10-K 1 form10k.htm 10-K ARC NYRR 12.31.2013 10-K SS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934
 

For the transition period from _________ to __________
Commission file number: 000-54689

AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
27-1065431
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
405 Park Ave., 15th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12 (g) of the Act: Common stock, $0.01 par value per share (Title of class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x         (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

There is no established public market for the registrant's shares of common stock. The registrant completed its ongoing initial public offering of its shares of common stock pursuant to its Registration Statement on Form S-11 (File No. 333-163069), which shares were being sold at $10.00 per share, with discounts available for certain categories of purchasers. The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter, was $591.7 million based on a per share value of $10.00 (or $9.50 for shares issued under the distribution reinvestment plan).

As of February 14, 2014, the registrant had 175,135,391 shares of common stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive proxy statement to be delivered to stockholders in connection with the registrant's 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.


AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

FORM 10-K
Year Ended December 31, 2013


 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

FORM 10-K
Year Ended December 31, 2013


Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital New York Recovery REIT, Inc. (the "Company," "we" "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in our Advisor and other American Realty Capital-affiliated entities.  As a result, our executive officers, New York Recovery Advisors, LLC (our "Advisor") and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investors advised by American Realty Capital affiliates, and conflicts in allocating time among these investors and us. These conflicts could result in unanticipated actions.
•
Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital-advised programs or investors, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
•
While we are investing the proceeds from our initial public offering or IPO, the competition for the type of properties we desire to acquire may cause our distributions and the long-term returns of our investors to be lower than they otherwise would be.
•
We depend on tenants for our revenue, and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.
•
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions.
•
We may not generate cash flows sufficient to pay our distributions to stockholders, as such, we may be forced to borrow at higher rates or depend on our Advisor or our property manager, New York Recovery Properties, LLC (the "Property Manager"), to waive reimbursement of certain expenses and fees to fund our operations.
•
No public market currently exists, or may ever exist, for shares of our common stock, which are, and may continue to be, illiquid.
•
We may be unable to pay or maintain cash distributions or increase distributions over time.
•
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates, including fees payable upon the sale of properties.
•
We are subject to risks associated with the significant dislocations and liquidity disruptions that recently existed or occurred in the credit markets of the United States.
•
We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes("REIT").
•
Our properties may be adversely affected by economic cycles and risks inherent to the New York metropolitan statistical area ("MSA"), especially New York City.
All forward-looking statements should be read with the risks noted in Part I, Item 1A of this annual report on Form 10-K.

ii

PART I
Organization
We are a New York City focused REIT that seeks to provide stockholders with an opportunity to participate in one of the world's most dynamic real estate markets by primarily acquiring income-producing commercial real estate in New York City. We focus on acquiring and owning office and retail properties in Manhattan, the largest and most liquid real estate market in the United States. We purchased our first property and commenced active operations in June 2010.  As of December 31, 2013, we owned 23 properties and real estate-related assets located in New York City. As of December 31, 2013 our properties aggregated 3.1 million rentable square feet, had an average occupancy of 94.2% and an average remaining lease term of 10.2 years. Approximately 80% of our portfolio (by rentable square footage) consisted of office properties and 10% consisted of retail properties as of December 31, 2013. To add diversity to our portfolio, we may also acquire multifamily, industrial, hotel and other types of real properties. We also may originate or acquire first mortgage loans, mezzanine loans, or preferred equity positions related to New York City real estate. 
We were incorporated on October 6, 2009 as a Maryland corporation that qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2010. Substantially all of our business is conducted through New York Recovery REIT Operating Partnership, L.P (the "OP"), a Delaware limited partnership. We have no employees.  Our Advisor manages our affairs on a day-to-day basis and our Property Manager manages or oversees management of our properties. The Advisor and the Property Manager are indirectly wholly owned entities of American Realty Capital III, LLC (the "Sponsor"). We are headquartered in New York City.
Investment Objectives
Our investment objectives include capital preservation, income generation and asset appreciation. We achieve our objectives through:
•
Focus on New York City — Acquiring high-quality commercial real estate in New York City, and, in particular, properties located in Manhattan;
•
Focus on Income Producing Properties — Acquire income producing commercial real estate with an emphasis on office and retail properties with 80% or greater occupancy at the time of purchase;
•
Maintain Low Leverage - Target a leverage level of not more than 40% to 60% loan-to-value;
•
Make Monthly Distributions - Pay distributions monthly;
•
Maximize Total Returns - Maximize total returns to our stockholders through a combination of appreciation and current income.
Acquisitions and Investments
To date, we have acquired a portfolio of properties, all located in New York City that we believe provides us with a solid foundation for future growth. All of our properties were acquired during the time period 2010-2013 so we have no legacy assets relating back to acquisitions that suffered from the recession. Further, because our asset base is still relatively small, we believe future acquisitions will have a meaningful impact on our size and profitability.
The following table presents information about the property type diversity of the properties and real estate-related assets we owned at December 31, 2013:
Property Type
 
Rentable Square Feet (1)
 
Square Feet as a Percentage of the Total Portfolio
Office
 
2,579,568

 
82.0
%
Retail
 
258,325

 
8.2
%
Other
 
306,459

 
9.8
%
 
 
3,144,352

 
100.0
%
______________________________
(1)
Includes our proportionate share of investments in unconsolidated joint ventures.

1

The following table presents information about the geographic diversity of the properties and real estate-related assets we owned at December 31, 2013:
Property Type
 
Rentable Square Feet (1)
 
Square Feet as a Percentage of the Total Portfolio
Manhattan
 
3,005,576

 
95.6
%
Brooklyn
 
129,009

 
4.1
%
Queens
 
9,767

 
0.3
%
 
 
3,144,352

 
100.0
%
______________________________
(1)
Includes our proportionate share of investments in unconsolidated joint ventures.
The following table lists the tenants whose annualized rental income on a straight-line basis represented greater than 10% of our total annualized rental income for all portfolio properties on a straight-line basis as of the dates indicated for the years ending December 31, 2013, 2012 and 2011, respectively:
 
 
 
 
December 31,
Property Portfolio
 
Tenant
 
2013
 
2012
 
2011
Worldwide Plaza
 
Cravath, Swaine & Moore, LLP
 
18.2%
 
*
 
*
Worldwide Plaza
 
Nomura Holdings America, Inc.
 
12.4%
 
*
 
*
229 West 36th Street
 
American Language Communication Center, Inc.
 
*
 
13.5%
 
*
One Jackson Square
 
TD Bank, N.A.
 
*
 
*
 
12.2%
Bleecker Street
 
Burberry Limited
 
*
 
*
 
10.7%
Duane Reade
 
Duane Reade
 
*
 
*
 
10.0%
________________________________
* Tenant's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
The termination, delinquency or non-renewal of any of the above tenants would have a material adverse effect on our revenues.  No other tenant represents more than 10% of our annualized rental income for the periods presented.  
Financing Strategies / Offerings
 We may use debt financing to fund property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness varies in terms of duration (long or short term), secured or unsecured, or fixed or variable rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes but may do so in order to manage or mitigate our interest rate risks on variable rate debt.
We seek to maintain a strong balance sheet with conservative leverage. As of December 31, 2013, our net leverage ratio was equal to 31.6% based on the purchase price of our properties and including our portion of debt from our unconsolidated joint venture, net of cash and cash equivalents. If we need additional flexibility, our charter permits us to incur maximum indebtedness equal to 300% of our total "net assets" (as defined by the North American Securities Administrators Association REIT Guidelines), which is generally expected to be approximately 75% of the cost of our investments. We may also exceed this limit if our board (including a majority of our independent directors) approve and if we disclose such borrowings in our next quarterly report along with justification for exceeding such limits. As of December 31, 2013, we had net debt, including debt on our unconsolidated joint venture, of $672.2 million with a weighted average interest rate equal to 3.6% per annum.

2

On September 2, 2010, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share on a primary basis, at a price of $10.00 per share along with up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of 95% of the fair market value per share as determined by our board of directors and $9.50 per share. The primary offering was completed on December 11, 2013. On November 27, 2013, we registered an additional 25.0 million shares for issuance under the DRIP (including a direct stock component). The new DRIP, including the direct stock component, became effective December 6, 2013. We used the net proceeds from these offerings to fund acquisition of the properties and other assets we now own. As of December 31, 2013, we had 174.1 million shares of common stock outstanding and had received total gross proceeds of $1.7 billion from the sale of 172.1 million shares of common stock, including shares issued under the DRIP.  In addition, we sold 2.0 million shares of convertible preferred stock for gross proceeds of $17.0 million in a private placement pursuant to Rule 506 of Regulation D of the Securities Act, which terminated on September 2, 2010.
Tax Status
 We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code, beginning with the taxable year ended December 31, 2010. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. So long as we distribute at least 90% of our REIT taxable income, we will continue to qualify for taxation as a REIT and will not be subject to federal corporate income tax. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income. We believe we are organized and operating in such a manner as to continue to qualify to be taxed as a REIT. 
Competition
The office, retail, lodging, industrial and residential real estate markets are highly competitive. We compete with other owners and operators of properties in these same real estate segments. We compete based on a number of factors that include location, rental rates, security, suitability of the property's design to prospective tenants' needs and the manner in which the property is operated and marketed. The number of competing properties in the New York MSA could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties and to acquire and to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. In addition, these same entities seek financing through similar channels. Therefore, we compete for financing in a market where funds for real estate financing may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available. It also may result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
Because we are organized as an umbrella partnership REIT, we believe we are well positioned to offer tax-sensitive sellers an opportunity to contribute their properties to our company in tax-deferred transaction.
 Regulations
 Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity.  We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
 As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future.  However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. We hire third parties to conduct Phase I environmental reviews of the real property that we intend to purchase.
Employees
 We have no direct employees.  The employees of our Advisor and other affiliates perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale brokerage and investor relations services.

3

 We are dependent on these affiliates for services that are essential to us, including the sale of shares of our common stock, asset acquisition decisions, property management and other general administrative responsibilities.  In the event that any of these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources.
Financial Information About Industry Segments
  Our current business consists of owning, managing, operating, leasing, acquiring, investing in and disposing of real estate assets.  All of our consolidated revenues are from our consolidated real estate properties.  We internally evaluate operating performance on an individual property level and view all of our real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC.  We also filed with the SEC our Registration Statement in connection with our current DRIP offering.  You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge.  In addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.americanrealtycap.com.  Access to these filings is free of charge.  We are not incorporating our website or any information from the website into this Form 10-K.
Item 1A. Risk Factors.
The occurrence of any of the risks discussed herein could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our stockholders.
Our growth will partially depend upon our ability to successfully acquire future properties, and we may be unable to enter into and consummate property acquisitions on advantageous terms or our property acquisitions may not perform as we expect.
We compete with many other entities engaged in real estate investment activities particularly for properties located in New York City. The competition may significantly increase the price we pay and reduce the returns that we earn. Our potential acquisition targets may find our competitors to be more attractive because they may have greater resources, may be willing to pay more for the properties or may have a more compatible operating philosophy. In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Because of an increased interest in single-property acquisitions among tax-motivated individual purchasers, we may pay higher prices if we purchase single properties in comparison with portfolio acquisitions. In addition:
•
we may acquire properties that are not accretive and we may not successfully manage and lease those properties to meet our expectations;
•
we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on satisfactory terms;
•
we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
•
agreements for the acquisition of properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate;
•
the process of acquiring or pursuing the acquisition of a new property may divert the attention of our management team from our existing business operations;
•
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
•
market conditions may result in future vacancies and lower-than expected rental rates; and
•
we may acquire properties without recourse, or with only limited recourse, for liabilities, whether known or unknown, such as cleanup of environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

4

We rely on our Advisor to acquire properties on our behalf. Because the management personnel of our Advisor are also engaged in the process of acquiring properties for other entities formed and managed by affiliates of our Advisor, we could suffer delays in locating suitable investments or may miss out on opportunities. If our Advisor is unable to obtain further suitable investments, we will not be able to continue to increase our asset base.
We may be unable to renew leases or re-lease space as leases expire.
If tenants do not renew their leases upon expiration, we may be unable to re-lease the vacated space. Even if the tenants do re-lease the lease or we are able to re-lease to a new tenant, the terms and conditions of the new lease may not be as favorable as the terms and conditions of the expired lease.
In addition, one or more of our properties may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. The resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the cash flow generated from the property which in the case of vacancies, will be reduced.
Our properties may be subject to impairment charges.
We periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property. Impairment charges also indicate a potential permanent adverse change in the fundamental operating characteristics of the impaired property. There is no assurance that these adverse changes will be reversed in the future and the decline in the impaired property’s value could be permanent.
Our real estate investments are relatively illiquid, and therefore we may not be able to dispose of properties when appropriate or on favorable terms.
Investments in real properties are relatively illiquid. We may not be able to quickly alter our portfolio or generate capital by selling properties. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. If we need or desire to sell a property or properties, we cannot predict whether we will be able to do so at a price or on the terms and conditions acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Further, we may be required to invest monies to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct these defects or to make these improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
In addition, applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code") impose restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies. Thus, we may be unable to realize our investment objectives by selling or otherwise disposing of or refinancing a property at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy.
There is no public trading market for our shares and there may never be one.
Our shares are not listed on a national securities exchange and there currently is no established trading market for our shares and no assurance that one will develop. Even though we intend to file an application to list our shares on a national securities exchange, there is no assurance that our shares will in fact be listed or of the price at which the shares would trade or the volume that would develop. Unless our shares are listed, purchasers in so-called secondary market transactions must satisfy applicable suitability and minimum purchase standards and the sale must not violate state securities laws. Those requirements may further limit the ability of stockholders to sell shares.


