Investments.  Although we expect to invest primarily in necessity retail, office and industrial properties, we also may invest in other income-producing properties, where the properties share some of the same characteristics as our core properties, including one or more principal, creditworthy tenants, long-term leases, and/or strategic locations. We may also invest in ground leases.
 
Ownership Structure.  Our investment in real estate generally takes the form of holding fee title or a long-term leasehold estate. We expect to acquire such interests either directly through our operating partnership or indirectly through limited liability companies, limited partnerships or other entities owned and/or controlled by our operating partnership. We may acquire properties by acquiring the entity that holds the desired properties. We also may acquire properties through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with third parties, including the developers of the properties or affiliates of our advisor. See the section captioned “Operating Partnership Agreement” in this prospectus and the “— Joint Venture Investments” section below.
 
Investment Decisions.  Our advisor has substantial discretion with respect to the selection of our specific investments, subject to our investment and borrowing policies, and our policies are approved by our independent directors. In pursuing our investment objectives and making investment decisions on our behalf, our advisor evaluates the proposed terms of the investment against all aspects of the transaction, including the condition and financial performance of the asset, the terms of existing leases, the creditworthiness of the tenant or tenants, and property location and characteristics. Because the factors considered, including the specific weight we place on each factor, vary for each potential investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
 
Our advisor procures and reviews an independent valuation estimate on each and every proposed investment. In addition, our advisor, to the extent such information is available, considers the following:
 
  •  tenant rolls and tenant creditworthiness;
 
  •  a property condition report;
 
  •  unit level store performance;
 
  •  property location, visibility and access;


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  •  age of the property, physical condition and curb appeal;
 
  •  neighboring property uses;
 
  •  local market conditions, including vacancy rates;
 
  •  area demographics, including trade area population and average household income; and
 
  •  neighborhood growth patterns and economic condition
 
Our advisor also reviews the terms of each existing lease by considering various factors, including:
 
  •  rent escalations;
 
  •  remaining lease term;
 
  •  renewal option terms;
 
  •  tenant purchase options;
 
  •  termination options;
 
  •  scope of the landlord’s maintenance, repair and replacement requirements;
 
  •  projected net cash flow yield; and
 
  •  projected internal rates of return.
 
Environmental Matters.  All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. State and federal laws in this area are constantly evolving, and we intend to take commercially reasonable steps, a summary of which is described below, to protect ourselves from the impact of these laws.
 
We generally will not purchase any property unless and until we obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. However, we may purchase a property without obtaining such assessment if our advisor determines the assessment is not necessary under the circumstances. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to asses surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel who perform a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, ground water or building materials from the property and may not reveal all environmental hazards on a property.
 
We expect that some of the properties that we will acquire may contain, at the time of our investment, or may have contained prior to our investment, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our potential properties may be adjacent to or near other properties that have contained or then currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our potential properties may be on or adjacent to or near other properties upon which others, including former owners or tenants of our properties, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.
 
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we will


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underwrite the costs of environmental investigation, clean-up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
 
Conditions to Closing Our Acquisitions.  Generally, we condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or developer, including, where appropriate:
 
  •  plans and specifications;
 
  •  surveys;
 
  •  evidence of marketable title, subject to such liens and encumbrances as are acceptable to our advisor;
 
  •  financial statements covering recent operations of properties having operating histories;
 
  •  title and liability insurance policies; and
 
  •  tenant estoppel certificates.
 
In addition, we will take such steps as we deem necessary with respect to potential environmental matters. See the section of the prospectus, above, entitled “— Environmental Matters.”
 
We may enter into purchase and sale arrangements with a seller or developer of a suitable property under development or construction. In such cases, we will be obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. In such cases, prior to our acquiring the property, we generally would receive a certificate of an architect, engineer or other appropriate party, stating that the property complies with all plans and specifications. If renovation or remodeling is required prior to the purchase of a property, we expect to pay a negotiated maximum amount to the seller upon completion.
 
In determining whether to purchase a particular property, we may obtain an option to purchase such property. The amount paid for an option, if any, normally is forfeited if the property is not purchased and normally is credited against the purchase price if the property is purchased.
 
In the purchasing, leasing and developing of properties, we are subject to risks generally incident to the ownership of real estate. See the “Risk Factors — Risks Related to Investments in Real Estate” section of this prospectus.
 
Joint Venture Investments
 
We may enter into joint ventures, partnerships, co-tenancies and other co-ownership arrangements with third parties, including affiliates of our advisor, for the acquisition, development or improvement of properties or the acquisition of other real estate-related investments. We may also enter into such arrangements with real estate developers, owners and other unaffiliated third parties for the purpose of developing, owning and operating real properties. In determining whether to invest in a particular joint venture, our advisor will evaluate the underlying real property or other real estate-related investment using the same criteria described above in “— Investment Decisions” for the selection of our real property investments. Our advisor also will evaluate the joint venture or co-ownership partner and the proposed terms of the joint venture or a co-ownership arrangement.
 
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. In the event that the co-venturer elects to sell all or a portion of the interests held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the joint venture. It is also possible that joint venture partners may resist granting us a right of first refusal or may insist on a different methodology for unwinding the joint venture if one of the parties wishes to liquidate its interest.
 
Our advisor’s officers and key persons may have conflicts of interest in determining which Cole-sponsored program should enter into any particular joint venture agreement. The co-venturer may have


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economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our advisor’s officers and key persons may face a conflict in structuring the terms of the relationship between our interests and the interests of the affiliated co-venturer and in managing the joint venture. Since some or all of our advisor’s officers and key persons will also advise the affiliated co-venturer, agreements and transactions between us and any other Cole-sponsored co-venturer will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition,we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
 
We may enter into joint ventures with other Cole real estate programs, or with our sponsor, our advisor, one or more of our directors, or any of their respective affiliates, only if a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by unaffiliated joint venturers, and the cost of our investment must be supported by a current appraisal of the asset.
 
Development and Construction of Properties
 
We may invest in properties on which improvements are to be constructed or completed or which require substantial renovation or refurbishment. We expect that joint ventures would be the exclusive vehicle through which we would invest in build-to-suit properties. Any such joint ventures will make up no more than 20% of our total assets and our general policy is to structure them as follows:
 
  •  we may enter into a joint venture with the future tenant whereby we will provide a portion of the equity or debt financing;
 
  •  we would accrue a preferred return during construction on any equity investment;
 
  •  the properties will be developed by third parties; and
 
  •  consistent with our general policy regarding joint venture investments, we would have a right of first refusal to purchase the co-investor’s interest.
 
In the event that we may elect to engage in development or construction projects, in order to help ensure performance by the builders of properties that are under construction, completion of such properties will be guaranteed at the contracted price by a completion guaranty, completion bond or performance bond. Our advisor may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the person entering into the construction or development contract as an alternative to a completion bond or performance bond. Development of real estate properties is subject to risks relating to a builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. See the “Risk Factors — Risks Related to Investments in Real Estate” section of this prospectus.
 
We may make periodic progress payments or other cash advances to developers and builders of our properties prior to completion of construction only upon receipt of an architect’s certification as to the percentage of the project then completed and as to the dollar amount of the construction then completed. We intend to use such additional controls on disbursements to builders and developers as we deem necessary or prudent. We may directly employ one or more project managers, to plan, supervise and implement the development of any unimproved properties that we may acquire. Such persons would be compensated directly by us.
 
In addition, we may invest in unimproved properties or in mortgage loans secured by such properties, provided that we will not invest more than 10% of our total assets in unimproved properties or in mortgage loans secured by such properties. We will consider a property to be an unimproved property if it was not acquired for the purpose of producing rental or other operating cash flows, has no development or construction in process at the time of acquisition and no development or construction is planned to commence within one year of the acquisition.


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Investing in and Originating Loans
 
The criteria that our advisor will use in making or investing in loans on our behalf is substantially the same as those involved in acquiring our investment in properties. We do not intend to make loans to other persons, to underwrite securities of other issuers or to engage in the purchase and sale of any types of investments other than those relating to real estate. However, unlike our property investments which we expect to hold in excess of seven years, we expect that the average duration of loans will typically be one to five years. We are not limited as to the amount of gross offering proceeds that we may apply to mortgage loan investments; however, our board of directors has adopted a policy limiting the amount of gross offering proceeds that we may apply to mortgage loan investments.
 
We do not expect to make or invest in loans that are not directly or indirectly secured by real estate. We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including our loan, would exceed an amount equal to 85% of the appraised value of the property, as determined by an independent third party appraiser, unless we find substantial justification due to other underwriting criteria. We may find such justification in connection with the purchase of loans in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and in which the cost of the loan investment does not exceed the fair market value of the underlying property. We will not invest in or make loans unless an appraisal has been obtained concerning the underlying property, except for those loans insured or guaranteed by a government or government agency.
 
We may invest in first, second and third mortgage loans, mezzanine loans, bridge loans, wraparound mortgage loans, construction mortgage loans on real property, loans on leasehold interest mortgages, and CMBS held as long-term investments. However, we will not make or invest in any loans that are subordinate to any mortgage or equity interest of our advisor or any of its or our affiliates. We also may invest in participations in mortgage loans. A mezzanine loan is a loan made in respect of certain real property but is secured by a lien on the ownership interests of the entity that, directly or indirectly, owns the real property. A bridge loan is short term financing, for an individual or business, until permanent or the next stage of financing, can be obtained. Second mortgage and wraparound loans are secured by second or wraparound deeds of trust on real property that is already subject to prior mortgage indebtedness. A wraparound loan is one or more junior mortgage loans having a principal amount equal to the outstanding balance under the existing mortgage loan, plus the amount actually to be advanced under the wraparound mortgage loan. Under a wraparound loan, we would generally make principal and interest payments on behalf of the borrower to the holders of the prior mortgage loans. Third mortgage loans are secured by third deeds of trust on real property that is already subject to prior first and second mortgage indebtedness. Construction loans are loans made for either original development or renovation of property. Construction loans in which we would generally consider an investment would be secured by first deeds of trust on real property for terms of six months to two years. Loans on leasehold interests are secured by an assignment of the borrower’s leasehold interest in the particular real property. These loans are generally for terms of from six months to 15 years. The leasehold interest loans are either amortized over a period that is shorter than the lease term or have a maturity date prior to the date the lease terminates. These loans would generally permit us to cure any default under the lease. Mortgage participation investments are investments in partial interests of mortgages of the type described above that are made and administered by third-party mortgage lenders.
 
In evaluating prospective loan investments, our advisor will consider factors such as the following:
 
  •  the ratio of the investment amount to the underlying property’s value;
 
  •  the property’s potential for capital appreciation;
 
  •  expected levels of rental and occupancy rates;
 
  •  the condition and use of the property;
 
  •  current and projected cash flow of the property;
 
  •  potential for rent increases;


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  •  the degree of liquidity of the investment;
 
  •  the property’s income-producing capacity;
 
  •  the quality, experience and creditworthiness of the borrower;
 
  •  general economic conditions in the area where the property is located;
 
  •  in the case of mezzanine loans, the ability to acquire the underlying real property; and
 
  •  other factors that our advisor believes are relevant.
 
In addition, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage or condition of the title. We will also consider the requirements of the REIT rules, which may limit our ability to make certain loan investments. Because the factors considered, including the specific weight we place on each factor, will vary for each prospective loan investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
 
We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or may purchase existing loans that were originated by other lenders. Our advisor will evaluate all potential loan investments to determine if the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. Most loans that we will consider for investment would provide for monthly payments of interest and some may also provide for principal amortization, although many loans of the nature that we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.
 
We do not have any policies directing the portion of our assets that may be invested in construction loans, mezzanine loans, bridge loans, loans secured by leasehold interests and second, third and wraparound mortgage loans. However, we recognize that these types of loans are riskier than first deeds of trust or first priority mortgages on income-producing, fee-simple properties, and we expect to minimize the amount of these types of loans in our portfolio, to the extent that we make or invest in loans at all. Our advisor will evaluate the fact that these types of loans are riskier in determining the rate of interest on the loans. We do not have any policy that limits the amount that we may invest in any single loan or the amount we may invest in loans to any one borrower. We are not limited as to the amount of gross offering proceeds that we may use to invest in or originate loans.
 
Our loan investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosures to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders and these requirements may affect our ability to effectuate our proposed investments in loans. Commencement of operations in these or other jurisdictions may be dependent upon a finding of our financial responsibility, character and fitness. We may determine not to make loans in any jurisdiction in which the regulatory authority determines that we have not complied in all material respects with applicable requirements.
 
Liquid Investment Portfolio
 
Investment in Liquid Securities.  To the extent permitted by the REIT rules, we intend for our liquid investment portfolio to primarily consist of U.S. government securities, agency securities and corporate debt. We use the term “agency” to refer to a U.S. government agency such as the Government National Mortgage Association, or Ginnie Mae, or a federally-chartered corporation such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac.
 
We may also invest in liquid real estate-related securities, including equity and debt securities of companies whose shares are listed for trading on a national securities exchange and are engaged in real estate activities. Listed companies engaged in real estate activities may include, for example, REITs. Our


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investments in securities of companies engaged in activities related to real estate will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer.
 
We may also make investments in CMBS to the extent permitted by the REIT rules. CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined portfolios of one or more commercial mortgage loans. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust’s income. Losses and other shortfalls from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest to which they are entitled. CMBS are subject to all of the risks of the underlying mortgage loans. We may invest in investment grade and non-investment grade CMBS classes.
 
Additionally, we may acquire exchange traded funds, or ETFs, and mutual funds focused on REITs and real estate companies. To a lesser extent we may also invest in traded securities that are unrelated to real estate and make other investments or enter into transactions designed to limit our exposure to market volatility, illiquidity, interest rate or other risks related to our real-estate related, equity or debt, securities subject to complying with the REIT rules.
 
Cash, Cash Equivalents and Other Short-Term Investments.  Our cash, cash equivalents and other short-term investments may include investments in money market instruments, cash and other cash equivalents (such as high-quality short-term debt instruments, including commercial paper, certificates of deposit, bankers’ acceptances, repurchase agreements and interest-bearing time deposits), to the extent consistent with our qualification as a REIT.
 
Other Investments
 
Although it is our expectation that our portfolio will consist primarily of commercial real estate, as well as notes receivable, liquid assets and cash and cash equivalents, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a high quality investment because it does not precisely fit our presently expected portfolio composition. Thus, to the extent that our advisor presents us with high quality investment opportunities that allow us to meet the REIT requirements under the Code, and that result in an overall real estate portfolio that is consistent with our investment objectives, our portfolio composition may vary from time to time.
 
Borrowing Policies
 
Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors and providing us with added liquidity. By operating on a leveraged basis, we have more funds available for investment in properties. This allows us to make more investments than would otherwise be possible, resulting in a more diversified portfolio.
 
At the same time, our advisor believes in utilizing leverage in a moderate fashion. Under our charter we may not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria. Additionally, our charter limits our aggregate borrowings to 75% of the greater of cost (or 300% of net assets) (before deducting depreciation or other non-cash reserves) or market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. Consistent with our advisor’s approach toward the moderate use of leverage. Our board of directors has adopted a policy to further limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or market value of our gross assets, unless such borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with a justification for such excess borrowing. During the period of this offering, we expect to seek and receive approval of our


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independent directors to exceed this limit because we will then be in the process of raising our equity capital to acquire our portfolio. After we have acquired a substantial portfolio, our advisor will target a leverage of 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets.
 
Our advisor will use its best efforts to obtain financing on the most favorable terms available to us. Lenders may have recourse to assets not securing the repayment of the indebtedness. Our advisor may refinance properties during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of the refinancing may include increased cash flow resulting from reduced debt service requirements, an increase in dividend distributions from proceeds of the refinancing, if any, and an increase in property ownership if some refinancing proceeds are reinvested in real estate.
 
Our ability to increase our diversification through borrowing may be adversely impacted if banks and other lending institutions reduce the amount of funds available for loans secured by real estate. When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. To the extent that we do not obtain mortgage loans on our properties, our ability to acquire additional properties will be restricted and we may not be able to adequately diversify our portfolio.
 
Our sponsor, our advisor, any of our directors and any of their respective affiliates will not make loans to us, except that we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transactions as being fair and reasonable to us.
 
In an effort to have adequate cash available to support our redemption plan, our advisor may determine to reserve borrowing capacity under a line of credit. Our advisor could then elect to borrow against this line of credit in its discretion in order to fund redemption requests.
 
Disposition Policies
 
We intend to hold each property we acquire for an extended period, generally in excess of seven years. Holding periods for other real estate-related investments may vary. Regardless of intended holding periods, circumstances might arise that could cause us to determine to sell an asset before the end of the expected holding period if we believe the sale of the asset would be in the best interests of our stockholders. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing and projected economic conditions, current tenant rolls and tenant creditworthiness, whether, depending on the assets tax attributes, we could apply the proceeds from the sale of the asset to make other investments, whether disposition of the asset would increase cash flow, and whether the sale of the asset would be a prohibited transaction under the Code or otherwise impact our status as a REIT. The selling price of a property that is net leased will be determined in large part by the amount of rent payable under the lease. If a tenant has a repurchase option at a formula price, we may be limited in realizing any appreciation. In connection with our sales of properties we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale.
 
