Principal Activity and Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Principal Activity and Significant Accounting Policies [Abstract]

PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2012 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine month periods ended September 30, 2012 and 2011, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2012 and our consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity and our consolidated cash flows for the three and nine month periods ended September 30, 2012 and 2011, as applicable. These adjustments are of a normal recurring nature.

Principles of Consolidation

The consolidated financial statements include the accounts of INREIT, INREIT Properties, LLLP and 25 single asset limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders as well as whether the entity is a variable interest entity for which we are the primary beneficiary.

Principal Business Activity

INREIT is the sole general partner of the operating partnership, which owns and operates the following property:

Residential Property

• 2,392 and 204 units respectively in Fargo and West Fargo, North Dakota.

• 551 units in Grand Forks, North Dakota.

• 470 units in Bismarck, North Dakota.

• 316 units in Omaha, Nebraska.

• 14 units in Hawley, Minnesota.

• 414 units in Eagan, Minnesota.

• 116 units in Moorhead, Minnesota.

• 193 unit assisted living facility in Bismarck, North Dakota.

Commercial Property

• 15,010 square foot office building in Minot, North Dakota.

• 8,000 square foot office building in Norfolk, Nebraska.

• 15,000 square foot office and retail complex in Fargo, North Dakota.

• 28,500 square foot office and retail complex in Fargo, North Dakota.

• 30,200 square foot retail facility in Waite Park, Minnesota.

• 17,000 square foot office building in Fargo, North Dakota.

• 124,306 square foot office complex in Fargo, North Dakota.

• 10,810 square foot office building in St. Cloud, Minnesota.

• 95,961 square foot office building in Duluth, Minnesota.

• 11,973 square foot office building in Fargo, North Dakota.

• 21,492 square foot office building and 1,625 square foot storage area in Grand Forks, North Dakota.

• 102,448 square foot office building in Edina, Minnesota.

• 5,043 square foot restaurant in Bloomington, Minnesota.

• 5,576 square foot restaurant in Coon Rapids, Minnesota.

• 4,936 square foot restaurant in Savage, Minnesota.

• 7,296 square foot restaurant in Austin, Texas.

• 15,400 square foot commercial building in Mandan, North Dakota.

• 4,997 square foot restaurant in Apple Valley, Minnesota.

• 2,712 square foot restaurant in Moorhead, Minnesota.

• 3,510 square foot office building in Moorhead, Minnesota.

• 2,811 square foot restaurant in Dickinson, North Dakota.

• 42,000 square foot retail building in Marshall, Minnesota.

• 17,760 square foot retail building in Dickinson, North Dakota.

• 23,690 square foot retail building in Minot, North Dakota.

• 100,600 square foot office building in Fargo, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a commercial building with approximately 31,000 square feet of rental space in Fargo, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases two 36 unit residential apartment buildings in Grand Forks, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 136 unit residential apartment complex in Bismarck, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases two commercial buildings with approximately 75,000 square feet of rental space in Bismarck, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 168 unit residential apartment complex in Omaha, Nebraska.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 75 unit residential apartment complex in Fargo, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 148 unit residential apartment complex in Omaha, Nebraska.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 179 unit residential apartment complex in Bismarck, North Dakota.

The operating partnership is the owner of five single asset limited liability companies which own five separate commercial properties totaling 72,140 square feet, located in Alexandria, Louisiana; Batesville, Arkansas; Fayetteville, Arkansas; Laurel, Mississippi; and Denver, Colorado.

The operating partnership is the owner of ten single asset limited liability companies which own ten separate commercial properties totaling 124,686 square feet, located in Mankato, Minnesota; Janesville, Wisconsin; Eau Claire, Wisconsin; Stevens Point, Wisconsin; Sheboygan, Wisconsin; Oshkosh, Wisconsin; Onalaska, Wisconsin; Grand Forks, North Dakota; Marquette, Michigan; and Bismarck, North Dakota.

The operating partnership is also a 81.25% owner of single asset partnership which owns and leases a 144 unit residential apartment complex in West Fargo, North Dakota. The remaining owners consist of Kenneth Regan, James Wieland and James Echtenkamp, related parties.

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the three and nine months ended September 30, 2012 and 2011.

Through December 31, 2011, we accounted for our investment in unconsolidated affiliates using the proportional method as defined in ASC 970. We have not restated prior periods’ financial statements as we believe the accounting change does not have a material effect on those statements.