5

We or our Advisor may be unable to obtain key personnel.
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor, including Nicholas S. Schorsch and Edward M. Weil, Jr. We cannot guarantee that all, or any particular one of these key personnel, will remain affiliated with our Advisor or become our employees if we become self-managed by internalizing the functions performed by our Advisor. We do not separately maintain key person life insurance on Messrs. Schorsch and Weil, or any other person. Failure to retain these key employees or the Advisor's failure to hire and retain highly skilled managerial operational and marketing personnel could have a material adverse effect on our ability to achieve our investment objectives, lessen or eliminate the benefits of becoming self-managed and could result could result in us incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Further, because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities.
We may be unable to pay or maintain distributions from cash available from operations or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions are based principally on cash available from our operations, but we may be required to borrow funds or sell assets to fund distributions. Actual cash available for distributions may vary substantially from estimates. There is no assurance that we will be able to pay or maintain our current level of distributions or that distributions will increase over time. Distributions funded from anything other than cash flow from operations reduces the amount of capital available to invest in properties and other permitted investments.
Our operating results are affected by economic and regulatory changes that have an adverse impact on the real estate market in general. These changes may impact our profitability and ability to realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
•changes in general economic or local conditions;
•changes in supply of or demand for similar or competing properties in an area;
•
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
•
increases in operating expenses;
•
vacancies and inability to lease or sublease space;
•changes in tax, real estate, environmental and zoning laws; and
•periods of high interest rates and tight money supply.
Tenant credit concentrations make us more susceptible to adverse events with respect to those tenants.
As of December 31, 2013, Cravath, Swaine & Moore, LLP, Nomura Holdings America, Inc., Macy's, Inc., RentPath, Inc., and The Segal Company (Eastern States), Inc. represented us 18.2%, 12.4%, 7.4%, 6.2% and 5.8%, respectively, of rental income on a straight-line basis. The financial failure or an adverse change in the tenant's financial condition or credit rating of any of these tenants would, therefore, likely have a material adverse effect on our results of operations and our financial condition and the value of our investments.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could adversely affect our financial condition and ability to pay distributions.
Any of our tenants, or any guarantor of a tenant's lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. A bankruptcy filing by one of our tenants or any guarantor of a tenant's lease obligations would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. There is no assurance the tenant or its trustee would agree to assume the lease. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages and it is unlikely we would receive any payments from the tenant.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available to pay distributions.

6

If a sale-leaseback transaction is re-characterized in a tenant's bankruptcy proceeding, our financial condition and ability to make distributions to you 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 affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result 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, our lessee and we could be treated as co-venturers 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.
We may suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insure against liability claims and provide for the costs of defense Similarly, we may not have adequate coverage against the risk of direct physical damage or to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property. There are also certain types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Also, insuring against potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. These insurance policies may or may not be available, or available at reasonable cost. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. If we suffer a substantial loss, our insurance coverage may not be sufficient to pay the full current market value or current replacement value of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for any distributions.
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. Environmental laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants' operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties, may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance.
State and federal laws in this are constantly evolving, and we may be affected by such changes and be required to comply with new laws, including obtaining environmental assessments of most properties that we acquire; however, we will not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We may be required to spend substantial sums defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims.

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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 enter into other partnerships and co-ownership arrangements (including preferred equity investments). We may not be in a position to exercise sole decision-making authority regarding such joint ventures. 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. These 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 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.
Potential changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease does not meet any of the criteria for a capital lease, the lease is considered an operating lease by the tenant, and the obligation does not appear on the tenant's balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. The Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") conducted a joint project to re-evaluate lease accounting and have jointly released exposure drafts of a proposed accounting model that would significantly change lease accounting. Changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how the real estate leasing business is conducted. For example, if the accounting standards regarding the financial statement classification of operating leases are revised, then companies may be less willing to enter into leases in general or desire to enter into leases with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated. This in turn could make it more difficult for us to enter into leases on terms we find favorable.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.
Our properties will be subject to the Americans with Disabilities Act of 1990 (the "Disabilities Act"). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for "public accommodations" and "commercial facilities" that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act'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. We cannot assure you that we will be able to acquire properties in compliance with the Disabilities Act or allocate the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner.
Our business and operations would suffer in the event of system failures.   
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures.  Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business.  We may also incur additional costs to remedy damages caused by such disruptions.
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationship with our tenants, and private data exposure.  We have implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as our increased awareness of a risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.

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Risks Associated with Real Estate-Related Debt and Other Investments
Any real estate debt security that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to numerous risks including delinquency and foreclosure and risks of loss. Typically, we will not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a real estate debt security secured by an income-producing property depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower.
We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the real estate debt security, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to you. In the event of the bankruptcy of a borrower, the real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed real estate debt security. We also may be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.
In addition, the value of mortgage loan investments is impacted by changes in the value of underlying collateral (if any), interest rates, volatility and prepayment rates, among other things. For example:
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interest rate increases will reduce the amount of payments leaving us with a debt security generating less than market yields and reducing the value of our real estate debt;
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prepayment rates may increase if interest rates decline causing us to reinvest the proceeds in potentially lower yielding investments;
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decreases in the collateral for a non-recourse mortgage loan will likely reduce the value of the investment even if the borrower is current on payments;
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mezzanine loans investments may be even more volatile because, among other things, the senior lender may be able to exercise remedies that protect the senior lenders but that result in us losing our investment.
Any hedging strategies we utilize may not be successful in mitigating our risks.
We may enter into hedging transactions to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets. To the extent that we use derivative financial instruments in connection with these risks, we will be exposed to credit, basis and legal enforceability risks. Derivative financial instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. We may not be able to manage these risks effectively.
We may invest in collateralized mortgage-backed securities, which may increase our exposure to credit and interest rate risk and the risks of the securitization process.
We may invest in CMBS, which may increase our exposure to credit and interest rate risk. We have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with our investments in CMBS. In this context, credit risk is the risk that borrowers will default on the mortgages underlying the CMBS.
Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the CMBS. For example, when interest rates fall, borrowers are more likely to prepay their existing mortgages to take advantage of the lower cost of financing. As prepayments occur, principal is returned to the holders of the CMBS sooner than expected, thereby lowering the effective yield on the investment. On the other hand, when interest rates rise, borrowers are more likely to maintain their existing mortgages. As a result, prepayments decrease, thereby extending the average maturity of the mortgages underlying the CMBS.  
CMBS are also subject to several risks created through the securitization process. Subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes delinquent loans, there is a risk that the interest payment on subordinate CMBS will not be fully paid. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to you will be adversely affected.

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Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
Our Advisor faces conflicts of interest relating to the purchase and leasing of properties, and these conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Affiliates of our Advisor have sponsored and may sponsor one or more other real estate investment programs in the future. We may buy properties at the same time as one or more of the other American Realty Capital-sponsored programs managed by officers and key personnel of our Advisor. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another American Realty Capital-sponsored program. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of managers of other American Realty Capital-sponsored programs will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other American Realty Capital-sponsored programs own properties. In such a case, a conflict could arise in the acquisition or leasing of properties if we and another American Realty Capital-sponsored program were to compete for the same properties or tenants in negotiating leases, or a conflict could arise in connection with the resale of properties if we and another American Realty Capital-sponsored program were to attempt to sell similar properties at the same time. Conflicts of interest also may exist at such time as we or our affiliates managing properties on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances.
Also, we may acquire properties from, or sell properties to, other American Realty Capital-sponsored programs. If one of the other American Realty Capital-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 apply if our Advisor determines to make or purchase mortgage, bridge or mezzanine loans or participations therein on our behalf, since other American Realty Capital-sponsored programs may be competing with us for these investments.
The management of multiple REITs, especially REITs in the development stage, by our executive officers and officers of our Advisor may significantly reduce the amount of time our executive officers and officers of our Advisor are able to spend on activities related to us and may cause other conflicts of interest, which may cause our operating results to suffer.
Our executive officers and officers of our Advisor are part of the senior management or are key personnel of the other American Realty Capital-sponsored REITs and their advisors. Five of the American Realty Capital-sponsored REITs, including ARC Realty Finance Trust, Inc., American Realty Capital Healthcare Trust II, Inc., American Realty Capital Trust V, Inc., Phillips Edison - ARC Grocery Center REIT II, Inc. and American Realty Capital Hospitality Trust, Inc. have registration statements that became effective in the past 18 months and currently are offering securities and none of the American Realty Capital-sponsored REITs are more than five years old. As a result, such REITs will have concurrent or overlapping acquisition, operational and disposition and liquidation phases as us, which may cause conflicts of interest to arise throughout each phase of our company with respect to, among other things, locating and acquiring properties, entering into leases and disposing of properties. The conflicts of interest each of our executive officers and each officer of our Advisor face may cause our operating results and the value of our investments to suffer. Officers of any service provider may face similar conflicts of interest should they be involved with the management of multiple REITs, and especially REITs in the developmental stage.
Our officers and directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to you.
Certain of our executive officers, including Nicholas S. Schorsch, who also serves as the chairman of our board of directors, and Edward M. Weil, Jr., president, chief operating officer and secretary, also are officers of our Advisor, our Property Manager and other affiliated entities, including the advisor and property manager of other REITs sponsored by the American Realty Capital group of companies. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders.
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 business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) our purchase of properties from, or sale of properties, to affiliated entities, (c) the timing and terms of the investment in or sale of an asset, (d) development of our properties by affiliates, (e) investments with affiliates of our Advisor, (f) compensation to our Advisor, and (g) our relationship with our Property Manager.

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Our Advisor and its affiliates face conflicts of interest relating to the incentive fee structure, including New York Recovery Special Limited Partnership, LLC (the "Special Limited Partner"), which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under our advisory agreement and the partnership agreement of our operating partnership, our Advisor and its affiliates, including the Special Limited Partner, are entitled to fees and distributions 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. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor's interests are not wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to fees. In addition, our Advisor's and its affiliates' entitlement to fees and distributions upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle the Advisor to compensation relating to those sales, even if continued ownership of those investments might be in our best long-term interest. The partnership agreement will require us to pay a performance-based termination distribution to the Special Limited Partner if we terminate the advisory agreement prior to the listing of our shares for trading on an exchange or, absent a listing, in respect of its participation in net sales proceeds. To avoid paying this fee, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the distribution the Special Limited Partner at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the distribution to the terminated advisor. Moreover, our Advisor will have the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the terminated distribution, which could have the effect of delaying, deferring or preventing the change of control.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest, and such conflicts may not be resolved in our favor, which could adversely affect the value of your investment.
Proskauer Rose LLP acts as legal counsel to us and also represents our Advisor and some of its affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Proskauer Rose LLP may be precluded from representing any one or all such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Proskauer Rose LLP may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
Risks Related to Corporate Structure
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce your and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, our officers and our Advisor and our Advisor's affiliates and permits us to indemnify our employees and agents. We and our stockholders also may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce your and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents, or our Advisor and its affiliates in some cases.
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our 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 own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or number, whichever is more restrictive) of any class or series of the outstanding shares of our stock. This restriction 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 our assets) that might provide a premium price for holders of our common stock. Similarly, this restriction further limits a stockholder's ability to sell shares.

11

Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit your ability to exit the investment.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
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any person who beneficially owns 10% or more of the voting power of the corporation's outstanding voting stock; or
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an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any affiliate of our Advisor. As a result, our Advisor and any of its affiliates may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholder.
The Maryland Control Share Acquisition Act provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.


12

Stockholders are limited in their ability to sell your shares pursuant to our share repurchase program and may have to hold shares for an indefinite period of time.
Our board of directors may amend the terms of our share repurchase program without stockholder approval. Our board of directors also is free to amend, suspend (in whole or in part) or terminate or reduce or increase the number of shares purchased under the share repurchase program upon 30 days' notice or to reject any request for repurchase. In addition, the share repurchase program includes numerous restrictions that limit a stockholder’s ability to sell shares. Generally, the stockholder must have held the shares for at least one year in order to participate in our share repurchase program. Subject to funds being available, until we establish estimated values for our shares, the purchase price for shares repurchased under our share repurchase program will be based on the amount paid to us for the purchase of common stock (which will equal a percentage ranging from 90% to 97.5% until a stockholder has continuously held his shares for at least four years, at which point such percentage will be 100%). The limits on repurchases under our share repurchase plan might prevent us from accommodating all repurchase requests made in any year. These restrictions severely limit a stockholder’s ability to sell shares. Further, the price at which we repurchase share could be greater than the original purchase price for the shares less commissions and organization and offering costs associated with the shares. Thus, the repurchase could have the effect of diluting remaining stockholders shares.
Existing stockholders’ interests will be diluted if we issue additional shares.
Existing stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently authorizes us to issue 350 million shares of stock, of which 300 million shares are classified as common stock and 50 million are classified as preferred stock. Our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock, or the number of authorized shares of any class or series of stock, or may classify or reclassify any unissued shares into the classes or series of stock without the necessity of obtaining stockholder approval. Except for preferred stock, all our shares may be issued in the discretion of our board of directors. Existing stockholders likely will suffer dilution of their equity investment in us, if we: (a) sell additional shares in the future, including those issued pursuant to our DRIP; (b) sell securities that are convertible into shares of our common stock; (c) issue shares of our common stock in a private offering of securities to institutional investors; (d) issue restricted share awards to our directors; (e) issue shares to our Advisor or its affiliates, successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement or other agreements; or (f) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership units of the OP ("OP Units"). In addition, the partnership agreement for our operating partnership contains provisions that would allow, under certain circumstances, other entities, including other American Realty Capital-sponsored programs, to merge into or cause the exchange or conversion of their interest for OP Units. Because the OP Units may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our operating partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders.
If we issue preferred stock, the holders thereof will, upon liquidation, be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any preferred stock including convertible preferred stock or other securities convertible, exercisable or exchangeable for common stock that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Any preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay distributions to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the value of our common stock and diluting the interest of existing stockholders.
We depend on our operating subsidiary and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of our operating subsidiary and its subsidiaries.
Our only significant asset is and will be the general partnership interests we own in our operating partnership. We conduct, and intend to conduct, all of our business operations through our operating partnership. Accordingly, our only source of cash to pay our obligations is distributions from our operating partnership and its subsidiaries of their net earnings and cash flows. There is no assurance that our operating partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations or otherwise pay any other obligations. Each of our operating partnership's subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from these entities. In addition, because we are a holding company, stockholder claims will be structurally subordinated to all existing and future liabilities and obligations of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy stockholder claims as stockholders only after all of our and our operating partnerships and its subsidiaries liabilities and obligations have been paid in full.