Investment Limitations, In General
 
Our charter places numerous limitations on us with respect to the manner in which we may invest our funds or issue securities. We will not:
 
  •  borrow in excess of 75% of the greater of the aggregate cost (or 300% of net assets) (before deducting depreciation or other non-cash reserves) or fair market value of all assets owned by us, unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly


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  report along with the justification for such excess borrowing (although our board of directors has adopted a policy to reduce this limit from 75% to 60%);
 
  •  make investments in unimproved property or mortgage loans on unimproved property in excess of 10% of our total assets;
 
  •  make or invest in mortgage loans unless an appraisal is obtained concerning the underlying property, except for those mortgage loans insured or guaranteed by a government or government agency;
 
  •  make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria;
 
  •  invest in indebtedness secured by a mortgage on real property that is subordinate to the lien or other indebtedness of our advisor, any director, our sponsor or any of our affiliates;
 
  •  invest in real estate contracts of sale, otherwise known as land sale contracts, unless the contract is in recordable form and is appropriately recorded in the chain of title;
 
  •  invest in commodities or commodity futures contracts, except for futures contracts when used solely for the purpose of hedging in connection with our ordinary business of investing in real estate assets and mortgages;
 
  •  issue equity securities on a deferred payment basis or other similar arrangement;
 
  •  issue debt securities in the absence of adequate cash flow to cover debt service;
 
  •  issue equity securities that are assessable after we have received the consideration for which our board of directors authorized their issuance;
 
  •  issue equity securities redeemable solely at the option of the holder, which restriction has no effect on our share redemption program or the ability of our operating partnership to issue redeemable partnership interests;
 
  •  issue options or warrants to our advisor, our directors, our sponsor or any of their respective affiliates except on the same terms as such options or warrants are sold to the general public and provided that such options or warrants do not exceed ten percent of our outstanding shares on the date of grant;
 
  •  make any investment that we believe will be inconsistent with our objectives of qualifying and remaining qualified as a REIT unless and until our board of directors determines, in its sole discretion, that REIT qualification is not in our best interests; or
 
  •  acquire properties or loans from affiliates, except as noted in “Conflict of Interest — Potential Conflicts Arising From Other Activities of Our Advisor and its Affiliates.”
 
In addition, our charter includes many other investment limitations in connection with transactions with affiliated entities or persons, which limitations are described below under the “Conflicts of Interest” section of this prospectus. Our charter also includes restrictions on roll-up transactions, which are described under the “Description of Capital Stock” section of this prospectus.
 
Investment Limitations to Avoid Registration as an Investment Company
 
We intend to conduct our operations and the operations of our operating partnership so that each is exempt from registration as an investment company under the Investment Company Act. Under the Investment Company Act, in relevant part, a company is an “investment company” if:
 
  •  pursuant to Section 3(a)(1)(A), it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; and


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  •  pursuant to Section 3(a)(1)(C), it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis. “Investment securities” excludes U.S. Government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
 
We intend to acquire real estate and real estate-related assets directly, for example, by acquiring fee interests in real property, or by purchasing interests, including controlling interests, in REITs or other “real estate operating companies,” such as real estate management companies and real estate development companies, that own real property. We also may acquire real estate assets through investments in joint venture entities, including joint venture entities in which we may not own a controlling interest. We anticipate that our assets generally will be held in wholly and majority-owned subsidiaries of the company, each formed to hold a particular asset.
 
Because we are organized as a holding company that will conduct its business primarily through our operating partnership, which in turn is a holding company that will conduct its business through its subsidiaries, we intend to conduct our operations and the operations of our operating partnership so that each will comply with the 40% test. In addition, we expect that most, if not all, of our wholly-owned and majority-owned subsidiaries will not be relying on exemptions under either Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Consequently, interests in these subsidiaries (which are expected to constitute most, if not all, of our assets) generally will not constitute “investment securities.” Accordingly, we believe that the company and most, if not all, of its wholly- and majority-owned subsidiaries will not be considered investment companies under Section 3(a)(1)(C) of the Investment Company Act.
 
In addition, we believe that we, our operating partnership and any subsidiaries of our operating partnership will not be considered investment companies under Section 3(a)(1)(A) of the Investment Company Act because none of these entities will engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, we, our operating partnership and any subsidiaries will be primarily engaged in non-investment company businesses related to real estate. Consequently, we expect that we, our operating partnership and any subsidiaries will be able to conduct our respective operations such that none of these entities will be required to register as an investment company under the Investment Company Act.
 
The determination of whether an entity is a majority-owned subsidiary of our company is made by us. The Investment Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. We intend to treat entities in which we own at least a majority of the outstanding voting securities as majority owned subsidiaries for purposes of the 40% test. We do not intend to request that the SEC staff approve our treatment of any particular entity as a majority-owned subsidiary and the SEC staff has not done so. If the SEC staff were to disagree with our treatment of one or more subsidiary entities as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to comply with the 40% test. Any such adjustment in our strategy could have a material adverse effect on us.
 
Even if the value of investment securities held by any of our wholly-owned or majority-owned subsidiaries were to exceed 40% of their respective total assets, we expect that such subsidiaries would be able to rely on the exclusion from the definition of “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act, which is available for entities primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion, as interpreted by the staff of the SEC, generally requires that at least 55% of an entity’s assets must be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying assets,” and at least 80% of the entity’s assets must be comprised of additional qualifying assets and a broader category of assets that we refer


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to as “real estate-related assets” under the Investment Company Act. Additionally, no more than 20% of the entity’s assets may be comprised of miscellaneous assets.
 
We will classify our assets for purposes of the Investment Company Act, including our 3(c)(5)(C) exclusion, in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. Accordingly, no assurance can be given that the SEC will concur with our classification of our assets.
 
For purposes of determining whether we satisfy the exclusion provided by Section 3(c)(5)(C), as interpreted by the staff of the SEC, we will classify the assets in which we invest as follows:
 
  •  Real Property.  Based on the no-action letters issued by the SEC staff, we will classify our fee interests in real properties as qualifying assets. In addition, based on no-action letters issued by the SEC staff, we will treat our investments in joint ventures, which in turn invest in qualifying assets such as real property, as qualifying assets only if we have the right to approve major decisions affecting the joint venture; otherwise, such investments will be classified as real estate-related assets. We expect that no less than 55% of our assets will consist of investments in real property, including any joint ventures that we control.
 
  •  Securities.  We intend to treat as real estate-related assets debt and equity securities of both non-majority owned publicly traded and private companies primarily engaged in real estate businesses, including REITs and other real estate operating companies, and securities issued by pass-through entities of which substantially all of the assets consist of qualifying assets or real estate-related assets.
 
  •  Loans.  Based on the no-action letters issued by the SEC staff, we will classify our investments in various types of whole loans as qualifying assets, as long as the loans are “fully secured” by an interest in real estate at the time we originate or acquire the loan. However, we will consider loans with loan-to-value ratios in excess of 100% to be real estate-related assets. We will treat our mezzanine loan investments as qualifying assets so long as they are structured as “Tier 1“mezzanine loans in accordance with the guidance published by the SEC staff in a no-action letter that discusses the classifications of Tier 1 mezzanine loans under Section 3(c)(5)(C) of the Investment Company Act.
 
Qualification for exemption from registration under the Investment Company Act will limit our ability to make certain investments. For example, these restrictions may limit the ability of the company and its subsidiaries to invest directly in mortgage-related securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities and real estate companies or in assets not related to real estate. Although we intend to monitor our portfolio, there can be no assurance that we will be able to maintain this exemption from registration for our company or each of our subsidiaries.
 
A change in the value of any of our assets could negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To maintain our exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy.
 
Change in Investment Policies
 
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we follow are in the best interests of our stockholders. Each determination and the basis for that determination shall be set forth in the minutes of the meetings of our board of directors. The methods of implementing our investment policies also may vary as new real estate development trends emerge and new investment techniques are developed. The methods of implementing our investment policies, except as otherwise provided in our organizational documents, may be altered by a majority of our directors, including a majority of the independent directors, without the approval of our stockholders.


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Public Disclosure of Our Investments
 
As of the date of this prospectus, we have not acquired or contracted to acquire any specific real properties or other real estate-related investments. Our advisor and its affiliates are continually evaluating various potential property investments and engaging in discussions and negotiations with sellers, developers and potential tenants regarding the purchase and development of properties. Accordingly, we expect that acquisition opportunities may be made available to us relatively quickly once the offering has commenced. If we believe that a reasonable probability exists that we will acquire a specific property, this prospectus will be supplemented to disclose the negotiations and pending acquisition of such property. We expect that this will normally occur upon the signing of a purchase agreement for the acquisition of a specific property, but may occur before or after such signing or upon the satisfaction or expiration of major contingencies in any such purchase agreement, depending on the particular circumstances surrounding each potential investment. A supplement to this prospectus will describe any improvements proposed to be constructed upon the respective real property and other information that we consider appropriate for an understanding of the transaction. Further data will be made available after any pending acquisition is consummated, also by means of a supplement to this prospectus, if appropriate. You should understand that the disclosure of any proposed acquisition cannot be relied upon as an assurance that we will ultimately consummate such acquisition or that the information provided concerning the proposed acquisition will not change prior to any actual purchase.


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Valuation Policies
 
Our Independent Valuation Expert
 
Our board of directors has retained CBRE, Inc. (CBRE) as its independent valuation expert. CBRE has expertise in appraising commercial real estate. CBRE will be provided with access to all of the information in our possession about our commercial real estate investments that it may deem relevant to the discharge of its responsibilities. CBRE will also have access to other sources of information as a result of its affiliated businesses. The compensation we pay to the independent valuation expert will not be based on the estimated values of the commercial real estate assets, related liabilities and notes receivable secured by real estate. Our independent valuation expert is not affiliated with us, or with our advisor or its affiliates. Our board of directors may replace the independent valuation expert at any time by majority vote (including a majority vote of our independent directors).
 
Our board of directors, including a majority of our independent directors, has adopted valuation guidelines to be used by our independent valuation expert in connection with estimating the values of our commercial real estate assets, related liabilities and notes receivable secured by real estate. Our independent valuation expert will review our valuation guidelines and methodologies with our advisor and our board of directors at least annually. Any changes to our valuation guidelines will require the approval of our board of directors, including a majority of our independent directors. We will publicly announce any changes to the identity or role of the independent valuation expert or material changes to our valuation guidelines in reports we file with the SEC and/or via our website.
 
The independent valuation expert will discharge its responsibilities under the oversight of our board of directors and in accordance with our valuation guidelines. Our board will not be involved in the day to day valuation of our assets and liabilities, but will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility, at regularly scheduled board of directors meetings. The valuations performed by our independent valuation expert will be one of several components to be used by our fund accountant in its calculation of our NAV per share, in the manner described below.
 
While our independent valuation expert will periodically provide estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate based upon individual appraisal reports, our independent valuation expert will not be responsible for or prepare our daily NAV per share.
 
Additional Information Regarding the Engagement for Valuation Services.  We have contracted to receive valuation services from CBRE pursuant to that certain master agreement for real estate valuation services between CBRE and us dated September 1, 2011, a copy of which has been filed as Exhibit 10.2 to the registration statement of which this prospectus forms a part. The following is a brief description of such agreement, which is qualified in its entirety by reference to such exhibit, which is incorporated by reference herein.
 
Pursuant to our master agreement for real estate valuation services, CBRE’s individual appraisal reports for each asset and liability will be addressed solely to the Company to assist our fund accountant in establishing an estimated value of our commercial real estate and real estate related assets and related liabilities. CBRE’s appraisal reports to be provided to us will not constitute a recommendation to any person to purchase or sell any shares of our common stock. CBRE’s appraisal reports will not be addressed to the public and may not be relied upon by any other person to establish an estimated value of our common stock.
 
In preparing its appraisal reports, CBRE will not, and will not be requested to, solicit third party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of the Company. CBRE’s analyses, opinions, and conclusions will be developed, in conformity with the Uniform Standards of Professional Appraisal Practice, as well as the requirements of the state where the real property is located. The reported analyses, opinions, and conclusions to be developed will


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be prepared in conformity with the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. The use of the reports are subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives.
 
In conducting its investigation and analyses, CBRE will take into account such accepted financial and commercial procedures and considerations as it deems relevant, which may include, without limitation, the review of documents, materials and information provided by us to CBRE, such as: (i) historical operating revenues and expenses of the properties; (ii) lease agreements on the properties; (iii) the revenues and expenses of the properties; (iv) information regarding recent or planned capital expenditures; and (v) any other information relevant to valuing the real estate property.
 
In connection with its review, while CBRE may review the information supplied or otherwise made available to it by us for reasonableness, CBRE will assume and rely upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to it by any other party, and will not undertake any duty or responsibility to verify independently any of such information. CBRE will not make or obtain an independent valuation or appraisal of any other assets or liabilities (contingent or otherwise) of the Company other than our commercial real estate and real estate related assets and related liabilities. With respect to operating or financial forecasts and other information and data to be provided to or otherwise to be reviewed by or discussed with CBRE, CBRE will assume that such forecasts and other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, board of directors and advisor, and will rely upon us to advise CBRE promptly if any information previously provided becomes inaccurate or was required to be updated during the period of its review.
 
In performing its analyses, CBRE will make numerous other assumptions with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond CBRE’s control and our control, as well as certain factual matters. For example, CBRE will assume that we have clear and marketable title to each commercial real estate property valued, that no title defects exist unless specifically informed to the contrary, that improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density or shape are pending or being considered. Furthermore, CBRE’s analysis, opinions and conclusions will necessarily be based upon market, economic, financial and other circumstances and conditions existing prior to the valuation, and any material change in such circumstances and conditions may affect CBRE’s analysis and conclusions.
 
The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to CBRE’s appraisal reports. All of the CBRE appraisal reports, including the analysis, opinions and conclusions set forth in such reports, are qualified by the assumptions, qualifications and limitations set forth in the respective appraisal reports.
 
The analyses to be performed by CBRE will not address the market value of the Company’s common stock. The prices at which the Company’s commercial real estate properties may actually be sold could differ from CBRE’s analyses. Among its other responsibilities, our board of directors has adopted our valuation guidelines for establishing our NAV on each business day. Consequently, the analyses contained in the CBRE individual appraisal reports should not be viewed as being determinative of the value of our common stock.
 
CBRE is actively engaged in the business of undertaking the valuation of commercial real estate properties in connection with public offerings, private placements, business combinations and similar transactions. CBRE has been engaged by the Company to deliver valuation reports and will receive fees upon the delivery of such reports. In addition, we have agreed to indemnify CBRE against certain liabilities arising out of this engagement.
 
CBRE is an affiliate of CBRE Group, Inc., a parent holding company of affiliated companies that are engaged in the ordinary course of business in many areas related to commercial real estate and related services. In the two years prior to the date hereof, CBRE and its affiliates have provided a number of


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commercial real estate and financial advisory services for us and our affiliates and have received fees in connection with such services. CBRE and its affiliates may from time to time in the future perform other commercial real estate and financial advisory services for us and our affiliates in transactions related to the properties that are the subjects of the valuations, so long as such other services do not adversely affect the independence of the applicable CBRE appraiser as certified in the applicable appraisal report.
 
In the ordinary course of its business, CBRE, its affiliates, directors and officers may structure and effect transactions for its own account or for the accounts of its customers in commercial real estate assets of the same kind and in the same markets as the Company’s assets.
 
Valuation
 
Valuation of Commercial Real Estate Properties and Secured Loans
 
Wholly Owned Commercial Real Estate Properties.  Our independent valuation expert will value on a rolling basis each of our wholly owned real estate properties held, directly or indirectly, by our operating partnership at least once per quarter beginning with the quarter following the first full calendar quarter after we acquire the property. The independent valuation expert will collect all reasonably available material information that it deems relevant, including information about the properties from our advisor, the independent valuation expert’s own sources, market information from public sources, the expert’s own proprietary data, and, when deemed necessary by our independent valuation expert, a physical inspection. The independent valuation expert will also review trends in capitalization rates, discount rates, interest rates, leasing rates, as well as a variety of macro- and micro-economic factors.
 
Based on the available information, the independent valuation expert will estimate the as is market value of that property. The independent valuation expert will consider, as appropriate, valuation methodologies, opinions and judgments, to the extent consistent with our valuation guidelines as adopted by our board of directors, and with the recommendations set forth in the Uniform Standards of Professional Appraisal Practice and the requirements of the Code of Professional Ethics and Standards of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute.
 
Between quarterly valuations, our advisor will monitor our real estate investments to determine whether a material event has occurred that our advisor believes may have a material impact on the most recent estimated values provided by our independent valuation expert. If, in the opinion of our independent valuation expert, an event identified by the advisor, or in some circumstances an event that becomes known to the independent valuation expert through other means, is likely to have a material impact on previously provided estimated values of the affected commercial real estate assets, notes receivable secured by real estate or related real estate liabilities, the independent valuation expert will recommend valuation adjustments that the fund accountant will then incorporate into our NAV. For example, an unexpected termination or renewal of a material lease, a material change in vacancies or an unanticipated structural or environmental event at a property or capital market events may cause the value of a property to change materially. Our independent valuation expert will determine the appropriate adjustment to be made to the estimated value of the property based on the information available. Any such adjustments will be estimates of the market impact of specific events as they occur, based on assumptions and judgments that may or may not prove to be correct, and may also be based on the limited information readily available at that time.
 
Upon acquisition, commercial properties will initially be carried at cost (purchase price plus all related acquisition costs and expenses, such as legal fees and closing costs) until the investment has been held for one full calendar quarter following the quarter of acquisition. Thereafter, commercial properties will be valued on a rolling basis each quarter by our independent valuation expert. We will amortize acquisition costs and expenses over a five year period. The independent valuation expert may perform valuations at any time during a quarter, based on its judgment. We will allocate the acquisition costs and expenses incurred in connection with the acquisition of multiple commercial properties that are not directly related to any single property among the applicable properties, generally pro rata based on relative purchase price of each property.


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Commercial Real Estate Properties Held Through Joint Ventures.  The estimated values of real estate properties held by joint ventures that we invest in will be determined by our independent valuation expert on the same basis as wholly-owned commercial real estate properties. Once the independent valuation expert has estimated the value of a joint venture real estate property, the value of our interest in the joint venture will be calculated by applying a percentage based on the distribution provisions of the applicable joint venture agreements to the value of the underlying real estate property held by the joint venture. Newly acquired properties held in a joint venture will be initially carried at cost and subsequently valued in the manner, and at the times, described above for wholly owned properties.
 