Investment in unconsolidated affiliates as of September 30, 2012 consists of our 40.26% interest in a single asset limited liability company which owns a 144 unit residential, multi-tenant apartment complex in Bismarck, North Dakota; our 50.00% interest in a single asset limited liability company which owns a 183,000 square feet of commercial space in Grand Forks, North Dakota; and our 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial space in Fargo, North Dakota. Consolidation of these investments are not required as the entities do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. We and the respective affiliate partners must approve significant decisions about the applicable entities activities. As of September 30, 2012, the unconsolidated affiliates held total assets of $29.0 million and mortgage notes payable of $21.7 million.

The operating partnership holds a 50.00% interest in the Grand Forks Marketplace Retail Center, located in Grand Forks, North Dakota, through 100% ownership in a limited liability company, which owns a 1/3 interest in the Retail Center, and a 50% ownership in a separate limited liability company, which owns a 1/3 interest in the Retail Center.

Concentration of Credit Risk

Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include appraisals of the properties by a certified independent appraiser at the time of acquisition.

Equipment, furniture and fixtures purchased are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:

Buildings and improvements	40 years
Furniture and fixtures	9 years

Depreciation expense for the three months ended September 30, 2012 and 2011 totaled $2,412,438 and $2,244,627, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 totaled $7,154,638 and $6,607,536, respectively.

Annually, we evaluate our real estate investments for significant operational changes to assess whether any impairment indications are present, including recurring operating losses or significant adverse changes in legal factors or business climate that affect the recovery of the recorded value. If any real estate investment is considered impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value. There have been no impairment losses during the nine month periods ended September 30, 2012 and 2011, respectively.

Cash and Cash Equivalents

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.

Receivables

Receivables consist primarily of amounts due for rent and real estate taxes. The receivables are non-interest bearing. The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected. As of September 30, 2012 and December 31, 2011, management determined that no allowance was necessary for uncollectible receivables.

Other assets

Lease intangibles represent a proportional purchase price allocation of a property acquisition. The lease intangibles represent the estimated value of in-place leases and above-market lease terms. Intangible assets are comprised of finite-lived and indefinite-lived assets. Indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined that impairment was unnecessary at September 30, 2012 or September 30, 2011.

Rental Incentives

Rental incentives consist of up-front cash payments to lessees to sign the lease. Rental incentives are amortized against rental income over the term of the lease.

Noncontrolling Interest

Interests in the operating partnership held by limited partners are represented by limited partnership units. The operating partnerships’ income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.

Financing Costs

Financing costs incurred in connection with financing have been capitalized and are being amortized over the life of the financing using the effective interest method.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to equity and noncontrolling interest.

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being that a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.

We intend to continue to qualify as a REIT and, as such, will not be taxed on the portion of the income that is distributed to the shareholders. In addition, we intend to distribute all of our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the financial statements.

The operating partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for partnership interest. The conversion of partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We have adopted the provisions of FASB Accounting Standards Codification Topic ASC 740-10 Accounting for Income Tax Uncertainties, on January 1, 2009. The implementation of this standard had no impact on the financial statements. As of both the date of adoption and as of September 30, 2012, the unrecognized tax benefit accrual was zero. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2008.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Effective for periods beginning after December 15, 2011, ASU No. 2011-04 clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks and the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. ASU No. 2011-04 will only apply to our disclosures in Note 9 related to fair value assets and liabilities and is not expected to have a significant impact on our footnote disclosures.

Revenue Recognition

Generally, housing units are rented under short-term lease agreements. Generally, commercial space is rented under long-term lease agreements.

We derive over 95% of our revenues from tenant rents and other tenant-related activities. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and straight-line rents. We record base rents on a straight-line basis, which means that the monthly base rent income according to the terms of our leases with tenants is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $69,641 and $58,527 for the three months ended September 30, 2012 and 2011, respectively. The straight-line rent adjustment increased revenue by $202,396 and $183,231 for the nine months ended September 30, 2012 and 2011, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheet as of September 30, 2012 and December 31, 2011 was $1,812,732 and $1,718,527, respectively. We receive payments for these reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. INREIT had no dilutive potential common shares as of September 30, 2012 or 2011, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the three months ended September 30, 2012 and 2011, INREIT’s denominators for the basic and diluted earnings per common share were approximately 4,958,416 and 3,781,982, respectively. For the nine months ended September 30, 2012 and 2011, INREIT’s denominators for the basic and diluted earnings per common share were approximately 4,538,247 and 3,761,159 shares, respectively.

Reclassifications

Certain amounts previously reported in our 2011 financial statements have been reclassified to conform to the fiscal 2012 presentation.