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Office Industry Risks
Declines in overall activity in our markets may adversely affect the performance of our office properties.
Rental income from office properties fluctuates with general market and economic conditions. Our office properties may be adversely affected by market or economic challenges experienced by the U.S. economy or real estate industry as a whole. Because our portfolio includes commercial office buildings located in the New York MSA, if economic conditions there persist or deteriorate, then our results of operations, financial condition and ability to service current debt and to pay distributions to our stockholders may be adversely affected by the following potential conditions, among others:
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that significant job losses in the financial and professional services industries have occurred and may continue to occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;
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that our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from both our existing operations and our acquisition and development activities and increase our future interest expense;
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that reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and
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that reduced liquidity in debt markets and increased credit risk premiums for certain market participants may impair our ability to access capital.
These conditions, which could have a material adverse effect on our results of operations, financial condition and ability to pay distributions, may continue or worsen in the future.
We also may experience a decrease in occupancy and rental rates accompanied by increases in the cost of re-leasing space (including for tenant improvements) and in uncollectible receivables. Early lease terminations may significantly contribute to a decline in occupancy of our office properties and may adversely affect our profitability. While lease termination fees increase current period income, future rental income may be diminished because, during periods in which market rents decline, it is unlikely that we will collect from replacement tenants the full contracted amount which had been payable under the terminated leases.
The loss of anchor tenants for our office properties could adversely affect our profitability.
Our portfolio includes office properties and, as with our retail properties, we are subject to the risk that tenants may be unable to make their lease payments or may decline to extend a lease upon its expiration. A lease termination by a tenant that occupies a large area of space in one of our office properties (commonly referred to as an anchor tenant) could impact leases of other tenants. Other tenants may be entitled to modify the terms of their existing leases in the event of a lease termination by an anchor tenant or the closure of the business of an anchor tenant that leaves its space vacant, even if the anchor tenant continues to pay rent. Any such modifications or conditions could be unfavorable to us as the property owner and could decrease rents or expense recoveries. In the event of default by an anchor tenant, we may experience delays and costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with those parties.
We may be adversely affected by certain trends that reduce demand for office real estate. 
Some businesses are rapidly evolving to increasingly permit employee telecommuting, flexible work schedules, open workplaces and teleconferencing. These practices enable businesses to reduce their space requirements. A continuation of the movement towards these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations, each of which could have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our stockholders.
Retail Industry Risks
Retail conditions may adversely affect our income.
A retail property's revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our common stock may be negatively impacted.
Some of our leases provide for base rent plus contractual base rent increases. A number of our retail leases also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases which contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue which we may derive from percentage rent leases could decline upon a general economic downturn.

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Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space.
In the retail sector, any tenant occupying a large portion of the gross leasable area of a retail center, a tenant of any of the triple-net single-user retail properties outside the primary geographical area of investment, commonly referred to as an anchor tenant, or a tenant that is our anchor tenant at more than one retail center, may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases permit cancellation or rent reduction if another tenant's lease is terminated. We may own properties where the tenants may have rights to terminate their leases if certain other tenants are no longer open for business. These "co-tenancy" provisions also may exist in some leases where we own a portion of a retail property and one or more of the anchor tenants leases space in that portion of the center not owned or controlled by us. If such tenants were to vacate their space, tenants with co-tenancy provisions would have the right to terminate their leases with us or seek a rent reduction from us. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases at the retail center. If we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to re-model the space to be able to re-lease the space to more than one tenant.
Competition with other retail channels may reduce our profitability and the return on your investment.
Our retail tenants face potentially changing consumer preferences and increasing competition from other forms of retailing, such as discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues and other forms of direct marketing, discount shopping clubs, internet websites and telemarketing. Other retail centers within the market area of our properties may compete with our properties for customers, affecting their tenants' cash flows and thus affecting their ability to pay rent. In addition, some of our tenants' rent payments may be based on the amount of sales revenue that they generate. If these tenants experience competition, the amount of their rent may decrease and our cash flow will decrease.
Lodging Industry Risks
The hotel industry is very competitive and seasonal and has been affected by economic slowdowns, terrorist attacks and other world events.
The hotel industry is intensely competitive and seasonal in nature and has been affected by the recent economic slowdown, terrorist attacks, military activity in the Middle East, natural disasters and other world events impacting the global economy and the travel and hotel industries, and, as a result, our lodging properties may be adversely affected. Because the hotel industry is intensely competitive, our third-party management company and our third-party tenants may be unable to compete successfully or if our competitors' marketing strategies are more effective, our results of operations, financial condition, and cash flows including our ability to service debt and to make distributions to our stockholders, may be adversely affected. In particular, as a result of terrorist attacks around the world, the wars in Iraq and Afghanistan and the effects of the economic recession, subsequent to 2001 the lodging industry experienced a significant decline in business caused by a reduction in both business and leisure travel. Our business and lodging properties may continue to be affected by such events, including our hotel occupancy levels and average daily rates, and, as a result, our revenues may decrease or not increase to levels we expect.
Because we do not directly operate our lodging properties, our revenues depend on the ability of our third-party management company and our-third party tenants to compete successfully with other hotels in the New York MSA. Some of our competitors have substantially greater marketing and financial resources than we do. If our third-party management company and our third-party tenants are unable to compete successfully, including competition from Internet intermediaries, or if our competitors' marketing strategies are effective, our results of operations, financial condition, ability to service debt and ability to make distributions to our stockholders may be adversely affected.
In addition, the seasonality of the hotel industry can be expected to cause quarterly fluctuations in our revenues and also may be adversely affected by factors outside our control, such as extreme or unexpectedly mild weather conditions or natural disasters, terrorist attacks or alerts, outbreaks of contagious diseases, airline strikes, economic factors and other considerations affecting travel. To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may attempt to borrow in order to make distributions to our stockholders or be required to reduce other expenditures or distributions to stockholders.

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Our profitability may be adversely affected by unstable market and business conditions and insufficient demand for lodging due to reduced business and leisure travel.
Our hotels will be subject to all the risks common to the hotel industry and subject to market conditions that affect all hotel properties. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:
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increases in supply of hotel rooms that exceed increases in demand;
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increases in energy costs and other travel expenses that reduce business and leisure travel;
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reduced business and leisure travel due to continued geo-political uncertainty, including terrorism;
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adverse effects of declines in general and local economic activity;
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adverse effects of a downturn in the hotel industry; and
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risks generally associated with the ownership of hotels and real estate, as discussed below.
We do not have control over the market and business conditions that affect the value of our lodging properties, and adverse changes with respect to such conditions could have an adverse effect on our results of operations, financial condition and cash flows. Hotel properties are subject to varying degrees of risk generally common to the ownership of hotels, many of which are beyond our control, including the following:
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increased competition from other existing hotels in our markets;
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new hotels entering our markets, which may adversely affect the occupancy levels and average daily rates of our lodging properties;
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declines in business and leisure travel;
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increases in energy costs, increased threat of terrorism, terrorist events, airline strikes or other factors that may affect travel patterns and reduce the number of business and leisure travelers;
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increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
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changes in, and the related costs of compliance with, governmental laws and regulations, fiscal policies and zoning ordinances; and
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adverse effects of international, national, regional and local economic and market conditions.
Adverse changes in any or all these factors could have an adverse effect on our results of operations, financial condition and cash flows, thereby adversely impacting our ability to service debt and to make distributions to our stockholders.
As a REIT, we cannot directly operate our lodging properties, which could adversely affect our results of operations, financial condition and our cash flows, which could impact our ability to service debt and make distributions to our stockholders.
We cannot and do not directly operate our lodging properties and, as a result, our results of operations, financial position, ability to service debt and our ability to make distributions to stockholders are dependent on the ability of our third-party management companies and our tenants to operate our hotel properties successfully. In order for us to satisfy certain REIT qualification rules, we cannot directly operate any lodging properties or actively participate in the decisions affecting their daily operations. Instead, through a taxable REIT subsidiary, or TRS, we must enter into management agreements with a third-party management company, or we must lease our lodging properties to third-party tenants on a triple-net lease basis. We cannot and do not control this third-party management company or the tenants who operate and are responsible for maintenance and other day-to-day management of our lodging properties, including, but not limited to, the implementation of significant operating decisions. Thus, even if we believe our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory operating results, we may not be able to require the third-party management company or the tenants to change their method of operation of our lodging properties. Our results of operations, financial position, cash flows and our ability to service debt and to make distributions to stockholders are, therefore, dependent on the ability of our third-party management company and tenants to operate our lodging properties successfully. Any negative publicity or other adverse developments that affect that operator and/or its affiliated brands generally may adversely affect our results of operations, financial condition, and consequently cash flows thereby impacting our ability to service debt, and to make distributions to our stockholders. There can be no assurance that our affiliate will continue to manage any lodging properties we acquire.

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We will rely on a third-party hotel management company to establish and maintain adequate internal controls over financial reporting at our lodging properties. We do not, however, control the design or implementation of or changes to internal controls at any of our lodging properties. Thus, even if we believe that our lodging properties are being operated without effective internal controls, we may not be able to require the third-party management company to change its internal control structure. This could require us to implement extensive and possibly inefficient controls at a parent level in an attempt to mitigate such deficiencies. If such controls are not effective, the accuracy of the results of our operations that we report could be affected. Accordingly, our ability to conclude that, as a company, our internal controls are effective is significantly dependent upon the effectiveness of internal controls that our third-party management company will implement at our lodging properties. It is possible that we could have a significant deficiency or material weakness as a result of the ineffectiveness of the internal controls at one or more of our lodging properties.
If we replace a third-party management company or tenant, we may be required by the terms of the relevant management agreement or lease to pay substantial termination fees, and we may experience significant disruptions at the affected lodging properties. We may not be able to make arrangements with a third-party management company or tenants with substantial prior lodging experience in the future. If we experience such disruptions, it may adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and to make distributions to our stockholders.
Our use of the taxable REIT subsidiary structure will increase our expenses.
A taxable REIT subsidiary structure will subject us to the risk of increased lodging operating expenses. The performance of our taxable REIT subsidiaries will be based on the operations of our lodging properties. Our operating risks will include not only changes in hotel revenues and changes to our taxable REIT subsidiaries’ ability to pay the rent due to us under the leases, but also increased hotel operating expenses, including, but not limited to, the following cost elements:
• wage and benefit costs;
• repair and maintenance expenses;
• energy costs;
• property taxes;
• insurance costs; and
• other operating expenses.
Any increases in one or more these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.
Failure to maintain franchise licenses could decrease our revenues.
The inability to maintain franchise licenses could decrease our revenues. Maintenance of franchise licenses for our lodging properties is subject to maintaining our franchisor’s operating standards and other terms and conditions. Franchisors periodically inspect lodging properties to ensure that such lodging properties are maintained in accordance with their standards. Failure to maintain our lodging properties in accordance with these standards or comply with other terms and conditions of the applicable franchise agreement could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination fee. As a condition to the maintenance of a franchise license, our franchisor could also require us to make capital expenditures, even if we do not believe the capital improvements are necessary, desirable, or likely to result in an acceptable return on our investment. We may risk losing a franchise license if we do not make franchisor-required capital expenditures.
If our franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise or to operate the lodging property without a franchise license. The loss of a franchise license could materially and adversely affect the operations or the underlying value of the lodging property because of the loss associated with the brand recognition and/or the marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for one or more lodging properties could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and make distributions to our stockholders.
There are risks associated with employing hotel employees.
We will generally be subject to risks associated with the employment of hotel employees. Any lodging properties we acquire will be leased to one or more taxable REIT subsidiaries and be subject to management agreements with our property manager or a third-party property manager to operate the properties that we do not lease to a third party under a net lease. Hotel operating revenues and expenses for these properties will be included in our consolidated results of operations. As a result, although we do not directly employ or manage the labor force at our lodging properties, we are subject to many of the costs and risks generally associated with the hotel labor force. Our property manager or a third-party property manager will be responsible for hiring and maintaining the labor force at each of our lodging properties and for establishing and maintaining the

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appropriate processes and controls over such activities. From time to time, the operations of our lodging properties may be disrupted through strikes, public demonstrations or other labor actions and related publicity. We may also incur increased legal costs and indirect labor costs as a result of the aforementioned disruptions, or contract disputes or other events. A third-party property manager may be targeted by union actions or adversely impacted by the disruption caused by organizing activities. Significant adverse disruptions caused by union activities or increased costs affiliated with such activities could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and make distributions to our stockholders.
The expanding use of Internet travel websites by customers can adversely affect our profitability.
The increasing use of Internet travel intermediaries by consumers may experience fluctuations in operating performance during the year and otherwise adversely affect our profitability and cash flows. Our property manager and any third-party property manager will rely upon Internet travel intermediaries such as Travelocity.com, Expedia.com, Orbitz.com, Hotels.com and Priceline.com to generate demand for our lodging properties. As Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our property manager or any third-party property manager. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as ‘‘three-star downtown hotel’’) at the expense of brand identification. Consumers may eventually develop brand loyalties to their reservations system rather than to our property manager or any third-party property manager and/or our brands, which could have an adverse effect on our business because we will rely heavily on brand identification. If the amount of sales made through Internet intermediaries increases significantly and our property manager or a third-party property manager fails to appropriately price room inventory in a manner that maximizes the opportunity for enhanced profit margins, room revenues may flatten or decrease and our profitability may be adversely affected.
Residential Industry Risks
The short-term nature of our residential leases may adversely impact our income.
If our residents decide not to renew their leases upon expiration, we may not be able to relet their units. Because substantially all our residential leases will be for apartments, they generally will be for terms of no more than one or two years. If we are unable to promptly renew the leases or relet the units then our results of operations and financial condition will be adversely affected. Certain significant expenditures associated with each equity investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances result in a reduction in rental income.
An economic downturn could adversely affect the residential industry and may affect operations for the residential properties that we acquire.
As a result of the effects of an economic downturn, including increased unemployment rates, the residential industry may experience a significant decline in business caused by a reduction in overall renters. The current economic downturn and increase in unemployment rates may have an adverse effect on our operations if the tenants occupying the residential properties we acquire cease making rent payments to us. Moreover, low residential mortgage interest rates could accompany an economic downturn and encourage potential renters to purchase residences rather than lease them. Our residential properties may experience declines in occupancy rate due to any such decline in residential mortgage interest rates.
Industrial Industry Risks
Potential liability as the result of, and the cost of compliance with, environmental matters is greater if we invest in industrial properties or lease our properties to tenants that engage in industrial activities.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.
We may invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties are more likely to contain, or may have contained, 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.
Leasing properties to tenants that engage in industrial, manufacturing and commercial activities will cause us to be subject to increased risk of liabilities under environmental laws and regulations. The presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.