Loans and Other Investments Secured by Real Estate.  Notes receivable and mezzanine loans held for long-term investment, which will typically be secured directly or indirectly by real estate, will initially be carried at our acquisition cost (purchase price plus all related acquisition costs and expenses, such as legal fees and closing costs) until the investment has been held by us for one full calendar quarter following the calendar quarter of acquisition. Thereafter, our independent valuation expert will value these assets on a rolling basis each quarter, and we will amortize the acquisition costs over a five year period. Typically, notes receivable will be valued by using a discounted cash flow analysis to estimate the value of the remaining loan payments and any balloon payment at maturity. In projecting the cash flow and the discount rate, various factors will be considered, including among others the quality of the underlying real estate collateral, loan-to value ratio, payment history and the remaining term of the notes. In addition, consideration will be given to the general real estate market conditions and prevailing interest rates.
 
Valuation of Other Illiquid Real Estate Related Assets
 
To the extent we invest in CMBS and privately placed, illiquid securities of real estate-related operating businesses (other than joint ventures that hold real estate properties), such as real estate development or management companies, those investments will initially be valued by at cost (purchase price plus all related acquisition costs and expenses, such as legal fees and closing costs) and thereafter will be valued quarterly on a rolling basis at fair value as determined in good faith by one or more third party pricing services that we will retain for this purpose (which may, under certain circumstances, include CBRE, subject to their acceptance of the additional engagement). Acquisition costs will be amortized over a five year period. In evaluating the fair value of our interests in certain commingled investment vehicles (such as private real estate funds), the third party pricing service performing the valuation may rely upon values periodically assigned to such interests by the respective issuers or affiliated investment advisers.
 
Valuation of Liquid Investment Portfolio
 
Liquid Real Estate-Related Securities.  Liquid debt and equity real estate-related securities that are not restricted as to salability or transferability will be valued daily, on the basis of information provided by third parties and not by the independent valuation expert. Generally, to the extent the information is available, such securities will be valued at the price of the last trade executed at or prior to closing on the valuation day or, in the absence of such trade, the last “bid” price. The value of liquid equity and debt real estate-related securities that are restricted as to salability or transferability will be adjusted for a discount. In determining the amount of such discount, consideration will be given to the nature and length of such restriction and the relative volatility of the market price of the security.
 
 
Valuation of Liquid Non-Real Estate-Related Assets.  Liquid non-real estate-related assets include credit rated government and corporate debt securities, agency securities, publicly traded equity securities, cash and cash equivalents and other investments designed to limit our exposure to market volatility, illiquidity, interest rate or other risks related to our real-estate related, equity or debt securities. Liquid non-real estate-related assets will be valued daily based on information provided by third party pricing services and not by the independent valuation expert.


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Valuation of Our Commercial Real Estate Related Liabilities
 
Our independent valuation expert will estimate the values of our commercial real estate-related liabilities, such as loans where we are the borrower, by using industry accepted methodologies specific to each type of liability. Typically, mortgage loans collateralized by our real estate will be valued by comparing the differences between the contractual loan terms and current market loan terms. This comparison would generally involve the present value of the remaining contractual payments and maturity amount at a market based interest rate. The market interest rate would reflect the risks associated with the loan, such as loan-to-value ratio, remaining loan term, the quality of the underlying collateral or other security, and credit risk, among other factors. Various sources could be used to estimate market terms for a specific loan, including published materials and market information gathered by other valuation experts.
 
Commercial real estate-related liabilities, such as loans, will initially be carried at cost (loan proceeds less all related costs and expenses, such as legal fees and closing costs) until the loan has been outstanding for one full calendar quarter following the quarter we enter into the loan. Thereafter, the independent valuation expert will estimate the value of these liabilities each quarter on a rolling basis, and we will amortize the related loan costs over the remaining loan term. The valuations may be performed at any time during a quarter based on the judgment of our independent valuation expert. We will allocate the financing costs and expenses incurred in connection with obtaining multiple loans that are not directly related to any single loan among the applicable loans, generally pro rata based on the amount of proceeds from each loan.
 
Role of Our Advisor and Our Board in the Valuation Process
 
The estimates of the values of our real estate and real estate related assets and liabilities will be reviewed by our advisor for consistency with our valuation guidelines and the overall reasonableness of the valuation conclusions. Our independent valuation expert may consider any comments received from the advisor to its individual appraisal reports, but the final estimated values of our commercial real estate assets, related liabilities and notes receivable secured by real estate shall be determined by our independent valuation expert and provided by our independent valuation expert to our fund accountant, State Street Bank and Trust Company.
 
At regularly scheduled board of directors meetings, our independent expert will be available to meet with our board of directors to review valuation information, as well as our valuation guidelines and the operation and results of the valuation process generally. Our board of directors will have the right to engage additional experts to review the valuation of our investments, if deemed appropriate.
 
Calculation of Our NAV Per Share
 
Our board of directors has retained State Street Bank and Trust Company to serve as our fund accountant to calculate our daily NAV per share, which will use a process that reflects (1) estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by our independent valuation expert in individual appraisal reports, as they may be updated upon certain material events described below, (2) daily updates in the price of liquid assets for which third party market quotes are available, (3) accruals of our daily distributions, and (4) estimates of daily accruals, on a net basis, of our operating revenues, expenses, debt service costs and fees. If a material event occurs between scheduled quarterly valuations that our advisor believes may materially affect the value of our commercial real estate assets, notes receivable secured by real estate or related real estate liabilities , our advisor will inform the independent valuation expert review so that, if appropriate, the expert can adjust the most recent valuations to account for the estimated impact.
 
Our fund accountant will calculate our NAV per share daily by beginning with the most recent estimated market values of our operating partnership’s commercial real estate assets, related liabilities and notes receivable secured by real estate provided by our independent valuation expert in individual appraisal reports in accordance with valuation guidelines approved by our board of directors. The latest value of liquid assets and assets that are traded with reasonable frequency, as determined by third party pricing institutions, will then be added. Our fund accountant will then subtract from the net value of the operating partnership’s real estate


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and real estate related assets and liabilities any other partnership liabilities, including the advisor’s estimates of accrued fees and expenses attributable to the offering, accrued operating fees and expenses and accrued distributions. These liabilities will be estimated by our advisor based on (1) recent and estimated operating data with respect to each of our commercial real estate properties, as well as our portfolio of real estate related assets; (2) estimates of advisory fees payable to our advisor (both the fixed component and the performance-based component) based on historical and projected performance over the applicable period; (3) projections of dealer manager fees payable to our dealer manager; and (4) recent and estimated data for all other income earned and expenses payable by us. From time to time, but no less frequently than at the end of each calendar month, our advisor will, to the extent necessary, adjust the accruals to reflect actual operating results and to reflect appropriately the outstanding receivable, payable and other account balances. After taking into account the daily estimate of accrued liabilities, our advisor will take the resulting amount and multiply that amount by our percentage ownership interest in the operating partnership. Initially, the only limited partner in the operating partnership will be our advisor, which will hold a nominal interest.
 
While our independent valuation expert will periodically provide estimated values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate based upon individual appraisal reports, our independent valuation expert will not be responsible for or prepare our daily NAV per share.
 
Our fund accountant will then add any assets held by the REIT, which should be limited to cash and cash equivalents, and subtract an estimate of any accrued liabilities of the REIT to the extent such liabilities are not reimbursable by the operating partnership, which should be limited to consist of accrued distributions and certain legal, accounting and administrative costs. Distributions will reflect the daily distribution rate set by our board of directors. The daily accrual of estimated liabilities of the REIT will also include the reimbursement of organization and offering expenses paid by our advisor on our behalf. We intend to reimburse these amounts up to 0.75% of the aggregate gross offering proceeds. However, as we expect our investor’s average hold period to be approximately five years, solely for the purposes of calculating our NAV, the amounts payable to our advisor will be amortized over an estimated five year period and included in our NAV on a daily basis. The result of this calculation will be our NAV as of the end of any business day. Our NAV per share will be determined by dividing our NAV on such day by the number of shares of our common stock outstanding as of the end of such business day, prior to giving effect to any share purchases or redemptions to be effected on such day.
 
At regularly scheduled board of directors meetings, our board will review the process by which our advisor estimated accrued liabilities and our fund accountant calculated the NAV per share and the operation and results of the process to determine NAV per share generally.
 
The table below provides a hypothetical illustration of how various factors could affect the calculation of our NAV at the end of any given business day. All amounts shown in the hypothetical calculation below are for illustrative purposes only and are not indicative of our current or projected financial condition or performance.
 
         
    NAV  
 
Beginning NAV on Hypothetical Business Day(1)
  $ 2,000,000,000  
Daily Portion of:
       
Portfolio Income (Loss) on Real Estate Portfolio and All Other Assets, Before Fees(2)
    493,000  
Advisory Fee, Dealer Manager Fee and Performance Fee
    (121,000 )
Accrued Dividend/Distribution
    (329,000 )
Increase (Decrease) in Market or Appraised Value of Assets and Liabilities
    548,000  
         
NAV Before Sales and Redemptions of Shares
    2,000,591,000  
Sales of Shares(3)
    5,479,000  
Redemptions of Shares(3)
    (191,000 )
         
Ending NAV on Hypothetical Business Day
  $ 2,005,879,000  
         


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(1) NAV at the beginning of a hypothetical business day will reflect all sales and redemptions of shares made on the prior business day.
 
(2) Portfolio Income (Loss) represents the net accrual of operating income, expenses, debt service costs and offering and organization costs, and excludes the daily portion of the Advisory Fee, Dealer Manager Fee and Performance Fee, shown on the next line in the table above.
 
(3) Daily sales and redemptions of shares at NAV will not increase or decrease our NAV per share because sales and redemptions of shares on each business day will be made at that day’s NAV.
 
Limits on the Calculation of Our NAV Per Share
 
The overarching principle of our valuation guidelines is to produce reasonable estimated values for each of our investments, or the price that would be received for that investment in orderly transactions between market participants. However, the majority of our assets will consist of real estate assets and, as with any real estate valuation protocol, the conclusions reached by our independent valuation expert will be based on a number of judgments, assumptions and opinions about future events that may or may not prove to be correct. The use of different judgments, assumptions or opinions would likely result in a different estimate of the value of our real estate investments. Any resulting potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders, depending on the circumstances at the time.
 
In addition, on any given day, our published NAV per share may not fully reflect certain material events, to the extent that the financial impact of such events on our portfolio is not immediately quantifiable. Between quarterly valuations, our advisor will monitor our real estate investments to determine whether a material event has occurred that our advisor believes may have a material impact on the most recent estimated values provided by our independent valuation expert. If, in the opinion of our independent valuation expert, an event identified by the advisor, or in some circumstances an event that becomes known to the independent valuation expert through other means, is likely to have a material impact on previously provided estimated values of the affected real estate or real estate related assets or liabilities, the independent valuation expert will recommend valuation adjustments that the fund accountant will then incorporate into our NAV. Our independent valuation expert will determine the appropriate adjustment to be made to the estimated value of the property based on the information available. Any such adjustments will be estimates of the market impact of specific events as they occur, based on assumptions and judgments that may or may not prove to be correct, and may also be based on limited information that is readily available at that time. Any potential disparity in our NAV from this estimate or from the independent valuation expert’s determination that no adjustment is necessary may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders, depending on the circumstances at the time.


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Our Structure and Formation
 
Cole Real Estate Income Strategy (Daily NAV), Inc. was formed as a Maryland corporation on July 27, 2010 and Cole Holdings Corporation is our sole stockholder. Our operating partnership was formed as a Delaware limited partnership on July 27, 2010.
 
In order to be organized as an UPREIT, we intend to contribute the proceeds from this offering to our operating partnership and to hold all or substantially all of our assets and conduct our operations through the operating partnership. UPREIT stands for “Umbrella Partnership Real Estate Investment Trust.” An UPREIT is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. We have elected to use an UPREIT structure to facilitate real estate property acquisitions and to facilitate investments in us by certain institutional investors. A sale of property directly to a REIT is generally a taxable transaction to the selling property owner. In an UPREIT structure, a seller of appreciated property who desires to defer taxable gain on the transfer of such property may transfer the property to our operating partnership in exchange for limited partnership interests. Such exchange generally could be made on a tax-free basis. Being able to offer a seller the opportunity to defer taxation of gain until the seller redeems its interests in our operating partnership for cash may give us a competitive advantage in acquiring desired properties or investments relative to buyers who cannot offer this opportunity. In addition, investing in our operating partnership, rather than in shares of our common stock, may be more attractive to certain institutional or other investors due to their business or tax structure.
 
We are the sole general partner of our operating partnership and Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC is the initial limited partner. As the sole general partner of our operating partnership, we have the exclusive power under the partnership agreement to manage and conduct its business, subject to certain limited approval and voting rights of the limited partners described more fully in “Operating Partnership Agreement.” Pursuant to the terms of our advisory agreement, we will delegate to our advisor authority to make decisions related to our and our operating partnership’s day-to-day business, the acquisition, management and disposition of assets and the selection of property managers and other service providers.


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The following chart shows our ownership structure and our relationship with our advisor, its sub-advisor and our dealer manager:
 
(CHART)
 
 
(1) Cole Holdings Corporation currently owns 13,334 shares of our common stock, which represents 100% of the outstanding shares of common stock, as of November 3, 2011. Cole Holdings Corporation is prohibited from selling the shares of our common stock for so long as Cole Real Estate Investments remains our sponsor; provided, however, that Cole Holdings Corporation may transfer ownership of all or a portion of the shares of our common stock to other affiliates of our sponsor.
 
(2) Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC currently owns a 0.1% limited partner interest in our operating partnership. After we begin admitting investors in this offering, that limited partner interest will be reduced.


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Management
 
Board of Directors
 
We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders as fiduciaries. Our board of directors expects to retain Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC as our advisor to manage our day-to-day affairs and the acquisition and disposition of our investments, subject to our board of directors’ supervision. Prior to the effective date of this offering, our charter shall have been reviewed and ratified by our board of directors, including a majority of the independent directors. This ratification by our board of directors is required by the NASAA REIT Guidelines.
 
Our charter and bylaws provide that the number of directors on our board of directors may be established by a majority of the entire board of directors, but may not be more than 15, nor, upon and after the commencement of this offering, fewer than three; provided, however, that there may be fewer than three directors at any time that we have only one stockholder of record. Our charter provides that, in general, upon and after commencement of this offering, a majority of the directors must be independent directors. An “independent director” is a person who is not, and within the last two years has not been, directly or indirectly associated with us or any of our affiliates or with our sponsor, our advisor or any of their affiliates by virtue of (1) ownership of an interest in our sponsor, our advisor or any of their affiliates, (2) employment by us, our sponsor our advisor or any of our or their affiliates, (3) service as an officer or director of our sponsor, our advisor or any of their affiliates, (4) performance of services, (5) service as a director of more than three REITs organized by our sponsor or advised by our advisor, or (6) maintenance of a material business or professional relationship with our sponsor, our advisor or any of their affiliates. Each director deemed to be independent pursuant to our charter also will be independent in accordance with the NASAA REIT Guidelines. There are no family relationships among any of our directors or officers, or officers of our advisor. Each director who is not an independent director must have at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by us. At least one of our independent directors must have at least three years of relevant real estate experience. We currently have a total of three directors, including a majority of independent directors. Mr. Snell has more than three years of relevant real estate experience.
 
Each director will serve until the next annual meeting of stockholders or until his or her successor is duly elected and qualifies. Although the number of directors may be increased or decreased, provided that a minimum of three directors will serve on the board at all times, a decrease will not have the effect of shortening the term of any incumbent director.
 
Any director may resign at any time and may be removed with or without cause by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast at a meeting properly called for the purpose of the proposed removal. The notice of the meeting will indicate that the purpose, or one of the purposes, of the meeting is to determine if the director shall be removed. None of the members of our board of directors, our advisor or any of their affiliates may vote or consent on matters submitted to the stockholders regarding the removal of our advisor or any director or any of their affiliates or any transaction between us and any of them. In determining the requisite percentage in interest required to approve such a matter, shares owned by members of our board of directors and their respective affiliates will not be included.
 
Any vacancy created by an increase in the number of directors or the death, resignation, removal, adjudicated incompetence or other incapacity of a director may be filled only by a vote of a majority of the remaining directors. Independent directors shall nominate replacements for vacancies in the independent director positions. If at any time there are no directors in office, successor directors shall be elected by the stockholders. Each director will be bound by our charter and bylaws.
 
Our board of directors will not be required to devote all of their time to our business and only are required to devote the time to our affairs as their duties require. Our directors meet quarterly, in person or by teleconference, or more frequently if necessary. Consequently, in the exercise of their responsibilities, the directors will rely heavily on our advisor and on information provided by our advisor. Our directors will have a fiduciary duty to our stockholders to supervise the relationship between us and our advisor. Our board of


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directors is empowered to fix the compensation of all officers that it selects and approve the payment of compensation to directors for services rendered to us.
 
Our board of directors has adopted written policies on investments and borrowing, the general terms of which are set forth in this prospectus. The directors may revise those policies or establish further written policies on investments and borrowings and monitor our administrative procedures, investment operations and performance to ensure that the policies are fulfilled and are in the best interest of our stockholders. In addition, our board of directors (including the independent directors) has adopted and is responsible for our valuation guidelines for establishing NAV and our valuation guidelines pertaining to the valuation of commercial real estate assets, related liabilities and notes receivable secured by real estate and will periodically review valuation information.
 