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The demand for and profitability of our industrial properties may be adversely affected by fluctuations in manufacturing activity in the United States.
Our industrial 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.
Our portfolio may be negatively impacted by a high concentration of industrial tenants in a single industry.
If we invest in industrial properties, we may lease properties to tenants that engage in similar industrial, manufacturing and commercial activities. A high concentration of tenants in a specific industry would magnify the adverse impact that a downturn in such industry might otherwise have to our portfolio.
Risks Associated with Debt Financing and Investments
We have broad authority to incur debt, and high levels of debt could hinder our ability to make distributions and could decrease the value of your investment.
We expect that in most instances, we will acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
Our Advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. There is no limitation on the amount we may borrow against any single improved property. Under our charter, our borrowings may not exceed 300% of our total "net assets" (as defined in our charter and in accordance with the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is our intention to limit our borrowings to 40% to 50% of the aggregate fair market value of our assets (calculated after the close of our offering and once we have invested substantially all the proceeds of our offering), unless excess borrowing is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for such excess borrowing. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under the NASAA REIT Guidelines. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. If we obtain independent director approval and borrow in excess of these limitation, our debt levels will be higher until we have invested most of our capital. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a 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 U.S. federal income tax purposes, a foreclosure of any of our properties would 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 would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide 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 mortgages contain 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 which could result in our losing our REIT status and would result in a decrease in the value of your investment.


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Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, a lender could 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, discontinue insurance coverage or replace our Advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay 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 that may not permit realization of the maximum return on such investments.
U.S. Federal Income Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations.
We have elected to be taxed as a REIT commencing with our taxable year ended December 31, 2011 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to qualify or remain qualified as a REIT is not binding on the Internal Revenue Service "IRS") and is not a guarantee that we will qualify, or continue to qualify, as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can qualify or remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to continue to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even if we qualify as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for other purposes.
Even if we qualify and maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are "dealer" properties sold by a REIT (a "prohibited transaction" under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our operating partnership or at the level of the other companies through which we indirectly own our assets, such as our TRSs, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for other purposes.

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To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4%nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. It is possible that we might not always be able to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT.
Certain of our business activities are potentially subject to the prohibited transaction tax.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including our operating partnership, but generally excluding TRSs, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a TRS (but such TRS would incur corporate rate income taxes with respect to any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or indirectly through any subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our operating partnership, but generally excluding TRSs will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our TRSs are subject to corporate-level taxes and our dealings with our TRSs may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the gross value of a REIT's assets may consist of stock or securities of one or more TRSs.
A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. We may operate our "qualified assets" through one or more TRSs that lease such properties from us. We may use our TRSs generally for other activities as well, such as to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A TRS will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, the rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.
If our leases to our TRSs are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as "rents from real property." Rents paid to our operating partnership by our TRSs pursuant to the lease of our "qualified assets" will constitute substantially all of our gross income. In order for such rent to qualify as "rents from real property" for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.

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If our operating partnership failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
We intend to maintain the status of our operating partnership as a partnership or a disregarded entity for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our operating partnership as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our operating partnership could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on your investment. In addition, if any of the partnerships or limited liability companies through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
Our investments in certain debt instruments may cause us to recognize "phantom income" for U.S. federal income tax purposes even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount ("OID") or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets referred to as "phantom income." In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms, (c) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (d) make a taxable distribution of our shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the loan must be secured by real property. We may acquire mezzanine loans that are not directly secured by real property but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests, we may be disqualified as a REIT.

22

We may choose to make distributions in our own stock, in which case the stockholder may be required to pay U.S. federal income taxes in excess of the cash dividends received by them.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed.
Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce your anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our TRSs, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder's investment in our common stock.
Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
If our stockholders participate in our DRIP, they will be deemed to have received, and for U.S. federal 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. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the shares of common stock received.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates 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 shares of REITs, including our common stock. Tax rates could be changed in future legislation.

23

If we were considered to actually or constructively pay a "preferential dividend" to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be "preferential dividends." A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS's position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan inadvertently causing a greater than 5% discount on the price of such stock purchased). While we believe that our operations have been structured in such a manner that we will not be treated as inadvertently paying preferential dividends, there is no de minimis exception with respect to preferential dividends. Therefore, if the IRS were to take the position that we inadvertently paid a preferential dividend, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute "gross income" for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely 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 TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Complying with REIT requirements may force us to forego and/or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets) and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements 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 and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions 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. While we have elected to be taxed as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders.

24

We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel's tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
If we enter into sale-leaseback transactions, we will use commercially reasonable efforts to structure any such sale- leaseback transaction such that the lease will be characterized as a "true lease" for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. The IRS may, however, challenge the characterization. In the event that any sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to the property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification "asset tests" or "income tests" and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.

25

Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as "effectively connected" with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") capital gain distributions attributable to sales or exchanges of "U.S. real property interests" ("USRPIs") generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business. However, a capital gain dividend will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (b) the non-U.S. stockholder does not own more than 5% of the class of our stock at any time during the one- year period ending on the date the distribution is received. We do not anticipate that our shares will be "regularly traded" on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long as we are a "domestically-controlled qualified investment entity". A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT's stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure you, that we will be a domestically- controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if (a) our common stock is "regularly traded," as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 5% or less of our common stock at any time during the five-year period ending on the date of the sale.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax- exempt investors.
If (a) we are a "pension-held REIT," (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code
Item 1B. Unresolved Staff Comments.
Not applicable.

26

Item 2. Properties
General
As of December 31, 2013, we owned 23 properties and real estate-related assets located in the New York MSA. The following table presents certain additional information about the properties and real estate-related assets we owned at December 31, 2013:
Portfolio Property
 
Acquisition
Date
 
Number of
Properties
 
Rentable
Square Feet
 
Occupancy
 
Average Remaining
Lease Term (1)
 
 
 
 
 
 
 
 
 
 
 
Interior Design Building
 
Jun. 2010
 
1
 
81,082

 
100.0%
 
3.7
367 - 369 Bleecker Street
 
Dec. 2010
 
1
 
4,726

 
100.0%
 
6.9
382 - 384 Bleecker Street
 
Dec. 2010
 
1
 
4,206

 
100.0%
 
6.5
387 Bleecker Street
 
Dec. 2010
 
1
 
792

 
100.0%
 
2.4
Foot Locker
 
Apr. 2011
 
1
 
6,118

 
100.0%
 
12.1
Regal Parking Garage
 
Jun. 2011
 
1
 
12,856

 
100.0%
 
20.6
Duane Reade
 
Oct. 2011
 
1
 
9,767

 
100.0%
 
14.8
416 Washington Street
 
Nov. 2011
 
1
 
9,001

 
57.4%
 
3.6
One Jackson Square
 
Nov. 2011
 
1
 
8,392

 
100.0%
 
13.4
350 West 42nd Street
 
Mar. 2012
 
1
 
42,774

 
100.0%
 
12.7
1100 Kings Highway
 
May 2012
 
1
 
61,318

 
100.0%
 
7.8
163 Washington Avenue Apartments
 
Sep. 2012
 
1
 
41,613

 
93.9%
 
1.4
1623 Kings Highway
 
Oct. 2012
 
1
 
19,960

 
100.0%
 
9.1
256 West 38th Street
 
Dec. 2012
 
1
 
117,902

 
94.7%
 
7.8
229 West 36th Street
 
Dec. 2012
 
1
 
148,894

 
100.0%
 
11.4
350 Bleecker Street
 
Dec. 2012
 
1
 
14,511

 
100.0%
 
11.9
218 West 18th Street
 
Mar. 2013
 
1
 
165,670

 
83.7%
 
9.8
50 Varick Street
 
Jul. 2013
 
1
 
158,573

 
100.0%
 
14.5
333 West 34th Street
 
Aug. 2013
 
1
 
346,728

 
100.0%
 
9.5
Worldwide Plaza (2)
 
Oct. 2013
 
1
 
1,005,178

 
91.2%
 
13.6
Viceroy Hotel
 
Nov. 2013
 
1
 
128,612

 
N/A
 
N/A
1440 Broadway
 
Dec. 2013
 
1
 
755,679

 
93.6%
 
6.0
Total properties, December 31, 2013
 
22
 
3,144,352

 
94.2%
 
10.2
123 William Street preferred equity investment
 
Oct. 2013
 
1
 


 
 
 
 
Total portfolio and other real estate-related assets, December 31, 2013
 
23
 
 
 
 
 
 
______________________________
(1)
Average remaining lease term in years as of December 31, 2013, calculated on a weighted-average basis.
(2)
Rentable square feet reflects our 48.9% pro-rata share of the building.

27

Future Minimum Lease Payments
The following table presents future minimum base rent payments, on a cash basis, due to us over the next ten years and thereafter at the properties we owned as of December 31, 2013, excluding our unconsolidated joint venture. These amounts exclude contingent rental payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum Base Rent Payments
2014
 
$
88,340

2015
 
86,551

2016
 
73,600

2017
 
71,003

2018
 
68,327

2019
 
67,413

2020
 
66,781

2021
 
63,773

2022
 
58,755

2023
 
53,712

Thereafter
 
136,698

Total
 
$
834,953

Future Lease Expirations Table
The following is a summary of lease expirations for the next ten years at the properties we owned as of December 31, 2013:
Year of Expiration
 
Number of Leases Expiring
 
Annualized Rental Income (1)
 
Annualized Rental Income as a Percentage of the Total Portfolio
 
Leased Rentable Square Feet
 
Percent of Portfolio Leased Rentable Square Feet Expiring
 
 
 
 
(In thousands)
 
 
 
 
 
 
2014
 
52
 
$
4,032

 
2.6%
 
100,681

 
3.6%
2015
 
13
 
15,341

 
10.0%
 
341,994

 
12.1%
2016
 
15
 
5,547

 
3.6%
 
116,962

 
4.1%
2017
 
17
 
6,779

 
4.4%
 
111,728

 
3.9%
2018
 
9
 
1,400

 
0.9%
 
36,217

 
1.3%
2019
 
3
 
721

 
0.5%
 
24,725

 
0.9%
2020
 
8
 
4,965

 
3.2%
 
82,380

 
2.9%
2021
 
9
 
2,387

 
1.6%
 
41,162

 
1.5%
2022
 
13
 
8,505

 
5.6%
 
164,983

 
5.8%
2023
 
6
 
4,627

 
3.0%
 
104,652

 
3.7%
Total
 
145
 
$
54,304

 
35.4%
 
1,125,484

 
39.8%
_____________________________
(1)
Annualized rental income as of December 31, 2013 for the leases in place in the property portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.

28

Tenant Concentration
The following table lists tenants whose rented square footage is greater than 10% of the total portfolio rentable square footage as of December 31, 2013:
Tenant 
 
Rented Square
Feet (1)
 
Rented Square Feet
as a % of
Total
Portfolio
 
Lease 
Expiration
 

Remaining
Lease
Term (2)
 
Renewal
Options
 
Annualized
Rental
Income (1) (3)
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Nomura Holdings America, Inc.
 
400,934

 
14.1%
 
Sep. 2033
 
19.8

 
(4) 
 
$
18,981

Cravath, Swaine & Moore, LLP
 
301,779

 
10.6%
 
Aug. 2024
 
10.7

 
None
 
$
27,938

________________________________
(1)
Rentable square feet and annualized rental income reflect our 48.9% pro-rata share of the building.
(2)
Remaining lease term in years as of December 31, 2013.
(3)
Annualized rental income as of December 31, 2013 for the in-place leases in the property portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
(4)
Nomura Holdings America, Inc. has up to four options to renew its lease. The first two options are for renewal terms of five or ten years each, whereas options two and three are for five years each. In total, the renewal options are designed to allow Nomura Holdings America, Inc. up to 20 years of extended term.

Significant Portfolio Properties
The rentable square feet or annualized rental income of Worldwide Plaza and the properties located at 1440 Broadway and 333 West 34th Street represent a significant portion of our total portfolio. The tenant concentrations of Worldwide Plaza and the properties located at 1440 Broadway and 333 West 34th Street are summarized below:
Worldwide Plaza
The following table lists tenants in Worldwide Plaza whose rented square footage is greater than 10% of the total rentable square footage of Worldwide Plaza as of December 31, 2013:
Tenant
 
Rented Square
Feet (1)
 
Rented Square Feet as a % of Total Worldwide Plaza
 
Lease Expiration
 
 Remaining Lease Term(2)
 
Renewal Options
 
Annualized Rental Income(1) (3)
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Nomura Holdings America, Inc.
 
400,934
 
39.9%
 
Sep. 2033
 
19.8

 
(4) 
 
$
18,981

Cravath, Swaine & Moore, LLP
 
301,779
 
30.0%
 
Aug. 2024
 
10.7

 
None
 
$
27,938

_____________________________
(1)
Rentable square feet and annualized rental income reflect our 48.9% pro-rata share of the building.
(2)
Remaining lease term in years as of December 31, 2013.
(3)
Annualized rental income as of December 31, 2013 for the in-place leases in the property portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
(4)
Nomura Holdings America, Inc. has up to four options to renew its lease. The first two options are for renewal terms of five or ten years each, whereas options two and three are for five years each. In total, the renewal options are designed to allow Nomura Holdings America, Inc. up to 20 years of extended term.

29

1440 Broadway
The following table lists tenants at 1440 Broadway whose rented square footage is greater than 10% of the total rentable square footage of 1440 Broadway as of December 31, 2013:
Tenant
 
Rented Square Feet
 
Rented Square Feet as a % of Total 1440 Broadway
 
Lease Expiration
 
 Remaining Lease Term(1)
 
Renewal Options
 
Annualized Rental Income(2)
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Macy's Inc.
 
203,196
 
26.9%
 
Jan. 2024
 
10.1

 
1 - 5 or 10 yr.
 
$
11,308

RentPath, Inc.
 
170,734
 
22.6%
 
Oct. 2015
 
1.8

 
None
 
$
9,460

_____________________________
(1)
Remaining lease term in years as of December 31, 2013.
(2)
Annualized rental income as of December 31, 2013 for the in-place leases in the property portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
333 West 34th Street
The following table lists tenants at 333 West 34th Street whose rented square footage is greater than 10% of the total rentable square footage of 333 West 34th Street as of December 31, 2013:
Tenant
 
Rented Square Feet
 
Rented Square Feet as a % of Total 333 West 34th Street
 
Lease Expiration
 
 Remaining Lease Term(1)
 
Renewal Options
 
Annualized Rental Income(2)
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
The Segal Company (Eastern States) Inc.
 
144,307
(3) 
41.6%
 
Feb. 2025
 
11.2

 
1 - 5 or 10 yr.
 
$
8,891

Metropolitan Transportation Authority
 
130,443
(4) 
37.6%
 
Jan. 2021
(5) 
1.1

 
2 - 5 yr.
 
$
3,371

Godiva Chocolatier, Inc.
 
42,290
 
12.2%
 
Feb. 2027
 
13.2

 
1 - 5 yr.
 
$
1,685

_____________________________
(1)
Remaining lease term in years as of December 31, 2013.
(2)
Annualized rental income as of December 31, 2013 for the in-place leases in the property portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
(3)
The Metropolitan Transportation Authority is contractually obligated to surrender 17,503 rentable square feet of the 5th floor to The Segal Company (Eastern States), Inc. in 2015.
(4)
Includes space required to be rented of 17,503 rentable square feet to be surrendered to the Segal Company (Eastern States), Inc. in 2015.
(5)
Early termination at the tenant's option available in January 2015.

30

Property Financing
The Company's mortgage notes payable as of December 31, 2013 and December 31, 2012 consist of the following:
 
 
 
 
Outstanding Loan Amount
 
 
 
 
 
 
Portfolio
 
Encumbered
Properties
 
December 31, 2013
 
December 31, 2012
 
Effective
Interest Rate
 
Interest Rate
 
Maturity
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Interior Design Building
 
1
 
$
20,582

 
$
20,949

 
4.4
%
 
Fixed
 
Dec. 2021
Bleecker Street
 
3
 
21,300

 
21,300

 
4.3
%
 
Fixed
 
Dec. 2015
Foot Locker
 
1
 
3,250

 
3,250

 
4.6
%
 
Fixed
 
Jun. 2016
Regal Parking Garage
 
1
 
3,000

 
3,000

 
4.5
%
 
Fixed
 
Jul. 2016
Duane Reed
 
1
 
8,400

 
8,400

 
3.6
%
 
Fixed
 
Nov. 2016
Washington Street Portfolio
 
1
 
4,831

 
4,917

 
4.4
%
 
Fixed
 
Dec. 2021
One Jackson Square
 
1
 
13,000

 
13,000

 
3.4
%
(1) 
Fixed
 
Dec. 2016
350 West 42nd Street
 
1
 
11,365

 
11,365

 
3.4
%
 
Fixed
 
Aug. 2017
1100 Kings Highway
 
1
 
20,200

 
20,200

 
3.4
%
(1) 
Fixed
 
Aug. 2017
1623 Kings Highway
 
1
 
7,288

 
7,288

 
3.3
%
(1) 
Fixed
 
Nov. 2017
256 West 38th Street
 
1
 
24,500

 
24,500

 
3.1
%
(1) 
Fixed
 
Dec. 2017
256 West 38th Street
 
—
 
—

 
2,400

 
5.3
%
(2) 
Variable
 
Dec. 2013
229 West 36th Street
 
1
 
35,000

 
35,000

 
2.9
%
(1) 
Fixed
 
Dec. 2017
229 West 36th Street
 
—
 
—

 
10,000

 
5.3
%
(2) 
Variable
 
Dec. 2013
 
 
14
 
$
172,716

 
$
185,569

 
3.6
%
(3) 
 
 
 
______________________
(1)
Fixed through an interest rate swap agreement.
(2)
These variable rate mezzanine loans were repaid in full in January 2013.
(3)
Calculated on a weighted average basis for all mortgages outstanding as of December 31, 2013.
Item 3. Legal Proceedings.
On October 15, 2013, RXR WWP Owner LLC (“RXR”) filed a lawsuit in the Supreme Court of the State of New York, New York County, against American Realty Capital Properties, Inc. and us (collectively, the “ARC Parties”) alleging that, under an agreement that RXR entered into with the co-defendant WWP Sponsor LLC dated May 30, 2013 (the “May 30 Agreement”), RXR was entitled to acquire a 48.9% equity interest in the indirect owner of Worldwide Plaza. RXR claimed that the ARC Parties are liable for breach of a confidentiality agreement, tortious interference with the May 30 Agreement and tortious interference with prospective business relations. RXR moved for a preliminary injunction barring the defendants from consummating the Worldwide Plaza transaction. On October 30, 2013, the Court denied RXR’s preliminary injunction motion, and the transaction was thereafter consummated. On November 21, 2013 RXR filed an amended complaint adding the ARC Parties as parties to a permanent injunction claim that was previously asserted solely against the ARC Parties’ co-defendants. The ARC Parties filed a motion to dismiss the amended complaint on December 11, 2013. The motion will be fully briefed on February 28, 2014. RXR seeks damages against the ARC Parties of no less than $200.0 million. We believe that such lawsuit is without merit, but the ultimate outcome of such matter cannot be predicted. While losses and legal expenses may be incurred, an estimate of the range of potential losses cannot be made, and no provisions for such losses have been recorded in the accompanying consolidated financial statements for the year ended December 31, 2013. As of December 31, 2013, there were no other material legal proceedings pending or known to be contemplated against us.
Item 4. Mine Safety Disclosure.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our shares are not listed on a national securities exchange and no established market currently exists for our shares of common stock although our board has announced that it intends to file an application to list our common stock on a national securities exchange. There is no assurance that the shares will, in fact, be listed.



31

Holders
As of February 14, 2014, we had 175.1 million shares of common stock outstanding held by a total of 38,168 stockholders.
Distributions
We have elected to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2010.  As a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders annually.  The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, and annual distribution requirements needed to qualify and maintain our status as a REIT under the Code.
On September 22, 2010, our board of directors approved, and we declared, a distribution rate equal to a 6.05% annualized rate based on the common share price of $10.00, or $0.605 per share per annum, commencing December 1, 2010.  The dividend is calculated based on stockholders of record each day during the applicable period at a rate of $0.00165753424 per day. From a tax perspective, of the amounts distributed during the year ended December 31, 2013, 93.1%, or $0.563 per share per annum and 6.9%, or $0.042 per share per annum, represented a return of capital and ordinary dividends, respectively. During the year ended December 31, 2012, 83.8%, or $0.51 per share per annum, and 16.2%, or $0.095 per share per annum, represented a return of capital and ordinary dividends, respectively.
Our distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds.  Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured. The first distribution was paid in January 2011. The following table reflects distributions paid in cash and through the DRIP to common stockholders, excluding distributions related to unvested restricted shares and Class B units, during the years ended December 31, 2013 and 2012:
(In thousands)
Distributions
Paid in Cash
 
Distributions Paid Through the DRIP
 
Total Distributions
Paid
 
Total Distributions Declared
2013:
 
 
 
 
 
 
 
1st Quarter 2013
$
1,592

 
$
1,502

 
$
3,094

 
$
3,472

2nd Quarter 2013
2,624

 
2,439

 
5,063

 
6,388

3rd Quarter 2013
5,162

 
5,383

 
10,545

 
12,861

4th Quarter 2013
8,412

 
9,528

 
17,940

 
21,678

Total 2013
$
17,790

 
$
18,852

 
$
36,642

 
$
44,399

 
 
 
 
 
 
 
 
2012:
 
 
 
 
 
 
 
1st Quarter 2012
$
523

 
$
467

 
$
990

 
$
1,136

2nd Quarter 2012
750

 
684

 
1,434

 
1,584

3rd Quarter 2012
974

 
932

 
1,906

 
2,055

4th Quarter 2012
1,198

 
1,175

 
2,373

 
2,616

Total 2012
$
3,445

 
$
3,258

 
$
6,703

 
$
7,391


32

We, our board of directors and Advisor share a similar philosophy with respect to paying our distributions. The distributions should principally be derived from cash flows generated from real estate operations. In order to improve our operating cash flows and our ability to pay distributions from operating cash flows, our related party Advisor and Property Manager agreed to waive certain fees including asset management and property management fees. Prior to July 1, 2012 we paid the Advisor a monthly asset management fee equal to one-twelfth of 0.75% of the aggregate contract purchase price of all real estate investments. Effective July 1, 2012, we issue to the Advisor restricted performance based Class B units for asset management fees, which will be forfeited immediately if certain conditions occur. During the years ended December 31, 2013 and 2012, the board of directors approved the issuance of 454,739 Class B units to the Advisor in connection with this arrangement. We also pay our Property Manager a property management fee of up to 4% per annum of the gross revenues of properties managed. Prior to July 1, 2012, the Advisor elected to waive the asset management fees. The Property Manager elected to waive the property management fees for both the years ended December 31, 2013 and 2012. In aggregate, $0.8 million and $1.0 million of fees were waived during the years ended December 31, 2013 and 2012, respectively. The Advisor and Property Manager will determine if a portion of property management fees will be waived in subsequent periods on a quarter-to-quarter basis. The fees that were waived are not deferrals and accordingly, will not be paid by us. Because the Advisor waived certain fees that we owed, cash flow from operations that would have been paid to the Advisor and the Property Manager was available to pay distributions to our stockholders. In certain instances, to improve our working capital, the Advisor may elect to absorb a portion of our costs that would otherwise have been paid by us. During the years ended December 31, 2013 and 2012, the Advisor absorbed $1.5 million and $1.0 million, respectively.
During the year ended December 31, 2013, cash used to pay our distributions was generated mainly from funds received from cash flows provided by operations, proceeds from common stock and proceeds from common stock issued under the DRIP. As additional capital is raised and we continue to build our portfolio of investments, we expect that we will use funds received from operating activities to pay a greater proportion of our distributions and will be able to reduce and in the future eliminate the use of funds from the sale of common stock to pay distributions. As the cash flows from operations become more significant our Property Manager may discontinue its past practice of forgiving fees and providing contributions and may charge the full fee owed to it in accordance with our agreements.  Distribution payments are dependent on the availability of funds.  Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share-Based Compensation Plans
We have a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to our independent directors, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan to the independent directors will be determined in accordance with applicable rules and regulations including, if our shares are listed the applicable rules and regulations of the national securities exchange on which the shares are listed.
Notwithstanding any other provisions of our Plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Code. The following table sets forth information regarding securities authorized for issuance under our stock option plan as of December 31, 2013:
Plan Category
 
Number of Securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants
and Rights
 
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
 
Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding
Securities Reflected
in Column (a)
 
 
(a)
 
(b)
 
(c)
Equity Compensation Plans approved by security holders
 
—

 
$
—

 
—

Equity Compensation Plans not approved by security holders
 
—

 
—

 
500,000

Total
 
—

 
$
—

 
500,000


33

Restricted Share Plan
We have an employee and director incentive restricted share plan (the "RSP") that provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by our board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder's meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary of the date of grant in increments of 20% per annum. The RSP provides us with the ability to grant awards of restricted shares to our directors, officers and employees (if we ever have employees), employees of the Advisor and its affiliates, employees of entities that provide services to us, directors of the Advisor or of entities that provide services to us, certain consultants to us and the Advisor and its affiliates or to entities that provide services to us.  The total number of shares of common stock granted under the RSP shall not exceed 5.0% of our outstanding shares on a fully diluted basis at any time, and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from us under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with us. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in common shares shall be subject to the same restrictions as the underlying restricted shares. As of December 31, 2013, we had 24,000 unvested restricted shares outstanding that were granted pursuant to the RSP.
Recent Sales of Unregistered Securities
We did not sell any equity securities that were not registered under the Securities Act during the years ended December 31, 2013, 2012 and 2011.
Use of Proceeds from Sales of Registered Securities
On September 2, 2010, we commenced our IPO on a "reasonable best efforts" basis of up to 150.0 million shares of common stock at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to the Registration Statement filed with the SEC under the Securities Act. The Registration Statement also covered up to 25.0 million shares available pursuant to a DRIP under which our common stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share and 95% of the estimated value of a share of common stock. On August 2, 2013, we filed a Registration Statement on Form S-11 with the SEC to register follow-on offering up to 12.5 million shares of common stock at a price of $10.00 per share on a “best efforts” basis and 1.25 million shares of common stock pursuant to the DRIP at $9.50 per share.
As of December 31, 2013, we had 174.1 million shares of common stock outstanding, including unvested restricted shares, converted shares of convertible preferred stock and shares issued under the DRIP. As of December 31, 2013, we had received common stock proceeds of $1.7 billion from the sale of 172.1 million shares of common stock, including DRIP and net of repurchases. On November 27, 2013, we registered an additional 25.0 million shares to be used under the DRIP (including a direct stock component) pursuant to a registration statement on Form S-3D (File No. 333-192576). The new DRIP, including the direct stock component, became effective December 6, 2013 and, as permitted by the IPO prospectus, we reallocated the remaining DRIP shares from our IPO to the IPO’s primary offering. As of December 11, 2013, we closed the IPO following the successful achievement of our target equity raise and therefore did not launch our follow-on offering.
The following table reflects the offering costs associated with the issuance of common stock.
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Selling commissions and dealer manager fees
 
$
134,972

 
$
12,576

 
$
4,303

Other offering costs
 
14,238

 
5,109

 
5,037

Reimbursement from Advisor (1)
 
—

 
(4,658
)
 
—

Total offering costs
 
$
149,210

 
$
13,027

 
$
9,340

__________________
(1) The Advisor elected to reimburse our offering costs in excess of 1.5% of proceeds from the sale of common stock during the year ended December 31, 2012.