Additionally, our board of directors will be responsible for reviewing our fees and expenses on at least an annual basis and with sufficient frequency to determine that the expenses incurred are in the best interest of the stockholders. In addition, a majority of the directors, including a majority of the independent directors who are not otherwise interested in the transaction, must approve all transactions with our advisor or its affiliates. The independent directors also will be responsible for reviewing the performance of our advisor and determining that the compensation to be paid to our advisor is reasonable in relation to the nature and quality of services to be performed and that the provisions of the advisory agreement are being carried out. The independent directors will consider such factors as they deem relevant, including:
 
  •  the amount of the fees paid to our advisor in relation to the size, composition and performance of our investments;
 
  •  the success of our advisor in generating appropriate investment opportunities;
 
  •  rates charged to other REITs, especially REITs of similar structure, and to investors other than REITs by advisors performing similar services;
 
  •  additional revenues realized by our advisor and its affiliates through their relationship with us, whether we pay them or they are paid by others with whom we do business;
 
  •  our advisor’s performance in selecting, overseeing and managing its sub-advisor;
 
  •  the quality and extent of service and advice furnished by our advisor and the performance of our investment portfolio; and
 
  •  the quality of our portfolio relative to the investments generated by our advisor or its affiliates for its other clients.
 
The advisory agreement will have a one-year term and may be renewed for an unlimited number of successive one-year periods. Either party may terminate the advisory agreement upon 60 days’ written notice without cause or penalty. Fees payable to our advisor pursuant to the advisory agreement, including any fees that may be paid upon termination of the advisory agreement, are described below under the caption “— The Advisory Agreement” and the section of this prospectus captioned “Compensation.”
 
Committees of Our Board of Directors
 
Our entire board of directors will be responsible for supervising our entire business. However, our bylaws provide that our board of directors may establish such committees as the board of directors believes appropriate and in our best interests. Our board of directors will appoint the members of the committee in the board of directors’ discretion. Our charter and bylaws require that a majority of the members of each committee of our board of directors is comprised of independent directors.
 
Our board of directors has established an audit committee, which consists of George N. Fugelsang and Roger D. Snell, our independent directors. Mr. Snell serves as the chairman of our audit committee. The audit committee, by approval of at least a majority of its members, will select the independent registered public accounting firm to audit our annual financial statements, review with the independent registered public accounting firm the plans and results of the audit engagement, approve the audit and non-audit services


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provided by the independent registered public accounting firm, review the independence of the independent registered public accounting firm, consider the range of audit and non-audit fees and review the adequacy of our internal accounting controls. Our board of directors has adopted a charter for the audit committee that sets forth its specific functions and responsibilities.
 
In addition, our advisor will establish a valuation committee. The valuation committee will be responsible for determining the value of securities and other assets we hold in circumstances where the current market prices or other valuations are not available from the fund accountant, the independent valuation expert or other third party pricing services. The members of the valuation committee will be appointed by our advisor’s chief executive officer. Our board of directors has adopted a charter for the valuation committee that sets forth its specific functions and responsibilities.
 
Duties of Independent Directors
 
In accordance with the NASAA REIT Guidelines, a majority of our independent directors generally must approve corporate actions that directly relate to the following:
 
  •  any transfer or sale of our sponsor’s initial investment in us; provided however, our sponsor may not sell its initial investment while it remains our sponsor, but our sponsor may transfer the shares to an affiliate;
 
  •  the duties of our directors, including ratification of our charter, the written policies on investments and borrowing, the monitoring of administrative procedures, investment operations and our performance and the performance of our advisor;
 
  •  the advisory agreement;
 
  •  liability and indemnification of our directors, advisor and its affiliates;
 
  •  fees, compensation and expenses, including organization and offering expense reimbursements, acquisition expenses, total operating expenses (including amounts paid to the transfer agent, fund accountant, and the independent valuation expert), real estate commissions on the resale of property, incentive fees, and advisor compensation;
 
  •  any change in modification of our statement of objectives;
 
  •  real property appraisals;
 
  •  our borrowing policies;
 
  •  annual and special meetings of stockholders;
 
  •  election of our directors; and
 
  •  our distribution reinvestment plan.
 
In addition, our board of directors (including the independent directors) is responsible for our valuation guidelines for establishing NAV and our valuation guidelines pertaining to the valuation of commercial real estate assets, related liabilities and notes receivable secured by real estate to be provided quarterly by our independent valuation expert in separate appraisal reports, and to periodically review such information as it deems necessary to exercise its oversight responsibility.
 
Compensation of Directors
 
We will pay to each of our independent directors a retainer of $50,000 per year, plus an additional retainer of $7,500 to the chairman of the audit committee. We also will pay $2,000 for each meeting of our board of directors or committee thereof the director attends in person ($2,500 for the attendance in person by the chairperson of the audit committee at each meeting of the audit committee) and $250 for each meeting the director attends by telephone. In the event there is a meeting of the board of directors and one or more committees thereof in a single day, the fees paid to each director will be limited to $2,500 per day ($3,000 per day for the chairperson of the audit committee if there is a meeting of such committee). All directors will


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receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at each meeting of our board of directors. If a director is also an employee of our company or our advisor or their affiliates, we will not pay compensation for services rendered as a director. We will not compensate Mr. Cole for his service to us on the board of directors.
 
Executive Officers and Directors
 
Our board of directors has elected Christopher H. Cole to serve as our chief executive officer and president, D. Kirk McAllaster, Jr. to serve as our executive vice president, chief financial officer and treasurer. Although most of the services Mr. McAllaster provides to our company are in his role as executive officer of our advisor, he has certain duties in his capacity as an executive officer of our company arising from Maryland corporate law, our charter and bylaws. We do not directly compensate Mr. McAllaster for his services as an executive officer of our company, nor do we reimburse our advisor or any affiliate of our advisor for his salary or benefits. We have provided below certain information about our executive officers and directors.
 
             
Name
  Age*  
Position(s)
 
Christopher H. Cole
    59     Chairman of our Board of Directors, Chief Executive Officer and President
D. Kirk McAllaster, Jr. 
    44     Executive Vice President, Chief Financial Officer and Treasurer
George N. Fugelsang
    71     Independent Director
Roger D. Snell
    55     Independent Director
 
 
* As of November 3, 2011.
 
Christopher H. Cole has served as our chairman, chief executive officer and president since our formation in July 2010. He also served as the chief executive officer of our advisor from its formation in July 2010 until June 2011. Mr. Cole has served as the chairman, chief executive officer and president of Corporate Income Trust since April 2010. He served as the chief executive officer of Cole Corporate Income Advisors, LLC (“CCI Advisors”) from April 2010 until June 2011. Mr. Cole has served as the chairman, chief executive officer and president of Cole Credit Property Trust I since its formation in March 2004. He served as the chief executive officer of Cole REIT Advisors, LLC (“CCPT I Advisors”) from its formation in April 2004 until June 2011 and as its president from April 2004 until March 2007 and from October 2007 until April 2010. Mr. Cole has served as the chairman, chief executive officer and president of Cole Credit Property Trust II since its formation in September 2004. He served as the chief executive officer of Cole REIT Advisors II, LLC (“CCPT II Advisors”) from its formation in September 2004 until June 2011 and as its president from September 2004 until March 2007 and from October 2007 until April 2010. Mr. Cole has served as the chairman, chief executive officer and president of Cole Credit Property Trust III since its formation in January 2008. He served as the chief executive officer of Cole REIT Advisors III, LLC (“CCPT III Advisors”) from its formation in January 2008 until June 2011, as its president from January 2008 until April 2010, and as its treasurer from January 2008 until September 2008.
 
Mr. Cole has been the sole stockholder and treasurer of Cole Holdings Corporation since its formation in August 2004, has served as its chairman and secretary since October 2007 and previously served as chief executive officer from August 2004 until June 2011 and as president from August 2004 until April 2010. Mr. Cole has also been engaged as a general partner in the structuring and management of real estate limited partnerships since February 1979. Mr. Cole has served as the treasurer of Cole Realty Advisors since its formation in November 2002, and previously served as its chief executive officer from August 2004 until June 2011 and as president from November 2002 until March 2007 and from October 2007 until September 2009 and as its secretary from November 2002 until December 2002. Mr. Cole has served as the treasurer of Cole Capital Partners since January 2003 and previously served as its chief executive officer from January 2003 until June 2011 and its president from January 2003 to March 2007 and from October 2007 until April 2010. Mr. Cole has served as the treasurer of Cole Capital Advisors since its formation in November 2002, and previously served as its chief executive officer from December 2002 until June 2011, as its president from


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November 2002 until March 2007 and from October 2007 until April 2010, and as its secretary from November 2002 until December 2002.
 
Mr. Cole has served as the chief executive officer and treasurer of the Cole Growth Opportunity Fund I GP, LLC since its formation in March 2007. Mr. Cole served as the executive vice president and treasurer of Cole Capital Corporation from December 2002 until January 2008. Mr. Cole has been the sole director of Cole Capital Corporation since December 2002. Mr. Cole was selected to serve as a director of our company based upon Mr. Cole’s experience and relationships in the non-exchange traded REIT and real estate industries, along with his knowledge of the Cole Real Estate Investments organization.
 
D. Kirk McAllaster, Jr. has served as our executive vice president, chief financial officer and treasurer since our formation in July 2010. He also has served as executive vice president and chief financial officer of our advisor since its formation in July 2010. Mr. McAllaster has served as the executive vice president, chief financial officer and treasurer of Corporate Income Trust since April 2010. He has served as the executive vice president, chief financial officer and treasurer of CCI Advisors since April 2010. Mr. McAllaster has served as executive vice president and chief financial officer of Cole Credit Property Trust I and Cole Credit Property Trust II since October 2007, and has been a member of the board of directors of Cole Credit Property Trust I since May 2008. He has served as executive vice president, chief financial officer and treasurer of Cole Credit Property Trust III since its formation in January 2008, and served as its secretary from January 2008 to November 2010. He has served as executive vice president and chief financial officer of CCPT I Advisors and CCPT II Advisors since March 2007, and previously served as vice president, finance for each of CCPT I Advisors and CCPT II Advisors from December 2005 until March 2007. He also has served as executive vice president and chief financial officer of CCPT III Advisors since its formation in January 2008. Mr. McAllaster has served as executive vice president, chief financial officer and treasurer of Cole Realty Advisors since September 2009, and previously served as executive vice president and chief financial officer from March 2007 until September 2009. Mr. McAllaster has served as executive vice president and chief financial officer of Cole Capital Partners and Cole Capital Advisors since March 2007 and previously served as vice president, finance for each of Cole Capital Partners and Cole Capital Advisors from December 2005 until March 2007. Prior to joining Cole in May 2003, Mr. McAllaster worked for six years with Deloitte & Touche LLP, most recently as audit senior manager. He has over 20 years of accounting and finance experience in public accounting and private industry. Mr. McAllaster received a B.S. degree from California State Polytechnic University — Pomona with a major in Accounting. He is a Certified Public Accountant licensed in the states of Arizona and Tennessee and is a member of the American Institute of CPAs and the Arizona Society of CPAs.
 
George N. Fugelsang has served as our director since September 2011. Mr. Fugelsang has served as a member of the board of directors of Cole Credit Property Trust II since May 2010 and as a member of its audit committee since June 2010. From 1994 through 2001, Mr. Fugelsang was chief executive officer of Dresdner Kleinwort Benson North America, the U.S.-based investment banking business of Dresdner Bank AG, where he was responsible for all of Dresdner Bank AG’s activities in North America. From 1996 until 2001, Mr. Fugelsang was also chairman of the board of Dresdner Bank Mexico, S.A., chairman of the board of Dresdner Bank Canada and a member of the board of directors of Dresdner RCM Global Investors LLC. Mr. Fugelsang served on the board of managers of Mrs. Fields’ Famous Brands, LLC from May 2004 until July 2008. Mr. Fugelsang also served on the boards of trustees of the Institute of International Bankers and the Thunderbird School of Global Management, and as a member of the board of directors of Advanced Research Technologies of Montreal, Canada. He was also a member of the board of the New York City Partnership, the German American Chamber of Commerce, Inc., and a director of the Foreign Policy Association in New York. Mr. Fugelsang formerly served on the advisory board of the Monterey Institute of International Studies, an affiliate of Middlebury College. Mr. Fugelsang was nominated to serve as a director because of his experience as the chief executive officer of an investment bank, his extensive financing experience and his general business accomplishments, all of which are expected to bring valuable insight to the board of directors.
 
Roger D. Snell has served as our director since September 2011. Mr. Snell has been managing director of SIP Investment Partners, a commercial real estate investment firm, since February 2003. From February 1997 to June 2002, Mr. Snell was president and chief executive officer of Peregrine Real Estate Investment Trust, a


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publicly-traded commercial real estate and hotel property REIT that was reorganized into a private company named WinShip Properties. Prior to joining Peregrine, Mr. Snell was managing director of Snell & Co., LLC, an investment advisory firm, in 1996, and president and chief executive officer of Perini Investment Properties, a publicly traded REIT focusing on commercial real estate and hotel properties (later renamed Pacific Gateway Properties), from January 1993 to January 1996. Prior to joining Perini, Mr. Snell held various leadership positions in other commercial real estate development companies. Mr. Snell received an MBA from Harvard Business School and a B.S. degree from the University of California, Berkeley. Mr. Snell was nominated to serve as a director because of his experience as a real estate industry executive with executive investment, capital markets and portfolio management expertise, all of which are expected to bring valuable insight to the board of directors.
 
The Advisor
 
Our advisor is Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC, an affiliate of our sponsor, Cole Real Estate Investments. Our executive officers and the chairman of our board of directors also are officers, key personnel and/or members of our advisor. Our advisor currently has no paid employees; however, our advisor’s affiliates have over 200 full-time employees, many of whom will serve as dual employees, of our advisor and of affiliates of our advisor, and dedicate a portion of his or her time providing services to our advisor. All of our day-to-day operations will be managed by our advisor.
 
Our advisor has contractual and fiduciary responsibility to us and our stockholders pursuant to the advisory agreement. Our advisor is wholly-owned indirectly by Christopher H. Cole.
 
The officers and key personnel of our advisor or certain affiliates are as follows:
 
             
Name
  Age*  
Position(s)
 
Marc T. Nemer
    38     President and Chief Executive Officer
D. Kirk McAllaster, Jr. 
    44     Executive Vice President and Chief Financial Officer
Jeffrey C. Holland
    40     Executive Vice President and Head of Capital Markets
Chong P. Huan
    54     Executive Vice President and Chief Technology Officer
John M. Pons
    48     Executive Vice President, Secretary, and General Counsel — Real Estate
Thomas W. Roberts
    52     Executive Vice President and Managing Director of Real Estate
Mitchell A. Sabshon
    59     Executive Vice President and Chief Operating Officer
Indraneel Karlekar
    39     Executive Vice President and Chief Investment Strategist
Kim S. Kundrak
    54     Chief Acquisitions Officer — Retail
Robert J. Micera
    49     Chief Investment Officer — Office and Industrial
 
 
* As of November 3, 2011.
 
The background of Mr. McAllaster is described in the “— Executive Officers and Directors” section above. Below is a brief description of the other officers and key employees of our advisor.
 
Marc T. Nemer serves as president and chief executive officer of our advisor. Mr. Nemer has served as chief executive officer of Cole Holdings Corporation (d/b/a Cole Real Estate Investments), the parent company of our advisor and affiliates, since June 2011, and as its president since May 2010. He has served as the president, secretary and treasurer of Cole Capital Corporation since January 2008. Mr. Nemer has served as the chief executive officer of CCI Advisors since June 2011 and as its president since April 2010. He has served as chief executive officer of Cole Capital Advisors since June 2011 and as its executive vice president and managing director of capital markets since March 2008. He previously served as its executive vice


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president, securities and regulatory affairs, from October 2007 until March 2008, as its vice president, legal services and compliance, from March 2007 until October 2007 and as its legal counsel from February 2006 to March 2007. He has served as chief executive officer of Cole Capital Partners since June 2011 and as its executive vice president and managing director of capital markets since March 2008. He previously served as its executive vice president, securities and regulatory affairs, from October 2007 until March 2008 and as its vice president, legal services and compliance, from March 2007 until October 2007. Mr. Nemer has served as chief executive officer for CCPT I Advisors and CCPT II Advisors since June 2011, and previously served for each as executive vice president and managing director of capital markets from March 2008 until April 2010, and as executive vice president, securities and regulatory affairs from October 2007 until March 2008. He has served as chief executive officer of CCPT III Advisors since June 2011, and its president since April 2010, as executive vice president and managing director of capital markets from September 2008 until April 2010, and as executive vice president, securities and regulatory affairs from its formation in January 2008 until September 2008. Mr. Nemer has served as chief executive officer of Cole Realty Advisors since June 2011 and previously served as its executive vice president and managing director of capital markets from March 2008 to June 2011, as its executive vice president, securities and regulatory affairs from October 2007 until March 2008, and as its vice president, legal services and compliance from March 2007 until October 2007. Prior to joining Cole, Mr. Nemer was an attorney with the international law firm Latham & Watkins LLP, where he specialized in securities offerings (public and private), corporate governance, and mergers and acquisitions from July 2000 until February 2006. Prior to that, Mr. Nemer worked at the international law firm Skadden, Arps, Slate, Meagher & Flom LLP, where he worked as an attorney in a similar capacity from August 1998 until July 2000. Mr. Nemer earned a J.D. from Harvard Law School in 1998 and a B.A. from the University of Michigan in 1995.
 
Jeffrey C. Holland serves as executive vice president and head of capital markets of our advisor. In this role, he provides strategic direction and oversees external and internal sales, marketing, broker-dealer relations, due diligence and securities operations. He has also served as executive vice president and head of capital markets of CCI Advisors, Cole Capital Advisors, Cole Capital Partners, CCPT I Advisors, CCPT II Advisors, CCPT III Advisors and CACI Advisors since December 2010. Prior to joining Cole Real Estate Investments in December 2010, Mr. Holland held several roles at BlackRock, Inc.’s U.S. Retail division, an asset management business focused on financial advisor-intermediated distribution channels, including chief operating officer from 2008 to 2010 and co-head of product development and management from 2006 to 2008. Prior to joining BlackRock, Mr. Holland served as vice president, consulting services, for Raymond James & Associates from 2003 to 2006. Mr. Holland served at Capital Resource Advisors from 1999 to 2003, most recently as director in the Business Strategies Group. From 1996 to 1999, he worked as an engagement manager for McKinsey & Company, Inc. Mr. Holland earned a JD from Harvard Law School and a BA from the University of Puget Sound.
 