34

The Dealer Manager reallowed the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of shares of common stock.
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Total commissions paid to the Dealer Manager
 
$
134,972

 
$
12,576

 
$
4,303

Less:
 
 
 
 
 

  Commissions to participating brokers
 
(86,497
)
 
(8,164
)
 
(2,800
)
  Reallowance to participating broker dealers
 
(14,770
)
 
(1,261
)
 
(307
)
Net to the Dealer Manager
 
$
33,705

 
$
3,151

 
$
1,196

As of December 31, 2013, we have incurred $174.9 million of cumulative offering costs in connection with the issuance and distribution of common stock. Offering proceeds of $1.7 billion exceeded cumulative offering costs by $1.5 billion at December 31, 2013.
Cumulative offering costs include $152.0 million incurred from our Dealer Manager for dealer manager fees and commissions and $14.3 million from our Advisor, net of the Advisor's reimbursement related to the 15% cap on total offering costs by the Advisor during the IPO.
We expect to use substantially all of the net proceeds from our IPO to primarily acquire income-producing commercial real estate in the New York MSA, and, in particular, properties located in New York City, with a focus on office and retail properties. We may also originate or acquire first mortgage loans secured by real estate.  As of December 31, 2013, we have used the net proceeds from our IPO, secured debt financing and credit facility to purchase 23 real estate-related investments with an aggregate gross purchase price of $2.1 billion.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our common stock is currently not listed on a national securities exchange and we will not seek to list our stock until such time as our independent directors believe that the listing of our stock would be in the best interest of our stockholders. Our board has determined that it is in the best interests of our stockholders to proceed to file an application to list our shares of common stock on a national securities exchange. In order to provide stockholders with the benefit of some interim liquidity, our board of directors has adopted a Share Repurchase Program (the "SRP") that enables our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. Our Sponsor, Advisor, directors and affiliates are prohibited from receiving a fee on any share repurchases.  
Repurchases of shares of our common stock, when requested, are at our sole discretion and generally will be made quarterly. We will limit the number of shares repurchased during any calendar year to 5% of the number of shares of common stock outstanding on December 31st of the previous calendar year (on a ratable basis during each quarterly period during the year). In addition, we are only authorized to repurchase shares pursuant to the SRP up to the value of the shares issued under the DRIP and will limit the amount spent to repurchase shares in a given quarter to the value of the shares issued under the DRIP in that same quarter. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.
Unless the shares of our common stock are being repurchased in connection with a stockholder's death, the purchase price for shares repurchased under our SRP will be as set forth below until we establish an estimated value of our shares. Unless our shares are listed on a national exchange, we expect to begin establishing an estimated value of our shares based on the value of our real estate and real estate-related investments beginning 18 months after the close of our IPO, or June 11, 2015. We will retain persons independent of us and our Advisor to prepare the estimated value of our shares.
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the SRP. We will repurchase shares as of the last business day of each quarter (and in all events on a date other than a dividend payment date). Prior to establishing the estimated value of our shares, the price per share that we will pay to repurchase shares of our common stock will be as follows: 
•
the lower of $9.25 or 92.5% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least one year;
•
the lower of $9.50 or 95.0% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least two years;

35

•
the lower of $9.75 or 97.5% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least three years; and
•
the lower of $10.00 or 100% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least four years (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock).
Upon the death or disability of a stockholder, upon request, we will waive the one-year holding requirement. Shares repurchased in connection with the death or disability of a stockholder will be repurchased at a purchase price equal to the price actually paid for the shares during the offering, or if not engaged in the offering, the per share purchase price will be based on the greater of $10.00 or the then-current net asset value of the shares as determined by our board of directors (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). In addition, we may waive the holding period in the event of a stockholder's bankruptcy or other exigent circumstances.
The following table summarizes our SRP activity for the years ended December 31, 2013, 2012 and 2011. The value of repurchases did not exceed DRIP elections by stockholders. We fund share repurchases from proceeds from the sale of common stock.
 
Number of Requests
 
Number of Shares Repurchased
 
Value of Shares Repurchased
 
Average Price
per Share
 
 
 
 
 
(In thousands)
 
 
Year ended December 31, 2011
1

 
2,538

 
$
25

 
$
9.85

Year ended December 31, 2012
10

 
81,661

 
780

 
9.55

Year ended December 31, 2013
24

 
195,395

 
1,886

 
9.65

Cumulative repurchases as of December 31, 2013(1)
35

 
279,594

 
2,691

 
$
9.63

Value of shares issued through DRIP
 
 
 
 
22,530

 
 
Excess
 
 
 
 
$
19,839

 
 
_________________________
(1) Includes six unfulfilled repurchase requests consisting of 51,829 shares at an average price per share of $9.76, which were approved for repurchase as of December 31, 2013 and completed in February 2014.

We process repurchases on a quarterly basis. The following table summarizes repurchase requests pursuant to our SRP for each quarter during the year ended December 31, 2013:
 
Number of Requests
 
Number of Shares Repurchased
 
Value of Shares Repurchased
 
Average Price
per Share
 
 
 
 
 
(In thousands)
 
 
Quarter ended March 31, 2013
7

 
62,791

 
$
587

 
$
9.35

Quarter ended June 30, 2013
5

 
44,495

 
443

 
9.96

Quarter ended September 30, 2013
6

 
36,719

 
359

 
9.79

Quarter ended December 31, 2013(1)
6

 
51,390

 
497

 
9.66

Total year ended December 31, 2013
24

 
195,395

 
$
1,886

 
$
9.65

__________________________
(1) Includes six unfulfilled repurchase requests consisting of 51,829 shares at an average price per share of $9.76, which were approved for repurchase as of December 31, 2013 and completed in February 2014.

The share repurchase program will terminate immediately if our shares are listed on any national securities exchange. In addition, our board of directors may amend, suspend (in whole or in part) or terminate the share repurchase program at any time upon 30 days' prior written notice to our stockholders. Further, our board of directors reserves the right, in its sole discretion, to reject any requests for repurchases.

36

Item 6. Selected Financial Data.
The following selected financial data as of December 31, 2013, 2012, 2011, 2010 and 2009 and for the years ended December 31, 2013, 2012, 2011, 2010 and the period from October 6, 2009 (date of inception) to December 31, 2009 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" below:
 
 
December 31,
Balance sheet data (In thousands)
 
2013
 
2012
 
2011
 
2010
 
2009
Total real estate investments, at cost
 
$
1,542,805

 
$
360,857

 
$
125,626

 
$
67,615

 
$
—

Total assets
 
2,048,305

 
367,850

 
136,964

 
69,906

 
954

Mortgage notes payable
 
172,716

 
185,569

 
75,250

 
35,385

 
—

Credit facility
 
305,000

 
19,995

 
—

 
—

 
—

Notes payable
 
—

 
—

 
5,933

 
5,933

 
—

Total liabilities
 
599,046

 
225,419

 
85,773

 
45,781

 
755

Total equity
 
1,449,259

 
142,431

 
51,191

 
24,125

 
199

 
 
Year Ended December 31,
 
For the Period  from October 6, 2009 (date of inception) to December 31, 2009
Operating data (In thousands, except share and per share data)
 
2013
 
2012
 
2011
 
2010
 
Total revenues
 
$
55,887

 
$
15,422

 
$
7,535

 
$
2,377

 
$
—

Operating expenses:
 
 
 
 
 
 

 
 
 
 

Property operating
 
14,918

 
2,398

 
1,039

 
672

 
—

Acquisition and transaction related
 
17,417

 
6,066

 
1,586

 
1,424

 
—

General and administrative
 
1,019

 
226

 
220

 
43

 
1

Depreciation and amortization
 
33,912

 
8,097

 
4,043

 
1,040

 
—

Total operating expenses
 
67,266

 
16,787

 
6,888

 
3,179

 
1

Operating income (loss)
 
(11,379
)
 
(1,365
)
 
647

 
(802
)
 
(1
)
Other income (expenses):
 
 
 
 
 
 

 
 
 
 

Interest expense
 
(10,673
)
 
(4,994
)
 
(3,910
)
 
(1,070
)
 
—

Income from unconsolidated joint venture
 
2,066

 
—

 
—

 
—

 
—

Income from preferred equity investment and investment securities
 
649

 
—

 
—

 
—

 
—

Interest and investment income
 
21

 
1

 
1

 
1

 
—

Losses on derivatives
 
5

 
(14
)
 
(3
)
 
—

 
—

Total other expenses
 
(7,932
)
 
(5,007
)
 
(3,912
)
 
(1,069
)
 
—

Net loss
 
(19,311
)
 
(6,372
)
 
(3,265
)
 
(1,871
)
 
(1
)
Net loss (income) attributable to non-controlling interests
 
32

 
33

 
(154
)
 
109

 
—

Net loss attributable to stockholders
 
$
(19,279
)
 
$
(6,339
)
 
$
(3,419
)
 
$
(1,762
)
 
$
(1
)
Other data:
 
 
 
 
 
 

 
 
 
 

Cash flows provided by (used in) operations
 
$
9,428

 
$
3,030

 
$
263

 
$
(1,234
)
 
$
(1
)
Cash flows used in investing activities
 
(1,309,508
)
 
(145,753
)
 
(25,736
)
 
(30,729
)
 
—

Cash flows provided by financing activities
 
1,528,103

 
137,855

 
35,346

 
32,312

 
1

Per share data:
 
 
 
 
 
 

 
 
 
 
Net loss per common share - basic and diluted
 
$
(0.26
)
 
$
(0.52
)
 
$
(2.31
)
 
$
(71.06
)
 
NM

Distributions declared per common share
 
$
0.605

 
$
0.605

 
$
0.605

 
$
0.605

 
$
—

Weighted-average number of common shares outstanding, basic and diluted
 
73,074,872

 
12,187,623

 
2,070,184

 
36,108

 
—

_______________________
NM - not meaningful

37

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties.
Organization
We were incorporated on October 6, 2009 as a Maryland corporation that qualified as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2010.  On September 2, 2010, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to our registration statement on Form S-11, as amended (File No. 333-163069) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). Our Registration Statement also covered up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock. On August 2, 2013, we filed a Registration Statement on Form S-11 with the SEC to register a follow-on offering of up to 12.5 million shares of common stock at a price of $10.00 per share on a “reasonable best efforts” basis and 1.25 million shares of common stock pursuant to the DRIP at $9.50 per share.
On November 27, 2013, we registered an additional 25.0 million shares to be used under the DRIP (including a direct stock component) pursuant to a registration statement on Form S-3D (File No. 333-192576). The new DRIP, including the direct stock component, became effective December 6, 2013 and, as permitted by the IPO prospectus, we reallocated the remaining DRIP shares from our IPO to the IPO’s primary offering. As of December 11, 2013, we closed the IPO following the successful achievement of our target equity raise and therefore we did not launch our follow-on offering.
As of December 31, 2013, we had 174.1 million shares of common stock outstanding, including unvested restricted shares, converted shares of convertible preferred stock (the "Preferred Shares") and shares issued under the DRIP. As of December 31, 2013, we had received total gross proceeds from the IPO and the DRIP of $1.7 billion from the sale of 172.1 million shares of common stock, including shares issued under the DRIP.  In addition, we sold 2.0 million Preferred Shares for gross proceeds of $17.0 million in a private placement pursuant to Rule 506 of Regulation D of the Securities Act, which terminated on September 2, 2010, the effective date of the Registration Statement. On December 15, 2011, we exercised our option to convert the Preferred Shares into 2.0 million shares of common stock on a one-for-one basis. As of December 31, 2013, the aggregate value of all issuances and subscriptions of common stock outstanding was $1.7 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP).
We were formed to acquire income-producing commercial and residential real estate in the New York metropolitan statistical area, and, in particular, properties located in New York City, with a focus on office and retail properties. All such properties may be acquired and operated by us alone or jointly with another party. We also may originate or acquire first mortgage loans secured by real estate.  We purchased our first property and commenced active operations in June 2010.  As of December 31, 2013, we owned 23 properties and real estate-related assets.
Substantially all of our business is conducted through New York Recovery Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. We have no employees.  We have retained New York Recovery Advisors, LLC (our "Advisor") to manage our affairs on a day-to-day basis. New York Recovery Properties, LLC (the "Property Manager") serves as our property manager, unless services are performed by a third party for specific properties. Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of our IPO.  The Advisor and the Property Manager are wholly owned entities of, and the Dealer Manager is under common ownership with, American Realty Capital III, LLC (the "Sponsor"), as a result of which, they are related parties and receive compensation, fees and expense reimbursements for services related to the IPO and for the investment and management of our assets. These entities receive fees during the offering, acquisition, operational and liquidation stages.

38

Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Offering and Related Costs
Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) include costs that may be paid by the Advisor, the Dealer Manager or their affiliates on our behalf.  These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse the bona fide diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We were obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor was obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our offering exceed 1.5% of gross offering proceeds in the IPO. As a result, these costs were only our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs did not exceed 11.5% of the gross proceeds determined at the end of our IPO. As of the end of our IPO in December 2013, offering costs were less than 11.5% of the gross proceeds in the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates. When we acquire a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Our hotel revenues are derived from room rentals and other sources such as charges to guests for telephone service, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five to ten years for fixtures and building improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.