Chong P. Huan has served as executive vice president and chief technology officer of our advisor since January 2011. In this role, he is responsible for oversight of all technology operations, including infrastructure and application development, strategic planning and information management. He also serves as executive vice president and chief technology officer of Cole Capital Advisors, Cole Capital Partners, CCPT I Advisors, CCPT II Advisors, CCPT III Advisors and CCI Advisors. Prior to joining Cole Real Estate Investments, Mr. Huan served as principal and founder of CIR Solutions LLC, an information technology consulting firm, from 2009 to 2010. Mr. Huan served as chief technology officer and managing director for Citi Global Investment Research from 2007 to 2009. Prior to joining Citi Global Investment Research, he served as senior information officer and vice president of AIG Investment in 2007, chief information officer and senior managing director of New York Life Investment Management from 2000 to 2006, and head of information technology in the Americas with UBS Private Banking and Asset Management from 1996 to 2000. Mr. Huan holds an Executive Masters in technology management from The Wharton School, University of Pennsylvania and an MBA from Northeastern University, and received a BS in engineering with honors from Oxford, U.K. He is also a Moore Fellow at the University of Pennsylvania’s School of Engineering and Applied Sciences.
 
John M. Pons serves as executive vice president and general counsel — real estate of our advisor. Mr. Pons has served as executive vice president and general counsel — real estate of CCI Advisors since its


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formation in April 2010, and as its secretary since January 2011 and from April 2010 until August 2010. He has served as executive vice president, general counsel and secretary of CCPT III Advisors since its formation in January 2008, and previously served as its chief operating officer from January 2008 until May 2008. Mr. Pons has served as secretary of Cole Credit Property Trust II since its formation in September 2004. He served as a member of Cole Credit Property Trust II’s board of directors from September 2004 until November 2004. Mr. Pons has served as executive vice president, general counsel and secretary of CCPT II Advisors since September 2008, and previously served as its executive vice president, chief administrative officer, general counsel and secretary from October 2007 until September 2008, as its executive vice president, chief operating officer, general counsel and secretary from March 2007 until October 2007, as its senior vice president and general counsel from December 2005 until March 2007, as its senior vice president and counsel from August 2005 until December 2005 and as its vice president, counsel and secretary from September 2004 until August 2005. Mr. Pons also has served as secretary for Cole Credit Property Trust I and has been a member of its board of directors since its formation in March 2004. He has served as executive vice president, general counsel and secretary of CCPT I Advisors since September 2008, and previously served as its executive vice president, chief administrative officer, general counsel and secretary from October 2007 until September 2008, as its executive vice president, chief operating officer, general counsel and secretary from March 2007 until October 2007, as its senior vice president and general counsel from December 2005 until March 2007, as its senior vice president and counsel from August 2005 until December 2005 and as its vice president, counsel and secretary from March 2004 until August 2005. Mr. Pons has served as executive vice president, general counsel and secretary of Cole Realty Advisors since September 2008, and previously served as its executive vice president, chief administrative officer, general counsel and secretary from October 2007 until September 2008, as its executive vice president, chief operating officer and general counsel from March 2007 until October 2007, and as its senior vice president from January 2006 until March 2007. He has served as executive vice president, general counsel and secretary of Cole Capital Advisors and Cole Capital Partners since September 2008, and previously served for each as its executive vice president, chief administrative officer, general counsel and secretary from October 2007 until September 2008, as its executive vice president, chief operating officer and general counsel from March 2007 until October 2007, as its senior vice president and general counsel from December 2005 until March 2007, as its senior vice president and counsel from August 2005 until December 2005, and as its vice president and counsel from September 2003 until August 2005. Prior to joining Cole in September 2003, Mr. Pons was an associate general counsel and assistant secretary with GE Capital Franchise Finance Corporation since December 2001. He was in private practice prior thereto. Before attending law school, Mr. Pons was a Captain in the United States Air Force where he served from 1988 until 1992. Mr. Pons received a B.S. degree in Mathematics from Colorado State University and a M.S. degree in Administration from Central Michigan University before earning his J.D. (Order of St. Ives) in 1995 at the University of Denver.
 
Thomas W. Roberts serves as executive vice president and managing director of real estate of our advisor. He has served as president of Cole Realty Advisors since September 2009. Mr. Roberts has also served as executive vice president and managing director of real estate of CCI Advisors since April 2010, and of Cole Capital Advisors, Cole Capital Partners, CCPT I Advisors, CCPT II Advisors and CCPT III Advisors since September 2009. Prior to joining Cole Real Estate Investments, Mr. Roberts served as president and chief executive officer of Opus West Corporation, a Phoenix-based real estate developer, from March 1993 until May 2009. Mr. Roberts also worked as vice president, real estate development for the Koll Company from 1986 until 1990. In July 2009, Opus West Corporation filed for Chapter 11 bankruptcy protection. Mr. Roberts received a B.S. from Arizona State University. Mr. Roberts has been active in many professional and community organizations including the Greater Phoenix Economic Council, International Council of Shopping Centers, National Association of Industrial and Office and Properties, Young Presidents Organization, Urban Land Institute, Phoenix Boys and Girls Club, and Xavier College Preparatory Board of Trustees.
 
Mitchell A. Sabshon serves as executive vice president and chief operating officer of our advisor. In this role, he is responsible for all corporate finance activities of the company. He also works on a broad range of initiatives across the Cole Real Estate Investments organization, including issues pertaining to mergers and acquisitions, portfolio strategy, asset management, fund operations and systems. He has also served as executive vice president and chief operating officer of CCI Advisors, Cole Capital Advisors, Cole Capital


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Partners, CCPT I Advisors, CCPT II Advisors, CCPT III Advisors and CACI Advisors since November 2010. Prior to joining Cole Real Estate Investments in November 2010, Mr. Sabshon served as managing partner and chief investment officer of EndPoint Financial LLC, an advisory firm providing acquisition and finance advisory services to equity investors, from 2008 to 2010. Mr. Sabshon served as chief investment officer and executive vice president of GFI Capital Resources Group, Inc., a national owner-operator of multifamily properties, from 2007 to 2008. Prior to joining GFI, Mr. Sabshon served with Goldman Sachs & Company from 2004 to 2007 and from 1997 to 2002 in several key strategic roles, including president and chief executive officer of Goldman Sachs Commercial Mortgage Capital and head of the Insurance Client Development Group. From 2002 to 2004, Mr. Sabshon was executive director of the U.S. Institutional Sales Group at Morgan Stanley. Mr. Sabshon held various positions at Lehman Brothers Inc. from 1991 to 1997, most recently as senior vice president in the Real Estate Investment Banking Group. Prior to joining Lehman Brothers, Mr. Sabshon was an attorney in the Real Estate Structured Finance group of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Sabshon received his JD from Hofstra University School of Law and a BA from George Washington University.
 
Indraneel Karlekar serves as executive vice president and chief investment strategist of our advisor. In this role, he is responsible for leading our advisor’s real estate investment strategy and continually enhancing Cole Real Estate Investments’ product offerings. He also works on a broad range of initiatives across the Cole Real Estate Investments organization, including serving as the firm’s economist. Mr. Karlekar also serves as executive vice president and chief investment strategist of Cole Capital Advisors, Cole Capital Partners, CCPT I Advisors, CCPT II Advisors, CCPT III Advisors and CCI Advisors. Prior to joining Cole Real Estate Investments in May 2011, Mr. Karlekar was head of global research and strategy at ING Clarion Real Estate Securities/ING Clarion Partners from 2003 through April 2011, where he was a member of the firm’s investment team and head of its asset allocation committee. Mr. Karlekar served as vice president and head of research of AIG Global Real Estate in 2003, and as a senior analyst — Asia-Pacific for The Economist Intelligence Unit (Economist Group) from 1999 to 2003. Mr. Karlekar received his Ph.D. in Economic Geography and his M.Phil. in International Relations from the University of Cambridge, England; an MA in International History from Jawaharlal Nehru University, New Delhi, India; and a BA in Global History from St. Stephen’s College in New Delhi, India.
 
Kim S. Kundrak has served as senior vice president and chief acquisitions officer — single tenant retail of CR III Advisors since July 2010. He has served as senior vice president and chief acquisitions officer — single tenant retail of CCPT I Advisors, Cole Realty Advisors, Cole Capital Partners and Cole Capital Advisors since September 2009. Prior to joining Cole, he worked for Realty Income Corporation, a publicly traded REIT from July 1996 until November 2008, serving as senior vice president, portfolio acquisitions from January 2000 until November 2008 and as vice president, portfolio acquisitions from July 1996 until December 1999. Prior to joining Realty Income, Mr. Kundrak worked at Burnham Pacific Properties, Inc. from April 1987 until October 1995. During his tenure at Burnham Pacific Properties, he held various positions, including senior vice president, chief financial officer and vice president, asset management. Mr. Kundrak also served as a real estate manager at John Burnham and Company, a real estate services firm from December 1985 until March 1987, as well as general manager at The Hahn Company, one of the nation’s premier regional shopping center developers, from July 1982 until December 1985. Mr. Kundrak received a B.A. from Point Loma Nazarene University in San Diego, California in 1979. He holds the professional designations of Certified Shopping Center Manager (CSM) from the International Council of Shopping Centers and Certified Property Manager (CPM) from the Institute of Real Estate Management.
 
Robert J. Micera has served as the chief investment officer of our advisor since July 2010. He has served as chief investment officer — office and industrial of CCI Advisors since July 2010. Prior to joining Cole Real Estate Investments in July 2010, Mr. Micera served as a principal of Cardinal Industrial Real Estate Services East, LLC, a California-based private real estate investment firm that invests in single-tenant industrial warehouse assets nationwide, from April 2009 to April 2010. Mr. Micera was senior vice president — national head of net lease investments at First Industrial Realty Trust, Inc., a Chicago-based REIT that buys, sells, leases, develops and manages industrial real estate, from August 2004 to December 2008. While at First Industrial Realty Trust, Inc., Mr. Micera served as the chief investment officer for a $1.4 billion co-investment


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program with the wealth management division of UBS Financial Services, Inc. and a $425 million co-investment program with Kuwait Finance House K.S.C. From 2003 to 2004, Mr. Micera served as a managing director, real estate advisory services for Ernst & Young, LLP. Mr. Micera served as a vice president, real estate and lodging investment banking for J.P. Morgan Securities Inc. from 1993 to 2002. Prior to joining J.P. Morgan Securities Inc., Mr. Micera worked at Metropolitan Life Insurance Company from 1984 to 1993, most recently in national sales. Mr. Micera earned a master’s degree in business administration from New York University’s Leonard N. Stern School of Business in 1992 and a bachelor’s degree in engineering from Lafayette College in 1984. Mr. Micera is licensed in New Jersey as a real estate salesperson and in New York as a real estate broker, and he is a member of the Urban Land Institute.
 
In addition to the officers and key personnel listed above, our advisor employs personnel on a dual basis with the other entities that comprise our sponsor who have extensive experience in selecting, managing and selling commercial properties similar to the properties sought to be acquired by us. As of the date of this prospectus, our advisor is the sole limited partner of our operating partnership.
 
The Advisory Agreement
 
Many of the services we expect to be performed by our advisor in managing our day-to-day activities pursuant to the advisory agreement are summarized below. We believe that our advisor currently has sufficient staff and experience so as to be capable of fulfilling the duties set forth in the advisory agreement. This summary is provided to illustrate the material functions that our advisor will perform for us as our advisor, and it is not intended to identify each and every task to be performed by our advisors. Under the terms of the advisory agreement that we expect to enter into, our advisor will undertake to use its commercially reasonable best efforts to present to us investment opportunities consistent with our investment policies and objectives as adopted by our board of directors. In its performance of this undertaking, our advisor, either directly or indirectly by engaging an affiliate or an unaffiliated third party, shall, among other duties and subject to the supervision of our board of directors:
 
  •  find, evaluate, present and recommend to us investment opportunities consistent with our investment policies and objectives;
 
  •  participate in formulating our financial valuation and other policies, consistent with achieving our investment objectives;
 
  •  monitor the independent valuation expert’s valuation process to ensure that it complies with our valuation guidelines and report on such compliance to our board of directors on a quarterly basis;
 
  •  serve as our investment and financial advisor and provide research and economic and statistical data in connection with our assets and our investment policies;
 
  •  determine the proper allocation of our investments between retail, corporate office and industrial properties and real estate-related assets and cash, cash equivalents and other short-term investments;
 
  •  select its sub-advisor, joint venture and strategic partners, and service providers for us such as our transfer agent and fund accountant and structure corresponding agreements;
 
  •  provide the daily management and perform and supervise the various administrative functions reasonably necessary for our management and operations;
 
  •  provide property management and leasing services;
 
  •  hire, direct and establish policies for employees who will have direct responsibility for the operations of each property we acquire, which may include, but is not limited to, on-site managers and building and maintenance personnel;
 
  •  direct the purchase of equipment and supplies, and supervise all maintenance activity, for our properties;


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  •  investigate, select, and, on our behalf, engage and conduct business with such third parties as the advisor deems necessary to the proper performance of the advisor’s obligations under the advisory agreement;
 
  •  consult with, and provide information to, our officers and our board of directors and assist our board of directors in formulating and implementing our financial policies;
 
  •  structure and negotiate the terms and conditions of our real estate acquisitions, sales or joint ventures;
 
  •  review and analyze each property’s operating and capital budget;
 
  •  acquire properties and make investments on our behalf in compliance with our investment objectives and policies;
 
  •  arrange, structure and negotiate financing and refinancing of properties;
 
  •  enter into leases of property and service contracts for assets and, to the extent necessary, perform all other operational functions for the maintenance and administration of such assets, including the servicing of mortgages;
 
  •  actively manage our real estate portfolio in accordance with our investment objectives, strategies and policies;
 
  •  prepare and review on our behalf, with the participation of one designated principal executive officer and principal financial officer, all reports and returns required by the SEC, IRS and other state or federal governmental agencies; and
 
  •  dispose of properties on our behalf in compliance with our investment objectives, strategies and policies.
 
It is the duty of the board of directors to evaluate the capabilities of our advisor before entering into the advisory agreement, and to evaluate the performance of our advisor before renewing the advisory agreement. The advisory agreement will have a one-year term ending September 28, 2012, and may be renewed for an unlimited number of successive one-year periods. Additionally, either party may terminate the advisory agreement without cause or penalty upon 60 days’ written notice. If we elect to terminate the agreement, we must obtain the approval of a majority of our independent directors. In the event of the termination of our advisory agreement, our advisor is required to cooperate with us and take all reasonable steps requested by us to assist our board of directors in making an orderly transition of the advisory function.
 
We will pay our advisor an advisory fee that will be payable in arrears on a monthly basis and accrue daily in an amount equal to 1/365th of 0.90% of our NAV for each day. Any portion of this fee may be deferred and paid in a subsequent year.
 
As compensation for services provided pursuant to the advisory agreement, we will also pay our advisor a performance-based fee calculated based on our annual total return to stockholders (defined below), payable annually in arrears. The performance fee will be calculated such that for any calendar year in which the total return to our stockholders as a percentage of their invested capital exceeds 6%, which we refer to as the 6% priority return, our advisor will receive 25% of the excess total return above the 6% priority return, but in no event will we pay our advisor more than 10% of the aggregate total return for such year. Therefore, payment of the performance-based component of the advisory fee (i) is contingent upon our actual annual total return exceeding the 6% priority return, (ii) will vary in amount based on our actual performance and total weighted average invested stockholder capital during each year and (iii) cannot cause our total return as a percentage of stockholders’ invested capital for the year to be reduced below 6%.
 
Our advisor will calculate our total return for each calendar year as the sum of capital appreciation or depreciation, measured by the annual change in our NAV, and cumulative distributions declared during the course of the calendar year. The 6% priority return calculation will reflect fluctuations in the actual number of shares outstanding during the year, such that for shares outstanding for less than 12 months (because of new share issuances and/or share redemptions), a prorated 6% annual total return will be determined for the partial period those shares were outstanding based on the NAV per share associated with them. In order to establish


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our total return and the accrual of the performance-based fee, on a daily basis our advisor will utilize the annualized internal rate of return on stockholders’ invested capital starting from the last calendar day of the prior calendar year, which we refer to as Day 1, and ending on the then current day, which we refer to as Day N. For such internal rate of return calculation, (i) the beginning investment value shall be equal to our NAV at the end of Day 1 (after accrual of all fees and expenses attributable to that year), (ii) the ending investment value shall be our NAV after all expenses, but prior to any purchases, redemptions and distributions, on Day N, and (iii) for each day between Day 1 and Day N net daily investment inflows or outflows, as applicable, will be factored in, specifically the combined total of all share redemptions and distributions less the total of the gross proceeds we receive from the sale of shares in our continuous public offering on such day.
 
On a daily basis, our advisor will accrue a liability reserve account equal to the amount due for both the fixed advisory fee and the performance fee, and this accrual will be reflected daily in our NAV per share calculation. On each day our advisor will calculate our year-to-date total return and, based on that return, adjust the balance of the advisory fee reserve accrual to reflect the estimated amount due, if any, on account of the performance-based fee. We will calculate and pay the performance-based fee to our advisor after the end of each calendar year. If our total return is less than the 6% priority return in any given calendar year, our advisor will not be entitled to receive any performance-based fee for that year. If our total return exceeds the 6% priority return in a particular calendar year, a performance-based fee is payable to our advisor even if total return to stockholders (or any particular stockholder) on a cumulative basis over any longer or shorter period has been less than 6% per annum. The advisor will not be obligated to return any portion of advisory fees paid based on our subsequent performance.
 