39

Long-lived assets are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted or when they are designated as held for sale. Valuation of real estate is considered a "critical accounting estimate" because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts, of our real estate. Additionally, decisions regarding when a property should be classified as held for sale are also highly subjective and require significant management judgment.
Events or changes in circumstances that could cause an evaluation for impairment include the following:
•
a significant decrease in the market price of a long-lived asset;
•
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
•
a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;
•
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; and
•
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset.
We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.
Purchase Price Allocation
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if-vacant basis. We utilize various estimates, processes and information to determine the as-if-vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on our analysis of comparable properties in our portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 12 months. We also estimate costs to execute similar leases, including leasing commissions, legal and other related expenses.
Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease.  The capitalized below-market lease values are amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option.  The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.

40

The aggregate value of intangible assets related to customer relationships, as applicable, is measured based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from 1 to 29 years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
 In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Derivative Instruments
We use derivative financial instruments to hedge the interest rate risk associated with a portion of our borrowings. The principal objective of such agreements is to minimize the risks and costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.
We record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.
Recently Issued Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (the "FASB") issued guidance regarding disclosures about offsetting assets and liabilities, which requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance was effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on our consolidated financial position, results of operations or cash flows.
In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments allow an entity to initially assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity is no longer required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments were effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective for annual and interim periods beginning after December 15, 2012. The adoption of this guidance, which is related to disclosure only, did not have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2013, the FASB issued new accounting guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on our consolidated financial position, results of operations or cash flows.

41

In March 2013, the FASB issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity.  The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on our consolidated financial position, results of operations or cash flows.
Results of Operations
As of December 31, 2013, we owned 23 properties and real estate-related assets, with an aggregate gross purchase price of $2.1 billion. As of January 1, 2012, we owned nine properties (our "Same Store"), with an aggregate purchase price of $124.2 million. Accordingly, our results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012, reflect significant increases in most categories.
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
Rental Income
Rental income increased $35.0 million to $49.5 million for the year ended December 31, 2013, from $14.5 million for the year ended December 31, 2012. The increase in rental income was primarily driven by our acquisitions since January 1, 2013, as well as a full year of operations for those acquired during 2012, which resulted in an increase in rental income of $34.9 million for the year ended December 31, 2013, compared to the year ended December 31, 2012. In addition, Same Store rental income increased $0.1 million due to new leasing activity at the Interior Design Building and One Jackson Square, which was partially offset by the termination of our garage tenant at our 416 Washington Street property, resulting from hurricane damage.
Operating Expense Reimbursements and Other Revenue
Operating expense reimbursements and other revenue increased $5.5 million to $6.4 million for the year ended December 31, 2013 from $0.9 million for year ended December 31, 2012.  Operating expense reimbursements increased in relation to the increase in property operating expenses, as a result of our acquisitions since January 1, 2013, as well as a full year of operations for those acquired during 2012, and an increase in property operating expenses in our Same Store. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.
Property Operating Expenses
Property operating expenses increased $12.5 million to $14.9 million for the year ended December 31, 2013, from $2.4 million for the year ended December 31, 2012.  The increase in property operating expenses related primarily to real estate taxes, maintenance and insurance costs associated with the properties that have been acquired since January 1, 2013, as well as a full year of operations for those acquired during 2012, which resulted in an increase of $11.5 million for the year ended December 31, 2013. In addition, Same Store property operating expenses increased $0.7 million, primarily as a result of bad debt expense of $0.5 million related to the hurricane damage to our 416 Washington Street property and increased real estate taxes and maintenance expenses at the Interior Design Building. Additionally, the Advisor elected to absorb $0.3 million of property operating expenses during the year ended December 31, 2012. No such expenses were absorbed during the year ended December 31, 2013.
Operating Fees to Affiliates
Our affiliated Property Manager is entitled to fees for the management of our properties.  Property management fees increase in direct correlation with gross revenues. Our Property Manager elected to waive these fees for the years ended December 31, 2013 and 2012.  For the years ended December 31, 2013 and 2012, we would have incurred property management fees of $0.8 million and $0.5 million, respectively, had these fees not been waived.
Effective July 1, 2012, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead the Company issues (when and if approved by the board of directors) to the Advisor Class B units, which will be forfeited unless certain conditions are met. During the years ended December 31, 2013 and 2012, the board of directors approved the issuance of 410,771 and 43,968 Class B units, respectively, to the Advisor in connection with this arrangement. Our Advisor elected to waive these fees prior to July 1, 2012. During the six months ended June 30, 2012, we would have incurred asset management fees of $0.5 million had these fees not been waived.

42

Acquisition and Transaction Related Expenses
Acquisition and transaction related expense of $17.4 million for the year ended December 31, 2013 primarily related to the acquisitions of seven properties and other real estate-related assets for an aggregate gross base cash purchase price of $1.8 billion, resulting in $17.8 million of acquisition and transaction-related expense which was partially offset by the reimbursement from the Advisor of $2.5 million of acquisition expenses and legal reimbursements that had been incurred on previous acquisitions. Acquisition and transaction related costs for the year ended December 31, 2013 also included $2.1 million incurred from the Dealer Manager for services rendered in connection with transaction management, information agent and advisory services agreements related to a potential liquidity event. Acquisition and transaction related expense of $6.1 million for the year ended December 31, 2012 related to the purchases of seven properties with an aggregate base purchase price of $226.5 million.
General and Administrative Expenses
General and administrative expenses increased $0.8 million to $1.0 million for the year ended December 31, 2013 from $0.2 million for the year ended December 31, 2012. This increase related primarily to $1.6 million of higher professional fees, including strategic advisory from the Dealer Manager services rendered during the IPO and other professional fees, as well as higher board member compensation to support our larger real estate portfolio. This increase was partially offset by the Advisor's election to absorb $1.5 million of general and administrative expenses during the year ended December 31, 2013, compared to $0.7 million during the year ended December 31, 2012.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $25.8 million to $33.9 million for the year ended December 31, 2013, compared to $8.1 million for the year ended December 31, 2012. The increase in depreciation and amortization expense related mainly to acquisitions since January 1, 2013, as well as a full year of depreciation for those acquired during 2012, which resulted in additional expense of $24.8 million. In addition, Same Store depreciation and amortization expense increased $1.0 million due to capitalized building and tenant improvement projects at the Interior Design Building and the write-off of intangible lease assets due to the termination of two tenants at 416 Washington Street, as a result of hurricane damage.
Interest Expense
Interest expense increased by $5.7 million to $10.7 million for the year ended December 31, 2013 from $5.0 million for the year ended December 31, 2012. Interest expense related to mortgage notes payable increased by $4.1 million as a result of a higher average balance outstanding of $197.9 million during the year ended December 31, 2013, compared to the $97.7 million during the year ended December 31, 2012, as well as the associated increased amortization of deferred financing costs.
In August 2013, we entered into a new credit facility agreement which increased the borrowings available from $40.0 million to $220.0 million. In December 2013, we amended the facility to increase aggregate borrowings available to $390.0 million. Interest expense related to our credit facilities increased by $1.7 million as a result of a higher average balance outstanding to $63.7 million during the year ended December 31, 2013, compared to the $9.7 million during the year ended December 31, 2012, as well as the associated increased amortization of deferred financing costs resulting from implementing our expanded credit facility.
These increases were partially offset by a reduction of $0.1 million in interest expense related to a note payable during the year ended December 31, 2012, which was repaid in full in April 2012.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital.  Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.
Income from Unconsolidated Joint Venture
Income from unconsolidated joint venture was $2.1 million for the year ended December 31, 2013, which represents our preferred distribution, net of our pro-rata share of the net loss of Worldwide Plaza, which we acquired in October 2013.
Income from Preferred Equity Investment and Investment Securities
Income from preferred equity investment and investment securities was $0.6 million for the year ended December 31, 2013, which primarily represents income earned on our preferred equity investment in 123 William Street, acquired in October 2013, and our investments in redeemable preferred stock. We did not own any preferred equity investments or investment securities during the year ended December 31, 2012.
Interest Income
Interest income of approximately $21,000 and $1,000 during the years ended December 31, 2013 and 2012, respectively, primarily represents the income earned on cash and cash equivalents held during the period.

43

Net Loss Attributable to Non-Controlling Interests
The net loss attributable to non-controlling interests of approximately $32,000 and $33,000 during the years ended December 31, 2013 and 2012, respectively, represents the net loss related to our Bleecker Street portfolio and the 163 Washington Avenue Apartments attributable to non-controlling interests, for the period these properties were owned. We fully redeemed the third party's non-controlling interest in Bleecker Street of $1.0 million in December 2013.
Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011
Rental Income
Rental income increased $7.6 million to $14.5 million for the year ended December 31, 2012, compared to $6.9 million for the year ended December 31, 2011. The increase in rental income was primarily driven by our acquisitions since January 1, 2012, as well as a full year of operations for those acquired during 2011, which resulted in an increase in rental income of $7.7 million for the year ended December 31, 2012, compared to the year ended December 31, 2011. In addition, this increase was partially offset by a decrease in rental income at the Interior Design Building of $0.1 million as a result of net lease expirations, amendments and new leasing activity. New leasing activity occurred during the year ended December 31, 2012, however, a full year of the leasing activity has not yet occurred. The Interior Design Building's occupancy rate increased to 100.0% at December 31, 2012 from 85.4% at December 31, 2011.
Operating Expense Reimbursements
Operating expense reimbursements increased $0.3 million to $0.9 million for the year ended December 31, 2012, from $0.6 million for the year ended December 31, 2011.  Additional operating expense reimbursements of $0.5 million related to acquisitions was partially offset by a decrease of $0.2 million in operating expense reimbursements at the Interior Design Building due to lease terminations. Pursuant to many of our lease agreements at the Interior Design Building, tenants are required to pay their pro rata share of property operating expenses in excess of a base amount. Property operating expenses for new and renewed tenants at the Interior Design Building were not in excess of their base amounts during the year ended December 31, 2012.
Property Operating Expenses
Property operating expenses increased $1.4 million to $2.4 million for the year ended December 31, 2012, compared to $1.0 million for the year ended December 31, 2011.  Additional property operating expense of $1.1 million relates to real estate taxes, maintenance and insurance costs associated with acquisitions. Additionally, the Advisor's absorption of property operating expenses decreased by $0.2 million to $0.3 million from $0.5 million during the years ended December 31, 2012 and 2011, respectively.
Operating Fees to Affiliates
Our affiliated Property Manager is entitled to fees for the management of our properties.  Our Property Manager elected to waive these fees for the years ended December 31, 2012 and 2011.  For the years ended December 31, 2012 and 2011, we would have incurred property management fees of $0.5 million and $0.2 million, respectively, had these fees not been waived. Property management fees will increase in direct correlation with the increase in gross revenues.
Effective July 1, 2012, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead the Company elected to issue to the Advisor Class B units, which will be forfeited unless certain conditions are met. In December 2012, the board of directors approved the issuance of 43,968 Class B units to the Advisor in connection with this arrangement. Our Advisor elected to waive these fees prior to July 1, 2012.  We would have incurred asset management fees of $0.5 million and $0.6 million for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively, had these fees not been waived.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expense of $6.1 million for the year ended December 31, 2012 related to the acquisition of the seven properties we purchased during the year for an aggregate base purchase price of $226.5 million. Acquisition and transaction related expense of $1.6 million for the year ended December 31, 2011 related to the five properties we purchased during the year for an aggregate base purchase price of $57.9 million.
General and Administrative Expenses
General and administrative expenses remained flat at $0.2 million for the years ended December 31, 2012 and 2011. An increase in board member compensation and professional fees of $0.3 million to support our larger real estate portfolio was offset by an increase of $0.3 million in the amount of general and administrative expenses that the Advisor elected to absorb. The Advisor elected to absorb $0.7 million and $0.4 million of general and administrative expenses during the years ended December 31, 2012 and 2011, respectively.