For our first year of operations, the performance-based component will be calculated for the period from the initial offering date through the end of the calendar year on the basis of a prorated 6% priority return and our actual total return for such partial calendar year. In the event the advisory agreement is terminated on a day other than the last business day of a calendar year, the fee will be calculated on the basis of a prorated 6% priority return and our actual total return to stockholders through the date of termination, and will be paid to our advisor promptly following completion of the necessary calculation.
 
We will reimburse our advisor for the expenses incurred in connection with its provision of advisory and administrative services including acquisition services, such as the portion of the salaries paid to employees of our sponsor who are dual employees of our advisor (including executive officers and key personnel of our advisor who are not also executive officers of our company) that are attributed to services rendered by our advisor in connection with our operations, including non-offering related legal and accounting services; provided, however, that we will not reimburse our advisor for the salaries and benefits paid to our executive officers.
 
The NASAA REIT Guidelines require that we include in our charter a provision that requires that any gain from the sale of assets that we may pay our advisor or an entity affiliated with our advisor be reasonable. Such a share in gain from the sale of assets is presumed reasonable if it does not exceed 15% of the balance of the net sale proceeds remaining after payment to common stockholders, in the aggregate, of an amount equal to 100% of the original issue price of the common stock, plus an amount equal to 6% of the original issue price of the common stock per year cumulative. Because we intend to be an investment vehicle of indefinite duration, as opposed to a finite-life vehicle that returns capital to investors following a single liquidation event, such as upon sale of its assets, as contemplated by the NASAA REIT Guidelines, we do not currently intend to pay incentive fees to our advisor in connection with the sale of our assets. Rather, our advisor will be entitled to receive performance compensation, if any, calculated based on the total return to stockholders exceeding an annual rate of 6%, measured over each calendar year during the term of the advisory agreement, the payment of which is not limited to asset disposition transactions.
 
Our advisor or its affiliates will pay on our behalf all other costs incurred in connection with our organization and the offering of our shares (excluding the dealer manager fee), including (i) our legal, accounting, printing, mailing and filing fees, charges of our escrow agent, and broker/dealer due diligence expenses; (ii) amounts to reimburse our advisor for the portion of the salaries paid to employees of its affiliates that are attributed to services rendered to our advisor in connection with preparing supplemental sales


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materials for us, holding educational conferences and attending retail seminars conducted by broker-dealers; and (iii) reimbursement for our dealer manager’s wholesaling costs, other marketing and organization costs including payments made to participating broker-dealers. Beginning on the date the offering proceeds are released from escrow, we will start to reimburse our advisor, without interest, for these organization and offering cost incurred both before and after the release of the escrow funds. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.75% of the aggregate gross offering proceeds from this offering, including shares issued in connection with the distribution reinvestment plan. If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.75% limit), calculated on an accumulated basis, until our advisor has been reimbursed in full.
 
Our advisor must reimburse us at least annually for fees paid to the advisor in any year to the extent that such fees to the advisor cause our total operating expenses to exceed the greater of (1) 2% of our average invested assets, or (2) 25% of our net income, which is defined as our total revenues less total expenses for any given period excluding reserves for depreciation and bad debt. “Average invested assets” means the average monthly book value of our assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including advisory fees and any amounts we may pay to intermediaries for record keeping, account maintenance services and other administrative services provided to our stockholders, but excluding: (a) the expenses of raising capital such as organizational and offering expenses, legal, audit, accounting, underwriting, brokerage, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer and registration of shares of our common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees; and (f) acquisition expenses (including expenses relating to potential acquisitions that we do not close), real estate commissions on the resale of real property and other expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other real property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).
 
Notwithstanding the foregoing, to the extent that total operating expenses payable by us exceed these limits and the independent directors determine that the excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient, our advisor may be paid in future periods for the full amount of the excess expenses, or any portion thereof. Within 60 days after the end of any fiscal quarters for which our total operating expenses for the four consecutive fiscal quarters then ended exceed these limits, we will send our stockholders a written disclosure of such fact, together with an explanation of the factors our independent directors considered in arriving at the conclusion that such excess expenses were justified. Our independent directors will review the total fees for operating expenses paid to our advisor to determine if they are reasonable in light of, among other factors, our performance, our net assets and our net income and the fees and expenses of other comparable unaffiliated REITs.
 
Our independent directors will evaluate at least annually whether the compensation that we contract to pay to our advisor is reasonable in relation to the nature and quality of services performed and that such compensation is within the limits prescribed by our charter. The independent directors will supervise the performance of our advisor and the compensation we pay to it to determine that the provisions of the advisory agreement are being carried out. For a list of the factors our independent directors will consider in evaluating the fees paid to our advisor, see the “Management — Board of Directors” section of this prospectus.
 
Other than the fees described above, neither the advisor nor its affiliates will be entitled to any additional fees for acquiring our properties, managing our properties, leasing our properties or assisting in the disposition of our properties.


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Officers, employees and affiliates of our advisor engage in other business ventures and, as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the advisory agreement, our advisor will be required to devote sufficient resources to our administration to discharge its obligations.
 
Our advisor may assign the advisory agreement to an affiliate upon approval of a majority of our independent directors. The advisory agreement also provides that our advisor may engage one or more sub-advisors to assist our advisor in providing services. We may assign or transfer the advisory agreement to a successor entity; provided that at least a majority of our independent directors determines that any such successor advisor possesses sufficient qualifications to perform the advisory function and to justify the compensation payable to the advisor. Our independent directors will base their determination on the general facts and circumstances that they deem applicable, including the overall experience and specific industry experience of the successor advisor and its management. Other factors that will be considered are the compensation to be paid to the successor advisor and any potential conflicts of interest that may occur.
 
Our advisor’s principal assets will be its cash balances and its advisory agreement with the Company, and the revenues associated with such agreement. In addition, our advisor is covered by an errors and omissions insurance policy. If our advisor is held liable for a breach of fiduciary duty, the Company expects that the liability would be paid by our advisor from its cash balances or by the insurance policy.
 
The fees payable to our advisor under the advisory agreement are described in further detail in the “Compensation” section of this prospectus.
 
The above summary is provided to illustrate the material functions which our advisor will perform for us as our advisor and it is not intended to include all of the services which may be provided to us by our advisor or third parties. The advisory agreement provides that our advisor may engage one or more sub-advisors to assist our advisor in providing these services.
 
The Sub-Advisory Agreement
 
Our advisor has engaged BlackRock Investment Management, LLC, a leading provider of investment advisory solutions, to serve as its sub-advisor and has entered into a sub-advisory agreement with the sub-advisor, pursuant to which the sub-advisor will serve as a fiduciary under the sub-advisory agreement and provide advisory services relating to selection, acquisitions, management and dispositions of our liquid assets (cash, cash equivalents, other short-term investments, U.S. government securities, agency securities, corporate debt, liquid, real estate-related, equity or debt securities and other investments for which there is reasonable liquidity). The sub-advisor will provide services related to the acquisition, management and disposition of our liquid assets and the selection of those assets in accordance with our investment objectives, strategy, guidelines, policies and limitations. The sub-advisory agreement may be terminated by our advisor or by the sub-advisor at any time. The fees paid to the sub-advisor will not be paid by us, but will instead be paid by our advisor out of the management fee that we will pay to our advisor. The sub-advisor will also be reimbursed for expenses incurred on our behalf. In the event the sub-advisory agreement is terminated, the sub-advisor will be paid all accrued and unpaid fees and expense reimbursements. The expense reimbursements that we will pay to our advisor include expenses incurred by the sub-advisor on our behalf that our advisor is required to reimburse to the sub-advisor under the sub-advisory agreement. Notwithstanding the terms of our advisor’s engagement of the sub-advisor, our advisor will be ultimately responsible to us for the performance of all of the matters entrusted to it pursuant to the advisory agreement, however, it will not have a fiduciary or contractual relationship with us. If our sub-advisor does not adequately perform its duties or fails to dedicate sufficient time to us our only recourse will be against our advisor.
 
Investment Decisions
 
The primary responsibility for the investment decisions of our advisor and its affiliates, the negotiation for the purchase and sale of these investments, and the management of our assets resides with Christopher H. Cole and the other executive officers and key personnel of our advisor. The backgrounds of the officers of our advisor are described in the “— Executive Officers and Directors” and “— The Advisor” sections above. Our board of directors is responsible for supervising and monitoring the activities of our advisor.


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Affiliated Dealer Manager
 
Cole Capital Corporation, our dealer manager, is a member firm of FINRA. Cole Capital Corporation was organized in December 1992 for the purpose of participating in and facilitating the distribution of securities of real estate programs sponsored by Cole Holdings Corporation, its affiliates and its predecessors, all of whom are affiliated with our sponsor.
 
Cole Capital Corporation will advise us regarding this offering, manage our relationships with participating broker-dealers and financial advisors and provide assistance in connection with compliance matters relating to the offering, including compliance regarding any sales literature that we may prepare. It may also sell a limited number of shares at the retail level. The compensation we will pay to Cole Capital Corporation in connection with this offering is described in the section of this prospectus captioned “Compensation.” See also “Plan of Distribution — General.”
 
Cole Capital Corporation is wholly-owned by Cole Capital Advisors, which is wholly-owned by Cole Holdings Corporation. Christopher H. Cole is the sole stockholder of Cole Holdings Corporation. Cole Capital Corporation is an affiliate of our advisor. The backgrounds of the officers of Cole Capital Corporation are described in the “— Executive Officers and Directors” and ‘‘— The Advisor” sections of this prospectus.


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Compensation
 
We have no paid employees. Our advisor and its affiliates manage our day-to-day affairs. The following table summarizes all of the compensation, fees and reimbursements we will pay to our advisor and its affiliates, including our dealer manager. See the “Plan of Distribution” section of this prospectus. We will not pay our advisor or its affiliates any separate fees for property acquisitions or dispositions, financings, property management or leasing. This table assumes the shares are sold through distribution channels associated with the highest possible dealer manager fee.
 
         
Type of Compensation — Recipient(1)
 
Method of Compensation
 
Estimated Amount
 
Organization and Offering Stage
Upfront Selling Commission   We will not pay any upfront selling commissions.(2)   None
Dealer Manager Fee — Our Dealer Manager(3)   We will pay our dealer manager an asset-based dealer manager fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.55% of our NAV for such day. At our dealer manager’s discretion it may reallow a portion of the dealer manager fee equal to an amount up to 1/365th of 0.20% of our NAV to participating broker dealers. Because the dealer manager fee is calculated based on NAV, it reduces NAV with respect to all shares of our common stock, including shares issued under our distribution reinvestment plan.   The actual amount will depend on the number of shares sold, the dates on which the shares are sold, the daily NAV per share and the period of time that the investor continues to hold the shares. Assuming that (i) one-half of all $3,500,000,000 of shares registered for sale in our primary offering are sold as of the first day after the end of the escrow period, and the other half are sold one year after the end of the escrow period; (ii) all of the shares are held until the end of the two-year offering period; and (iii) our NAV per share remains at $15.00 at all times, then we estimate that the dealer manager fee will equal approximately $9,625,000 in year one after the escrow period and $19,250,000 in year two. After year two, assuming all of the shares sold continue to be held and our NAV per share remains at $15.00, the dealer manager fee will equal approximately $19,250,000 per annum. In the aggregate, underwriting compensation from all sources, including the dealer manager fee and other underwriting compensation paid to participating broker-dealers by us or by our advisor and its affiliates, will not exceed 10% of the gross proceeds from our primary offering.


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Type of Compensation — Recipient(1)
 
Method of Compensation
 
Estimated Amount
 
Organization and Offering Expense Reimbursement — 
Our Advisor(4)
  Our advisor has agreed to fund on our behalf all costs of our organization and offering (other than the dealer manager fee). Beginning on the date the offering proceeds are released from escrow, we will start to reimburse our advisor, without interest, for these organization and offering cost incurred both before and after the release of the escrow funds. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.75% of the aggregate gross offering proceeds from this offering, including shares issued in connection with the distribution reinvestment plan. If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.75% limit), calculated on an accumulated basis, until our advisor has been reimbursed in full.   The timing and amount of reimbursements are dependent on the actual expenses incurred, the gross proceeds of shares sold, and the dates on which the shares are sold. Assuming that (i) one-half of all $4,000,000,000 of shares registered for sale in our primary offering, including shares issued under our distribution reinvestment plan, are sold as of the first day after the end of the escrow period, and the other half are sold one year after the end of the escrow period; and (ii) our NAV per share remains at $15.00 at all times, then the maximum amount of organization and offering expenses that can be reimbursed to our advisor will equal approximately $15,000,000 in year one after the escrow period and $15,000,000 in year two.
Operational Stage
Advisory Fee —
Our Advisor
  We will pay our advisor an advisory fee that will be payable in arrears on a monthly basis and accrue daily in an amount equal to 1/365th of 0.90% of our NAV for each day.   The annualized management fee, and the actual dollar amounts, are dependent upon our monthly average NAV and, therefore, cannot be determined at the present time. Based on the following assumed levels of our monthly average NAV, our annualized management fee will be as follows:
 
                 
            Total
 
        Monthly
  Annualized
 
        Average
  Advisory
 
       
NAV
  Fee ($)  
 
        $1 billion   $ 9,000,000  
        $2 billion   $ 18,000,000  
        $4 billion   $ 36,000,000  

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Type of Compensation — Recipient(1)
 
Method of Compensation
 
Estimated Amount
 
Acquisition Expense Reimbursement —
Our Advisor(5)
  We will not pay our advisor any acquisition, financing or other similar fees in connection with making investments. We will reimburse our advisor for out-of-pocket expenses in connection with the acquisition of commercial real estate properties, real estate-related assets and other investments, including reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of acquisition services to us other than our executive officers, provided that no reimbursement shall be made for costs of such employees of our advisor or its affiliates to the extent that such employees perform services for which our advisor receives a separate acquisition fee.   The actual amount will depend upon actual expenses incurred and, therefore, cannot be determined at this time.
Operating Expense Reimbursement —
Our Advisor(6)
  We will reimburse our advisor for out-of-pocket expenses in connection with providing services to us, including reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of services to us other than our executive officers, provided that no reimbursement shall be made for costs of such employees of our advisor or its affiliates to the extent that such employees perform services for which our advisor receives a separate fee. The expense reimbursements that we will pay to our advisor include expenses incurred by the sub-advisor on our behalf.   Actual amounts are dependent upon actual expenses incurred and, therefore, cannot be determined at this time.
Performance Fee — Our Advisor   We will pay our advisor a performance fee calculated on the basis of our total return to stockholders, payable annually in arrears, such that for any year in which our total return on stockholders’ capital exceeds 6% per annum, on a calendar year basis, our advisor will be entitled to 25% of the excess total return but not to exceed 10% of the aggregate total return for such year.   The actual amount will depend on our performance, as well as on the number of shares sold, the daily NAV per share and the period of time that the investor continues to hold the shares and, therefore, can not be determined at this time.
 
 
(1) We will pay all fees and expenses in cash, shares of our common stock, a non-interest bearing promissory note or any combination of the foregoing, as may be agreed upon by both parties.
 
(2) Although we will not pay any upfront selling commission in connection with this offering, an investor in our shares may be subject to transactional fees or expenses that their intermediary would ordinarily charge them in connection with a purchase of securities.
 
(3) We will cease paying dealer manager fees at the date at which, in the aggregate, underwriting compensation from all sources, including the dealer manager fee and other underwriting compensation paid by us and our advisor and its affiliates, equals 10% of the gross proceeds from our primary offering (i.e., excluding proceeds from sales pursuant to our distribution reinvestment plan). This limitation is intended to ensure that we satisfy the FINRA requirement that total underwriting compensation paid in connection with this offering from any source (including from our advisor and its affiliates), does not exceed 10% of the gross proceeds of our primary offering. Our advisor and its affiliates may pay

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additional amounts, without reimbursement by us, associated with the sale and distribution of our shares, which may include amounts paid to participating broker/dealers. Such payments will be deemed to be “underwriting compensation” by FINRA and will be subject to the 10% of gross offering proceeds limit on underwriting compensation.
 
(4) Our advisor, directly or through an affiliate, has agreed to fund organizational expenses and expenses incurred in connection with the offering, including: (i) our legal, accounting, printing, mailing and filing fees, due diligence expenses that are included in a detailed and itemized invoice (such as expenses related to a review of this offering by one or more independent due diligence reviewers engaged by broker-dealers participating in this offering); (ii) amounts to reimburse our advisor for the portion of the salaries paid to employees of its affiliates that are attributed to services rendered to our advisor in connection with the preparation of supplemental sales materials for us, holding our own educational conferences and attending retail seminars conducted by our participating broker-dealers for performing these services, and (iii) reimbursement of our dealer-manager’s wholesaling costs, other marketing and organization costs, including payments made to participating broker-dealers for performing these services. Under no circumstances may the total organization and offering expenses from all sources exceed 15% of the gross proceeds from the primary offering of our shares (i.e. excluding proceeds from sales pursuant to our distribution reinvestment plan). Expenses related to educational conferences and retail seminars described in (ii) above and expenses described in (iii) above will constitute underwriting compensation.
 
(5) We will pay all expenses incurred in connection with the acquisition of our investments, including legal and accounting fees and expenses, brokerage commissions payable to unaffiliated third parties, travel expenses, costs of appraisals (including independent third party appraisals), nonrefundable option payments on property not acquired, engineering, due diligence, title insurance and other expenses related to the selection and acquisition of investments, whether or not acquired. While most of the acquisition expenses are expected to be paid to third parties, a portion of the out-of-pocket acquisition expenses, such as travel or due diligence expenses, may be reimbursed to our advisor or its affiliates. Acquisition expenses, together with any acquisition fees paid to third parties for a particular real estate-related asset, will in no event exceed 6% of the gross purchase price. In addition, the expenses we pay to our advisor include expenses incurred by its sub-advisor on our behalf that our advisor is required to reimburse to its sub-advisor under the sub-advisory agreement.
 
(6) Our advisor must reimburse us at least annually for reimbursements paid to the advisor in any year to the extent that such reimbursements to the advisor cause our operating expenses to exceed the greater of (1) 2% of our average invested assets, which generally consists of the average book value of our real properties before reserved for depreciation or bad debts and the average book value of securities or (2) 25% of our net income, which is defined as our total revenues less total expenses for any given period excluding reserves for depreciation and bad debt, unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of our assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including management fees and any amounts we may pay to intermediaries for expenses related to record keeping, account maintenance services and other administrative services provided to our stockholders, but excluding: (a) the expenses of raising capital such as organizational and offering expenses, legal, audit, accounting, underwriting, brokerage, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer and registration of shares of our common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of our assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential acquisitions that we do not close), real estate commissions on the resale of real property and other expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other real property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).


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At least a majority of our independent directors must determine, from time to time but at least annually, that our total fees and expenses are reasonable in light of our investment performance, net assets, net income and the fees and expenses of other comparable unaffiliated REITs. Each such determination will be reflected in the minutes of our board of directors. For a list of the factors our independent directors will consider, in evaluating the fees paid to our advisor, see the “Management — Board of Directors” section of this prospectus. Our independent directors shall also supervise the performance of our advisor and the compensation that we pay to it to determine that the provisions of our advisory agreement are being carried out.
 
Our advisor is obligated to exercise good faith and integrity in all its dealings with respect to our affairs pursuant to the advisory agreement. See the “Management — The Advisory Agreement” section of this prospectus.


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Indemnification and Limitation of Liability
 
We are permitted to limit the liability of our directors and officers, and to indemnify and advance expenses to our directors, officers and other agents, only to the extent permitted by Maryland law and the NASAA REIT Guidelines. Subject to the limits described below, our charter contains a provision that eliminates directors’ and officers’ liability for money damages, requires us to indemnify and, in certain circumstances, advance expenses to our directors, officers, our advisor and its affiliates and permits us to indemnify our employees and agents. To the extent that the Maryland General Corporation Law conflicts with the provisions set forth in the NASAA REIT Guidelines, the NASAA REIT Guidelines will control, unless the provisions of the Maryland General Corporation Law are mandatory under Maryland law.
 
In accordance with Maryland law our charter includes a provision limiting the liability of our directors and officers to our stockholders and us for money damages, except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment and that is material to the cause of action.
 
The Maryland General Corporation Law requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he is made or threatened to be made a party by reason of his service in that capacity. The Maryland General Corporation Law allows directors and officers to be indemnified against judgments, penalties, fines, settlements and expenses actually incurred by them in connection with any proceeding unless it is established that:
 
  •  an act or omission of the director or officer was material to the cause of action adjudicated in the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty;
 
  •  the director or officer actually received an improper personal benefit in money, property or services; or
 
  •  with respect to any criminal proceeding, the director or officer had reasonable cause to believe his act or omission was unlawful.
 
In addition to the above limitations of the Maryland General Corporation Law, and as set forth in the NASAA REIT Guidelines, our charter further limits our ability to indemnify our directors for losses or liability suffered by them or hold harmless our directors for losses or liability suffered by us by requiring that the following additional conditions are met:
 
  •  the directors have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;
 
  •  the directors were acting on our behalf or performing services for us;
 
  •  in the case of non-independent directors the liability or loss was not the result of negligence or misconduct by the party seeking indemnification;
 
  •  in the case of independent directors, the liability or loss was not the result of gross negligence or willful misconduct by the party seeking indemnification; and
 
  •  the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from the stockholders.
 
We have also agreed to indemnify and hold harmless our advisor, its sub-advisor and its affiliates performing services for us from specific claims and liabilities arising out of the performance of their obligations under the advisory agreement so long as the following conditions are met:
 
  •  our advisor, its sub-advisor and its affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;
 
  •  our advisor, its sub-advisor and its affiliates were acting on our behalf or performing services for us; and
 
  •  the liability or loss was not the result of negligence or misconduct by our advisor and its affiliates.


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As a result, our stockholders and we may be entitled to a more limited right of action than they and we would otherwise have if these indemnification rights were not included in the advisory agreement.
 
The general effect to our stockholders of any arrangement under which we agree to insure or indemnify any persons against liability is a potential reduction in distributions resulting from our payment of premiums associated with insurance or indemnification payments in excess of amounts covered by insurance. In addition, indemnification could reduce the legal remedies available to our stockholders and us against our officers and directors. The Maryland General Corporation Law permits us to advance reasonable expenses to a director or officer upon receipt of (i) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and (ii) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed if it is ultimately determined that the standard of conduct was not met. However, indemnification does not reduce the exposure of directors and officers to liability under federal or state securities laws, nor does it limit the stockholders’ ability to obtain injunctive relief or other equitable remedies for a violation of a director’s or an officer’s duties to us, although the equitable remedies may not be an effective remedy in some circumstances.
 
The SEC and some state securities commissions take the position that indemnification against liabilities arising under the Securities Act is against public policy and unenforceable.
 
Under our charter, indemnification of our directors and our advisor or its affiliates will not be allowed for liabilities arising from or out of a violation of state or federal securities laws, unless one or more of the following conditions are met:
 
  •  there has been a successful adjudication on the merits in favor of the indemnitee of each count involving alleged securities law violations;
 
  •  such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction; or
 
  •  a court of competent jurisdiction approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the SEC and of the published position of any state securities regulatory authority in which our securities were offered as to indemnification for violations of securities laws.
 
Our charter provides that the advancement of our funds to our directors, our advisor or our advisor’s affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are satisfied: (i) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of us; (ii) our directors, our advisor or our advisor’s affiliates provide us with written affirmation of their good faith belief that they have met the standard of conduct necessary for indemnification; (iii) the legal action is initiated by a third party who is not a stockholder or, if the legal action is initiated by a stockholder acting in his or her capacity as such, a court of competent jurisdiction approves such advancement; and (iv) our directors, our advisor or our advisor’s affiliates agree in writing to repay the advanced funds to us together with the applicable legal rate of interest thereon, in cases in which such persons are found not to be entitled to indemnification.


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Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth, as of the date of this prospectus, information regarding the number and percentage of shares owned by each director, our chief executive officer, each executive officer, all directors and executive officers as a group, and any person known to us to be the beneficial owner of more than 5% of outstanding shares of our common stock. As of the date of this prospectus, we had one stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and includes securities over which a person has the right to acquire within 60 days. Except as indicated, the person named in the table has sole voting and investing power with respect to all shares beneficially owned by it. As used herein, “voting power” is the power to vote or direct the voting of shares and “investment power” is the power to dispose or direct the disposition of shares. The address for each of the persons named below is in care of our principal executive offices at 2575 East Camelback Road, Suite 500, Phoenix, AZ 85016.
 
                 
    Number of Shares
    Percent of All
 
Name of Beneficial Owner(1)
  Beneficially Owned     Shares(2)  
 
Christopher H. Cole, Chairman of the Board of Directors, Chief Executive Officer and President
    13,334       100 %
D. Kirk McAllaster, Jr., Executive Vice President, Chief Financial Officer and Treasurer
           
George N. Fugelsang, Director
           
Roger D. Snell, Director
           
                 
All directors and executive officers as a group
    13,334       100 %
 
 
(1) For purposes of calculating the percentage beneficially owned, the number of shares of common stock deemed outstanding includes 13,334 shares outstanding as of November 3, 2011. Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person or group who has or shares voting and investment power with respect to such shares.
 
(2) Includes 13,334 shares owned by Cole Holdings Corporation, an affiliate of our sponsor. Mr. Cole is the sole stockholder of Cole Holdings Corporation and controls the voting and disposition decisions of Cole Holdings Corporation. Cole Holdings Corporation is prohibited from selling the shares of our common stock for so long as Cole Real Estate Investments remains our sponsor; provided, however, that Cole Holdings Corporation may transfer ownership of all or a portion of the shares of our common stock to other affiliates of our sponsor.


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Operating Partnership Agreement
 
We have summarized the material terms and provisions of the Limited Partnership Agreement of Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP, which we refer to as the “partnership agreement.” This summary is not complete. For more detail, you should refer to the partnership agreement itself, which is filed as an exhibit to the registration statement of which this prospectus is part. For purposes of this section, references to “we,” “our,” “us” and “the company” refer to Cole Real Estate Income Strategy (Daily NAV), Inc.
 
Management of Our Operating Partnership
 
Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP, our operating partnership, was formed on July 27, 2010 to acquire and hold assets on our behalf. For purposes of satisfying the asset and gross income tests for qualification as a REIT for federal income tax purposes, the company’s proportionate share of the assets and income of our operating partnership will be deemed to be assets and income of the company.
 
We intend to hold substantially all of our assets in our operating partnership or in subsidiary entities in which our operating partnership owns an interest. This is commonly referred to as the “UPREIT” structure, which stands for “Umbrella Partnership Real Estate Investment Trust.” We have elected to use an UPREIT structure for a number of reasons, including to facilitate commercial real estate property acquisitions because this structure provides an owner of appreciated property the ability to defer taxable gain on the transfer of such property to us. In order to achieve this benefit, an owner may transfer the property to our operating partnership in exchange for limited partnership interests in the operating partnership. Being able to offer an owner of real estate the opportunity to defer taxation of gain until it redeems its interests in our operating partnership for cash may give us a competitive advantage in acquiring desired properties or investments relative to buyers who cannot offer this opportunity. In addition, investing in our operating partnership, rather than in shares of our common stock, may be more attractive to certain institutional or other investors due to their business or tax structure.
 
We will be the sole general partner of our operating partnership. As the sole general partner of our operating partnership, we will have the exclusive power to manage and conduct the business of our operating partnership. A general partner is accountable to a limited partnership as a fiduciary and consequently must exercise good faith and integrity in handling partnership affairs. Neither our advisor nor any other limited partner of our operating partnership may transact business for our operating partnership, or participate in management activities or decisions, except as provided in the partnership agreement and as required by applicable law. We may not be removed as general partner by the limited partners. Our board of directors will at all times have ultimate oversight and policy-making authority, including responsibility for governance, financial controls, compliance and disclosure with respect to our operating partnership. Pursuant to an advisory agreement, which will be effective as of the initial offering date, however, we will delegate to our advisor authority to make decisions related to our and our operating partnership’s day-to-day business, the acquisition, management and disposition of assets and the selection of property managers and other service providers, in accordance with our investment objectives, strategy, guidelines, policies and limitations.
 
Our advisor has expressly acknowledged and any future limited partners of our operating partnership will expressly acknowledge that we, as general partner, are acting for our benefit, and the benefit of the limited partners of our operating partnership and our stockholders collectively. Neither we nor our board of directors is under any obligation to give priority to the separate interests of the limited partners of our operating partnership or our stockholders in deciding whether to cause our operating partnership to take or decline to take any actions. If there is a conflict between the interests of our stockholders on one hand and our operating partnership’s limited partners on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or our operating partnership’s limited partners; provided, however, that for so long as we own a controlling interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or our operating partnership’s limited partners will be resolved in favor of our stockholders. We are not liable under the partnership agreement to our operating partnership or to any of its limited partners for monetary damages for losses sustained, liabilities incurred, or


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benefits not derived by such limited partners in connection with such decisions, provided that we have acted in good faith.
 
The partnership agreement requires that our operating partnership be operated in a manner that will enable us to: (1) satisfy the requirements for qualification as a REIT for federal income tax purposes, unless we otherwise cease to qualify as a REIT; (2) avoid any federal income or excise tax liability; and (3) ensure that our operating partnership will not be classified as a “publicly traded partnership” that is taxable as a corporation. See “Material U.S. Federal Income Tax Considerations.”
 
Capital Contributions and Distributions
 
We intend to contribute the proceeds from this offering to our operating partnership as capital contributions. These capital contributions will be reflected in our capital account in our operating partnership. In the future, we may issue another class of common stock with a different fee and expense structure than our current common stock. In exchange for our capital contribution in connection with the issuance of such a new class of common stock, our operating partnership will issue us interests in the operating partnership with a fee and expense structure that mirrors the new class of common stock.
 
If our operating partnership requires additional funds at any time in excess of capital contributions made by us, our operating partnership may borrow funds from a financial institution or other lender. In addition, as sole general partner of our operating partnership, we will have the ability to cause our operating partnership to issue additional limited partnership interests, including preferred limited partnership interests. These additional interests may be issued in connection with the admission of additional limited partners upon the transfer to our operating partnership of real estate properties or other assets, if our board of directors concludes in good faith that such admittance and the terms of the partnership interests issued to such additional limited partners are in our best interest.
 
The partnership agreement generally provides that our operating partnership will, except upon the liquidation of our operating partnership, distribute cash to the partners of our operating partnership in accordance with their relative percentage interests, generally on at least a quarterly basis, in amounts determined by us as general partner. In the event that our operating partnership were to liquidate, after payment of debts and obligations, any remaining assets of our operating partnership will be distributed in accordance with the distribution provisions of the partnership agreement to the extent of each partner’s positive capital account balance.
 
Redemption Rights
 
Pursuant to the partnership agreement, any future limited partners, other than us, will receive redemption rights, which will enable them to cause the operating partnership to redeem their limited partnership interests in exchange for cash based on, as applicable, the NAV per share of our common stock or shares of the corresponding class or series of our capital stock if we have multiple classes or series of capital stock at the time of redemption, assuming redemption of the number of shares that would correspond, on a one-for-one basis, to the partnership interests being redeemed. This one-for-one correspondence may be adjusted upon the occurrence of certain events such as share dividends, share subdivisions or combinations. We expect to fund any cash redemptions out of available cash or borrowings. Requests for redemption of limited partnership interests will be subject to the same condition and limitations applicable at the time to requests for redemption of shares of our common stock. See “Share Purchases and Redemptions.” Accordingly, under our redemption program, limited partners will be treated as if they had requested redemption of the full number of shares of our common stock on the basis of which the cash redemption amount for their limited partnership interests is to be calculated and as if they had held such shares from the date their partnership interests were issued to them. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption rights if the redemption would cause us to fail to qualify as a REIT under the Code or would cause our operating partnership to be treated as a publicly traded partnership taxable as a corporation.


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Transferability of General Partner Interest
 
We may not (1) voluntarily withdraw as the general partner of our operating partnership, (2) engage in any merger, consolidation or other business combination or (3) transfer our general partnership interest in our operating partnership (except to a wholly owned subsidiary), unless: (A) the transaction in which such withdrawal, business combination or transfer occurs results in the limited partners receiving or having the right to receive an amount of cash, securities or other property equal in value to the amount they would have received if they held, as applicable, shares of our common stock or shares of the corresponding class or series of capital stock if we have multiple classes or series of capital stock prior to such transaction; or (B) in the case of a merger or other business combination, the successor entity contributes substantially all of its assets to our operating partnership in return for an interest in our operating partnership and agrees to assume all obligations of the general partner of our operating partnership.
 
We may also enter into a business combination or we may transfer our general partnership interest upon the receipt of the consent of a majority-in-interest of the limited partners of our operating partnership, other than interests held by us. With certain exceptions, the limited partners may not transfer their interests in our operating partnership, in whole or in part, without our written consent, as general partner.
 
Exculpation
 
We, as general partner, will not be liable to our operating partnership or limited partners for errors in judgment or other acts or omissions not amounting to willful misconduct or gross negligence since provision has been made in the partnership agreement for exculpation of the general partner. Therefore, purchasers of interests in our operating partnership have a more limited right of action than they would have absent the limitation in the partnership agreement.
 
Indemnification
 
The partnership agreement provides for the indemnification of us, as general partner, by our operating partnership for liabilities we incur in dealings with third parties on behalf of our operating partnership. To the extent that the indemnification provisions purport to include indemnification of liabilities arising under the Securities Act, in the opinion of the SEC, such indemnification is contrary to public policy and therefore unenforceable.
 
Tax Matters
 
We are our operating partnership’s tax matters partner and, as such, have the authority to make tax elections under the Code on our operating partnership’s behalf.


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Conflicts of Interest
 
We are subject to various conflicts of interest arising out of our relationship with our advisor and its affiliates, including conflicts related to the arrangements pursuant to which we will compensate our advisor and its affiliates. While our independent directors will act on our behalf, our agreements and compensation arrangements with our advisor and its affiliates may be impacted by the fact that our stockholders invested with the understanding and expectation that an affiliate of Cole Real Estate Investments would act as our advisor. See the “Compensation” section of this prospectus. Some of the potential conflicts of interest in our transactions with our advisor and its affiliates, and certain conflict resolution procedures set forth in our charter, are described below.
 
Our officers and affiliates of our advisor will try to balance our interests with the interests of other Cole-sponsored programs to whom they owe duties. However, to the extent that these persons take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to you and the value of your investment. In addition, our directors, officers and certain of our stockholders may engage for their own account in business activities of the types conducted or to be conducted by our subsidiaries and us. For a description of some of the risks related to these conflicts of interest, see the “Risk Factors” section of this prospectus.
 
Our independent directors have an obligation to function on our behalf in all situations in which a conflict of interest may arise, and will be aided by independent counsel for the independent directors. Furthermore, all of our directors have a fiduciary obligation to act on behalf of our stockholders.
 
Potential Conflicts Arising From Interests of Our Advisor and Affiliates in Other Real Estate Programs
 
Affiliates of our advisor act as an advisor to, and our executive officers, and at least one of our directors, act as officers and/or directors of, Cole Credit Property Trust I, Cole Credit Property Trust II, Cole Credit Property Trust III and Corporate Income Trust, all of which are REITs distributed and managed by affiliates of our advisor. In addition, all of these REITs employ our sponsor’s investment strategy, which focuses on single-tenant properties subject to long term net leases to creditworthy tenants. Cole Credit Property Trust I, Cole Credit Property Trust II and Cole Credit Property Trust III, focus primarily on the retail sector, while Corporate Income Trust focuses on office and industrial properties. Nevertheless, the common investment strategy used by each REIT would permit them to purchase certain properties that may also be suitable for our portfolio.
 
Cole Credit Property Trust I and Cole Credit Property Trust II are no longer offering shares for investment and, with limited exceptions such as through the use of proceeds by Cole Credit Property Trust II from its distribution investment plan, are not currently pursuing the acquisition of additional properties. However, in the event Cole Credit Property Trust I or Cole Credit Property Trust II sells one or more of its assets, either REIT may seek to acquire additional properties, which may be similar to properties in which we invest. Cole Credit Property Trust III currently is engaged in a follow-on offering of 275,000,000 shares of its common stock. Cole Credit Property Trust III is an active investor in real estate and real estate-related investments, and the investment objective and strategy of Cole Credit Property Trust III overlaps with our investment objective and strategy, thereby increasing the likelihood of potential acquisitions being appropriate for both Cole Credit Property Trust III and for us. Corporate Income Trust currently is engaged in an initial public offering of up to 250,000,000 shares of its common stock and focuses primarily on the corporate office and industrial sector, which also overlaps with our investment strategy. We anticipate that there will be investments that will be appropriate investments by both Corporate Income Trust and us. See “— Potential Conflicts in Acquiring, Leasing and Reselling of Properties” below.
 
In addition, during the period from January 1, 2001 to December 31, 2010, an affiliate of our advisor had issued approximately $114.2 million of debt pursuant to four private offerings, the proceeds of which were used to acquire single-tenant properties in various states. During the same period, Cole Capital Partners, an affiliate of our advisor, sponsored 53 currently operating tenant-in-common and Delaware Statutory Trust real estate programs. Affiliates of our advisor may, from time to time, sponsor additional tenant-in-common and/or Delaware statutory trust real estate programs, which may invest in, and compete for, properties that would be suitable investments under our investment criteria. Affiliates of our advisor and of our executive officers also act as officers and directors of general partners of six limited partnerships that have invested in unimproved


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and improved real properties located in various states, including Cole Credit Property Fund Limited Partnership “Cole Credit LP I” and Cole Credit Property Fund II Limited Partnership “Cole Credit LP II”, during the period from January 1, 2001 to December 31, 2010. See the “Prior Performance Summary” section of this prospectus. Affiliates of our executive officers and entities owned or managed by such affiliates also may acquire or develop real estate for their own accounts, and have done so in the past. Furthermore, affiliates of our executive officers and entities owned or managed by such affiliates intend to form additional real estate investment entities in the future, whether public or private, which can be expected to have the same or similar investment objectives and targeted assets as we have, and such persons may be engaged in sponsoring one or more of such entities at the same time as our shares of common stock are being offered. Our advisor and its affiliates likely will experience conflicts of interest as they simultaneously perform services for us and other Cole-sponsored real estate programs. See “— Certain Conflict Resolution Procedures” below.
 
While we expect our board to adopt a policy limiting the types of transactions that may be conducted by us with our advisor and its affiliates, including other Cole-sponsored real estate programs, such transactions are subject to an inherent conflict of interest. Similarly, joint ventures involving affiliates of our advisor also give rise to conflicts of interest. In addition, our board of directors may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and our advisor, any of its affiliates or another Cole-sponsored real estate program.
 
Transactions with Our Advisor and its Affiliates
 
We rely on our advisor for the day-to-day operation of our business. As a result of the interests of members of its management in other Cole-sponsored programs and the fact that they also are engaged, and will continue to engage, in other business activities, our advisor and its officers, key persons and respective affiliates may have conflicts of interest in allocating their time between us and other Cole-sponsored programs and other activities in which they are involved. However, our advisor believes that it and its affiliates have sufficient personnel to discharge fully their responsibilities to all of the Cole-sponsored programs and other ventures in which they are involved.
 
In addition, each of our executive officers, with the exception of Christopher H. Cole, also serves as an officer of our advisor, our dealer manager and/or other affiliated entities. Christopher H. Cole, who serves as the chairman of our board of directors and as our president and chief executive officer, is the indirect sole owner of our advisor. As a result, each of our executive officers owes fiduciary duties to these other entities, as applicable, which may conflict with the fiduciary duties that he owes to us and our stockholders. If these individuals were to act or fail to act in a manner that was detrimental to our business, or favor one entity over another, they could be subject to liability for breach of their fiduciary duty to us and our stockholders.
 
From time to time our advisor may direct certain of its affiliates to acquire properties that would be suitable investments for us or may create special purpose entities to acquire properties for the specific purpose of selling the properties to us at a later time. Subsequently, we may acquire such properties from such affiliates, but any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of independent directors, not otherwise interested in such transactions as being fair and reasonable to us. In addition our purchase price in any such transaction will be limited to the cost of the property to the affiliate, including acquisition-related expenses. Further, our charter provides that in no event will the purchase price of any asset acquired from an affiliate exceed its current appraised value as determined by an independent appraiser.
 
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors not otherwise interested in such transaction, as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties. Our advisor or its affiliates may pay costs on our behalf, pending our reimbursement, or we may defer payment of fees to our advisor or its affiliates, but neither of these transactions would be


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considered a loan. By way of example only, the prohibition on loans would not restrict advances of cash for legal expenses or other costs incurred as a result of any legal action for which indemnification is being sought.
 
Our charter does not prohibit us from entering into transactions other than those described above with our directors, our advisor, our sponsor or any of their affiliates, subject to compliance with the requirements set forth under “— Certain Conflict Resolution Procedures,” including approval by a majority of our directors, including a majority of the independent directors, not otherwise interested in such transactions as being fair and reasonable to us and no less favorable to us than comparable terms and conditions available from unaffiliated third parties. Although we do not currently anticipate entering into any such transactions, we may sell investments to or acquire investments from affiliates, make loans to or borrow from affiliates and lease assets to or from affiliates. In addition, we would not be precluded from internalizing our advisor if our board of directors were to determine an internalization transaction to be in the best interests of our stockholders.
 
Potential Conflicts in Acquiring, Leasing and Reselling of Properties
 
There is a risk that a potential investment would be suitable for one or more Cole-sponsored programs, in which case the officers of our advisor will have a conflict of interest allocating the investment opportunity to us or another program. There is a risk that our advisor will choose a property that provides lower returns to us than a property purchased by another Cole-sponsored program. However, in such event, our advisor, with oversight by our board of directors, will determine which program will be first presented with the opportunity. See “— Certain Conflict Resolution Procedures” for details of the factors used to make that determination. Additionally, our advisor may cause a prospective tenant to enter into a lease for property owned by another Cole-sponsored program. In the event that these conflicts arise, our best interests may not be met when persons acting on our behalf and on behalf of other Cole-sponsored programs decide whether to allocate any particular property to us or to another Cole-sponsored program.
 
Conflicts of interest will exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where properties owned by other Cole-sponsored programs are located. In such a case, a conflict could arise in the acquisition or leasing of properties in the event that we and another Cole-sponsored program were to compete for the same properties or tenants, or a conflict could arise in connection with the resale of properties in the event that we and another Cole-sponsored program were to attempt to sell similar properties at the same time including in particular in the event another Cole-sponsored program liquidates at approximately the same time as us. Conflicts of interest may also exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances. Our advisor will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making prospective employees aware of all such properties seeking to employ such persons. In addition, our advisor will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties. However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements for employees at different properties or differing terms for re-sales or leasing of the various properties.
 
Any affiliated entity, whether or not currently existing, might also compete with us in the sale of our assets. Our advisor and its affiliates will face conflicts of interest in determining which properties from which portfolios might be appropriate for sale to different potential purchasers.
 
Potential Conflicts in Joint Venture and Co-ownership Arrangements with Affiliates of Our Advisor
 
We may enter into joint ventures or other co-ownership arrangements with other Cole-sponsored programs (as well as other parties) for the acquisition, development or improvement of properties and other investments. See the “Investment Objectives, Strategy and Policies — Acquisition and Investment Policies — Joint Venture Investments” section of this prospectus. Our advisor and its affiliates may have conflicts of interest in determining which Cole-sponsored program should enter into any particular joint venture or co-ownership agreement. The co-venturer or co-owner may have economic or business interests or goals which are or which may become inconsistent with our business interests or goals. In addition, should any such joint venture be consummated, our advisor may face a conflict in structuring the terms of the relationship between our interests


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and the interest of the co-venturer or co-owner, and in managing the joint venture or other co-ownership arrangement. Since our advisor and its affiliates will negotiate the terms of any agreements or transactions between us and a Cole-sponsored co-venturer or co-owner, we will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers or co-owners. However, in such event, our advisor will act according to policies adopted by our board of directors, including that the joint venture as must be and reasonable to us and on substantially the same terms and conditions as those received by the other joint venturers, and the cost of our investment must be supported by a current appraisal of the asset.
 
Potential Conflicts Arising From Receipt of Fees and Other Compensation by Our Advisor and Its Affiliates
 
Our advisor will receive substantial fees from us. These compensation arrangements could influence our advisor’s advice to us, as well as the judgment of the personnel of our advisor who serve as our officers or directors. Among other matters, the compensation arrangements could affect the judgment of our advisor’s personnel with respect to:
 
  •  the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and the dealer manager agreement, and the amounts we pay under such agreements;
 
  •  the advisory fee and performance fee that we pay to our advisor are based upon our NAV, and our advisor will be involved in estimating certain accrued fees and expenses that are part of our NAV and performing the administrative calculation of our daily NAV;
 
  •  our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance that would entitle our advisor to incentive compensation; and
 
  •  the decision to buy or sell an asset based on whether it will increase or decrease our NAV as opposed to whether it is the most suitable investment for our portfolio.
 
We will pay advisory fees to our advisor regardless of the quality of the services it provides during the term of the advisory agreement. Our board or our advisor, however, has a fiduciary duty to us. If our advisor fails to act in our best interests, then it will have violated this duty. The advisory agreement may be terminated by us or our advisor on 60 days’ notice.
 
Potential Conflicts of Our Advisor’s Affiliated Dealer Manager
 
Since Cole Capital Corporation, our dealer manager, is an affiliate of our advisor, we will not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the offering of securities. Accordingly, you will have to rely on your own broker-dealer to make an independent review of the terms of this offering. If your broker-dealer conducts an independent review of this offering, and/or engages an independent due diligence reviewer to do so on its behalf, we expect that we will pay or reimburse the expenses associated with such review, which may create conflicts of interest. If your broker-dealer does not conduct such a review, you will not have the benefit of an independent review of the terms of this offering. See the “Plan of Distribution” section of this prospectus.
 
In addition, the sale of our shares of common stock in this offering will result in dealer manager fees to Cole Capital Corporation, our dealer manager and an affiliate of our advisor. Further, our dealer manager may have a compensation program for its registered employees who market and sell this investment to participating broker-dealers that may be different from the compensation program it has for the marketing and sale of other Cole-sponsored investments. Different compensation programs may result in Cole Capital Corporation’s registered employees receiving more compensation for the marketing and sale of our investment than for the marketing and sale of other programs. Such a compensation program may create a conflict of interest by motivating our dealer manager’s registered employees to promote our investment over other Cole-sponsored investments.
 
Certain Conflict Resolution Procedures
 
In order to reduce or eliminate certain potential conflicts of interest, our charter contains a number of restrictions relating to (1) transactions we may enter into with our advisor and its affiliates, (2) certain future


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offerings, and (3) allocation of investment opportunities among affiliated entities. These restrictions include, among others, the following:
 
  •  We will not purchase or lease properties from our sponsor, our advisor, any of our directors or any of their respective affiliates, unless (1) a majority of the directors, including a majority of the independent directors, not otherwise interested in such transaction determines that such transaction is fair and reasonable to us, and (2) either (A) the purchase price is no greater than the cost of the property to the seller, including acquisition-related expenses, or (B) a majority of the independent directors determines that there is substantial justification for any amount above such cost and that the difference is reasonable. In no event will we acquire any property from an affiliate at an amount in excess of its current appraised value as determined by an independent appraiser.
 
  •  We will not sell or lease properties to our sponsor, our advisor, any of our directors or any of their respective affiliates, unless (1) a majority of the directors, including a majority of the independent directors, not otherwise interested in such transaction determines that such transaction is fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties, and (2) either (A) the sale is greater than the cost of the property to us, including acquisition-related expenses, or (B) a majority of the independent directors determines that there is substantial justification for any amount below such cost, and that the difference is reasonable. In no event will we sell any property to an affiliate at an amount less than its current appraised value as determined by an independent appraiser.
 
  •  Our sponsor, our advisor, any of our directors and any of their respective affiliates will not make loans to us, except that we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transactions as being fair and reasonable to us.
 
  •  In the event that an investment opportunity becomes available that may be suitable for both us and one or more other Cole-sponsored program, and for which more than one of such entities has sufficient uninvested funds, then our advisor, and the advisors of the other programs, with oversight by their respective boards of directors, will examine the following factors, among others, in determining the entity for which the investment opportunity is most appropriate:
 
  •  the investment objective of each entity;
 
  •  the anticipated operating cash flows of each entity and the cash requirements of each entity;
 
  •  the effect of the acquisition both on diversification of each entity’s investments by type of property, geographic area and tenant concentration;
 
  •  the amount of funds available to each program and the length of time such funds have been available for investment;
 
  •  the policy of each program relating to leverage of properties;
 
  •  the income tax effects of the purchase to each entity; and
 
  •  the size of the investment.
 
If, in the judgment of the advisors, the investment opportunity may be equally appropriate for more than one program, then the entity that has had the longest period of time elapse since it was offered an investment opportunity will first be offered such investment opportunity.
 
If a subsequent development, such as a delay in the closing of the acquisition or a delay in the construction of a property, causes any such investment, in the opinion of the advisors, to be more appropriate for an entity other than the entity that committed to make the investment, the advisors may determine that another program affiliated with our advisor or its affiliates will make the investment. Our board of directors, including the independent directors, has a duty to ensure that the method used for the allocation of the acquisition of properties by two or more affiliated programs seeking to acquire similar types of properties is applied fairly to us.


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Prior Performance Summary
 
Prior Investment Programs
 
The information presented in this section and in the Prior Performance Tables attached to this prospectus provides relevant summary information on the historical experience of the real estate programs managed over the last ten years by our sponsor, Cole Real Estate Investments, including certain officers and directors of our advisor. The prior performance of the programs previously sponsored by Cole Real Estate Investments is not necessarily indicative of the results that we will achieve. For example, most of the prior programs were privately offered and did not bear a fee structure similar to ours, or the additional costs associated with being a publicly held entity. Therefore, you should not assume that you will experience returns comparable to those experienced by investors in prior real estate programs sponsored by Cole Real Estate Investments.
 
We intend to conduct this offering in conjunction with future offerings by one or more public and private real estate entities sponsored by Cole Real Estate Investments. To the extent that such entities have the same or similar objectives as ours or involve similar or nearby properties, such entities may be in competition with the properties acquired by us. See the “Conflicts of Interest” section of this prospectus for additional information.
 
The Prior Performance Tables set forth information as of the dates indicated regarding certain of these prior programs as to (1) experience in raising and investing funds (Table I); (2) compensation to the sponsor and its affiliates (Table II); (3) annual operating results of prior real estate programs (Table III); (4) results of completed programs (Table IV); and (5) results of sales or disposals of properties (Table V). Additionally, Table VI, which is contained in Part II of the registration statement for this offering and which is not part of the prospectus, contains certain additional information relating to properties acquired by these prior real estate programs. We will furnish copies of such tables to any prospective investor upon request and without charge. The purpose of this prior performance information is to enable you to evaluate accurately the experience of our advisor and its affiliates in sponsoring like programs. The following discussion is intended to summarize briefly the objectives and performance of the prior real estate programs and to disclose any material adverse business developments sustained by them. As of December 31, 2010, approximately 98% of the prior real estate programs had investment objectives similar to those of this program, based on number of programs.
 
Summary Information
 
Prior Private Programs
 
During the period from January 1, 2001 to December 31, 2010, Cole Real Estate Investments sponsored 65 privately offered programs, including six limited partnerships, four debt offerings, 27 Delaware Statutory Trusts, 26 tenant-in-common programs, and Cole Credit Property Trust I, a privately offered REIT, each with investment objectives similar to this program, and one limited partnership that did not have similar investment objectives to this program. As of December 31, 2010, such privately offered prior programs have raised approximately $674.9 million from approximately 6,300 investors. For more detailed information about the experience of our affiliates in raising and investing funds for offerings initiated over the last three years and compensation paid to the sponsors of these programs, see Tables I and II of the Prior Performance Tables.
 
With respect to the six privately offered limited partnerships sponsored by Cole Real Estate Investments during the period from January 1, 2001 to December 31, 2010, which had similar investment objectives to this program, affiliates of our advisor have been general partners in each limited partnership. In total, limited partnership interests were sold to approximately 1,800 investors, raising approximately $86.6 million of capital. The foregoing partnerships have purchased in the aggregate 29 properties for an approximate acquisition cost of $204.0 million, of which approximately 57.4% is attributable to 23 single-tenant commercial properties, 40.0% is attributable to three shopping centers, 1.3% is attributable to one data center and 1.3% is attributable to two unimproved or partially-improved land parcels intended for high-rise/data center development. Four of the properties were located in the Phoenix metropolitan area, and 25 were located in the following states: three in Tennessee; three in Oklahoma; two in California; two in Florida; two in Ohio; and one each in Alabama, India