44

Depreciation and Amortization Expense
Depreciation and amortization expense increased $4.1 million to $8.1 million for the year ended December 31, 2012, compared to $4.0 million for the year ended December 31, 2011. The increase in depreciation and amortization expense related to acquisitions with an aggregate purchase price of $284.5 million, which resulted in additional expense of $4.5 million. This increase was partially offset by the decrease in amortization expense of in-place lease intangibles of $0.5 million as a result of lease terminations and expirations at the Interior Design Building.
Interest Expense
Interest expense increased by $1.1 million to $5.0 million for the year ended December 31, 2012, compared to $3.9 million for the year ended December 31, 2011. This increase primarily relates to the increase in mortgage notes payable to $185.6 million with a weighted average effective interest rate of 3.6% as of December 31, 2012, compared to $75.3 million with a weighted average effective interest rate of 4.1% as of December 31, 2011. In addition, since the first advance under our credit facility occurred in May 2012, we incurred interest expense related to our credit facility on an average outstanding balance of $15.2 million with an average variable interest rate of 2.8%. These increases were partially offset by the reduction in interest expense related to a note payable, which was repaid in full in April 2012 and $0.8 million of defeasance costs incurred during the year ended December 31, 2011 related to the defeasance of the original mortgage note payable on the Interior Design Building which occurred in November 2011.
Net Income Attributable to Non-Controlling Interests
Net loss of approximately $33,000 during the year ended December 31, 2012 represents the net loss on our Bleecker Street portfolio and the 163 Washington Avenue Apartments attributable to non-controlling interest holders. Net income of $0.2 million during the year ended December 31, 2011 represents net income on our Bleecker Street portfolio attributable to non-controlling interest holders. We fully redeemed the related party's non-controlling interest in Bleecker Street of $12.0 million in June 2012.
Cash Flows for the Year Ended December 31, 2013
For the year ended December 31, 2013, net cash provided by operating activities was $9.4 million.  The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2013 included $17.4 million of acquisition and transaction costs. Cash flows provided by operating activities included a net loss adjusted for non-cash items, resulting in a cash inflow of $12.9 million (net loss of $19.3 million adjusted for depreciation and amortization of tangible and intangible real estate assets and other non-cash charges of $32.2 million), an increase in accounts payable and accrued expenses of $7.8 million primarily due to fees owed to our Dealer Manager of $2.1 million for services rendered related to a potential liquidity event, operating costs associated with acquisitions and accrued tenant improvements, an increase in deferred rent of $7.1 million and a decrease in due from affiliated entities of $0.3 million. These cash inflows were partially offset by an increase in prepaid expenses and other assets of $18.7 million primarily due to unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis, other accounts receivable, prepaid real estate taxes, insurance and deferred leasing costs.
Net cash used in investing activities during the year ended December 31, 2013 of $1.3 billion primarily related the acquisition of seven properties and real estate-related assets for an aggregate cash base purchase price of $1.4 billion, which were partially funded with a $60.0 million mortgage note payable and liabilities assumed at acquisition of $12.2 million for tenant improvements. Cash used in investing activities also included $12.1 million for capital expenditures and tenant improvements and $1.3 million for the purchase of investment securities. These cash outflows were partially offset by distributions from our unconsolidated joint venture in World Wide Plaza of $2.1 million.
Net cash provided by financing activities of $1.5 billion during the year ended December 31, 2013 related to proceeds, net of receivables and repurchases, from the issuance of common stock of $1.5 billion and proceeds net of repayments on our credit facility of $285.0 million. These inflows were partially offset by payments related to offering costs of $148.2 million, repayments of mortgage notes payable of $72.9 million, distributions to stockholders of $17.8 million, payments related to financing costs of $7.6 million, increases to restricted cash of $0.2 million, payments to non-controlling interest holders of $1.0 million and payments of distributions to non-controlling interest holders of $0.1 million.

45

Cash Flows for the Year ended Ended December 31, 2012
For the year ended December 31, 2012, net cash provided by operating activities was $3.0 million.  The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2012 included $6.1 million of acquisition and transaction costs. Cash flows provided by operating activities included a net loss adjusted for non-cash items, resulting in a cash inflow of $2.5 million (net loss of $6.3 million adjusted for depreciation and amortization of tangible and intangible real estate assets and other non-cash charges of $8.8 million) as well as a combined increase in accounts payable, accrued expenses and deferred rent of $3.9 million mainly due to an increase in accrued acquisition and transaction related costs as well as interest expense payable and tenant deposits. This cash inflow was partially offset by an increase in prepaid expenses and other assets of $3.3 million primarily due to unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis and prepaid real estate taxes.
Net cash used in investing activities during the year ended December 31, 2012 of $145.8 million related to $229.1 million for the acquisition of seven properties, which were partially funded with proceeds from mortgage notes payable received at acquisition of $79.2 million and reduced by liabilities assumed at acquisition mainly related to building improvements and leasehold interests of $4.8 million as well as minority interest retained by a seller of $0.4 million. Cash used in investing activities also related to $1.0 million for capital expenditures at the Interior Design Building during the period.
Net cash provided by financing activities of $137.9 million during the year ended December 31, 2012 related to proceeds, net of receivables and repurchases, from the issuance of common stock of $127.5 million, proceeds net of repayments on our credit facility of $20.0 million and proceeds, net of repayments, from mortgage notes payable of $31.1 million. These inflows were partially offset by payments of $12.0 million to purchase our affiliate's non-controlling interest in our Bleecker Street subsidiary, payments related to offering costs of $13.6 million, payments on notes payable of $5.9 million, distributions to stockholders of $3.4 million, payments related to financing costs of $4.6 million, increases to restricted cash of $0.8 million and distributions to non-controlling members of $0.5 million.
Cash Flows for the Year Ended December 31, 2011
For the year ended December 31, 2011, net cash provided by operating activities was $0.3 million. The level of cash flows used in or provided by operating activities is affected by acquisition and transaction costs incurred, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2011 include $1.6 million of acquisition and transaction costs. Results include a net loss adjusted for non-cash items, which resulted in a cash inflow of $1.3 million (net loss of $3.4 million adjusted for depreciation and amortization of tangible and intangible real estate assets and other non-cash charges of $4.7 million) as well as a combined increase in accounts payable, accrued expenses and deferred rent of $0.2 million. This cash inflow was partially offset by an increase in prepaid expenses and other assets of $1.2 million primarily due to prepaid real estate taxes and insurance as well as unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis.
Net cash used in investing activities during the year ended December 31, 2011 of $25.7 million primarily related to $25.3 million for the acquisition of real estate assets. The contract purchase price of $57.9 million for the properties was partially funded by mortgage notes payable of $32.7 million on the acquisition dates. Cash used in investing activities also included $0.5 million related to capital expenditures at the Interior Design Building.
Net cash provided by financing activities of $35.3 million during the year ended December 31, 2011 related to proceeds, net of receivables, from the issuance of common stock of $42.5 million and mortgage notes payable from the refinancing of the Interior Design Building for $21.3 million as well as decreases in restricted cash of $0.6 million. This inflow was partially offset by principal payments on mortgage notes payable of $14.1 million, primarily due to the refinancing of the Interior Design Building, payments related to offering costs of $10.1 million, distributions to stockholders of $2.0 million, payments related to financing costs of $2.0 million and distributions to non-controlling interest holders of $0.9 million.
Liquidity and Capital Resources
Our principal demands for funds will continue to be for property acquisitions, either directly or through investment interests, for the payment of operating expenses, distributions to our stockholders and non-controlling interest holders, and for the payment of principal and interest on our outstanding indebtedness. Generally, capital needs for property acquisitions will be met through net proceeds received from the sale of common stock through our IPO as well as proceeds from our credit facility. We also may from time to time enter into other agreements with third parties whereby third parties will make equity investments in specific properties or groups of properties that we acquire. Expenditures other than property acquisitions and acquisition and transaction-related costs are expected to be covered by cash flows from operations.

46

We expect to meet our future short-term operating liquidity requirements through a combination of net cash provided by our current property operations and the operations of properties to be acquired in the future, proceeds from our DRIP and proceeds from our credit facility.  Management expects that in the future, as our portfolio matures, our properties will cover operating expenses and the payment of our monthly distribution. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations.
We expect to utilize the net proceeds from the sale of our common stock and proceeds from our credit facility to complete future property acquisitions. As of December 31, 2013, we had 174.1 million shares of common stock outstanding, including unvested restricted shares, converted Preferred Shares and shares issued under the DRIP. As of December 31, 2013, we had received gross proceeds of $1.7 billion and $17.0 million from the sale of shares of common stock and Preferred Shares, respectively.
Our board of directors has adopted a share repurchase plan that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such purchase. The following table reflects the cumulative number of shares repurchased during the years ended December 31, 2013, 2012 and 2011:
 
Number of Requests
 
Number of Shares Repurchased
 
Average Price per Share
Year ended December 31, 2011
1

 
2,538

 
$
9.85

Year ended December 31, 2012
10

 
81,661

 
9.55

Year ended December 31, 2013
24

 
195,395

 
9.65

Cumulative repurchase requests as of December 31, 2013 (1)
35

 
279,594

 
$
9.63

__________________________
(1)
Includes six unfulfilled repurchase requests consisting of 51,829 shares at an average price per share of $9.76, which were approved for repurchase as of December 31, 2013 and completed in February 2014.
As of December 31, 2013, we had cash and cash equivalents of $233.4 million. We expect cash flows from operations and the sale of common stock to be used primarily to invest in additional real estate, pay debt service, pay operating expenses and pay stockholder distributions.
Acquisitions
Our Advisor evaluates potential acquisitions of real estate and real estate-related assets and engages in negotiations with sellers and borrowers on our behalf.  Investors should be aware that after a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and fully negotiated binding agreements. During this period, we may decide to temporarily invest any unused proceeds from common stock offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under accounting principles generally accepted in the United States of America ("GAAP").
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above.

47

The historical accounting convention used for real estate assets requires depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book, value exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. We used the proceeds raised in our IPO to, among other things, acquire properties, and we intend to begin the process of achieving a liquidity event during the second quarter of 2014 through the listing of our common stock on the New York Stock Exchange. Thus, unless we raise, or recycle, a significant amount of capital in the future, we will not be continuing to purchase assets at the same rate as during our IPO. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we purchase a significant amount of new assets. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is stabilized. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our IPO has been completed and our portfolio has been stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our IPO and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities.

48

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations ("Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.
Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. The purchase of properties, and the corresponding expenses associated with that process, has been a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. Because our IPO is completed, in the absence of a new capital raise, acquisition fees and expenses will now be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as a limited and defined acquisition period. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance.

49

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

50

The table below reflects the items deducted from or added to net loss in our calculation of FFO and MFFO during the periods presented. The table reflects MFFO in the IPA recommended format and MFFO without the straight-line rent adjustment which management also uses as a performance measure. Items are presented net of non-controlling interest portions where applicable.
 
 
Three Months Ended
 
Year Ended
(In thousands)
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
December 31,
2013
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
(2,794
)
 
$
2,019

 
$
(5,373
)
 
$
(13,131
)
 
$
(19,279
)
Depreciation and amortization attributable to stockholders
 
4,246

 
5,947

 
10,219

 
15,298

 
35,710

FFO
 
1,452

 
7,966

 
4,846

 
2,167

 
16,431

Acquisition fees and expenses (1)
 
2,800

 
(2,434
)
 
4,273

 
12,778

 
17,417

Amortization of above or accretion of below market leases, net (2)
 
(70
)
 
(340
)
 
(948
)
 
(1,320
)
 
(2,678
)
Mark-to-market adjustments (3)
 
—

 
(4
)
 
—

 
—

 
(4
)
Losses from the extinguishment of debts
 
35

 
4

 
—

 
—

 
39

MFFO
 
4,217

 
5,192

 
8,171

 
13,625

 
31,205

Straight-line rent (4)
 
(1,373
)
 
(1,528
)
 
(3,094
)
 
(3,241
)
 
(9,236
)
MFFO - IPA recommended format
 
$
2,844

 
$
3,664

 
$
5,077

 
$
10,384

 
$
21,969

______________________________
(1) The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.
(2)
Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)
Management believes that adjusting for mark-to-market adjustments is appropriate because they may not be reflective of ongoing operations and reflect unrealized impacts on value based only on then-current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly or annual basis in accordance with GAAP.
(4)
Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management's analysis of operating performance.

51

Distributions
On September 22, 2010, our board of directors authorized, and we declared, a distribution rate equal to $0.605 per annum per share of common stock, commencing December 1, 2010.  The distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month at a rate of $0.00165753424 per day.
During the year ended December 31, 2013, distributions paid to common stockholders totaled $36.6 million inclusive of $18.9 million of distributions for which common stock was issued under the DRIP.  Distribution payments are dependent on the availability of funds.  Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the year ended December 31, 2013, cash used to pay our distributions was primarily generated from cash flows provided by operations, issuances of common stock and common stock issued under the DRIP.  We have continued to pay distributions to our stockholders each month since our initial distribution payment in April 2010.  There is no assurance that we will continue to declare distributions at this rate.
The following table shows the sources for the payment of distributions to common stockholders for the period presented:
 
 
Three Months Ended
 
Year Ended
 
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
December 31,
2013
(In thousands)
 
 
 
Percentage 
of
Distributions
 
 
 
Percentage 
of
Distributions
 
 
 
Percentage 
of
Distributions
 
 
 
Percentage 
of
Distributions
 
 
 
Percentage 
of
Distributions
Distributions:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distribution paid in cash
 
$
1,592

 
 
 
$
2,624

 
 
 
$
5,162

 
 
 
$
8,412

 
 
 
$
17,790

 
 
Distributions reinvested
 
1,502

 
 
 
2,439

 
 
 
5,383

 
 
 
9,528

 
 
 
18,852

 
 
Total distributions
 
$
3,094

 
 
 
$
5,063

 
 
 
$
10,545

 
 
 
$
17,940

 
 
 
$
36,642

 
 
Source of distribution coverage:
 
 
 
 
 
 
 
 
 
 

 
 
 
 

 
 
 
 

 
 
Cash flows provided by operations (1)
 
$
—

 
—
%
 
$
4,216

 
83.2
 %
 
$
2,189

 
20.8
%
 
$
3,023

 
16.9
%
 
$
9,428

 
25.7
%
Common stock issued under the DRIP / offering proceeds
 
1,502

 
48.5
%
 
2,439

 
48.2
 %
 
5,383

 
51.0
%
 
9,528

 
53.1
%
 
18,852

 
51.5
%
Proceeds from issuance of common stock
 
1,592

 
51.5
%
 
(1,592
)
 
(31.4
)%
 
2,973

 
28.2
%
 
5,389

 
30.0
%
 
8,362

 
22.8
%
Proceeds from financings
 
—

 
—
%
 
—

 
—
 %
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
Total sources of distributions
 
$
3,094

 
100.0
%
 
$
5,063

 
100.0
 %
 
$
10,545

 
100.0
%
 
$
17,940

 
100.0
%
 
$
36,642

 
100.0
%
Cash flows provided by (used in) operations (GAAP basis) (2)
 
$
(1,917
)
 
 
 
$
6,429

 
 
 
$
1,893

 
 

 
$
3,023

 
 
 
$
9,428

 
 

Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
(2,794
)
 
 
 
$
2,019

 
 
 
$
(5,373
)
 
 

 
$
(13,131
)
 
 
 
$
(19,279
)
 
 

__________________
(1) Excludes distributions related to unvested restricted shares and Class B units.
(2) Cash flows provided by operations for the year ended December 31, 2013 include acquisition and transaction related expenses of $17.4 million.

52

The following table compares cumulative distributions paid to cumulative net loss (in accordance with GAAP) for the period from October 6, 2009 (date of inception) through December 31, 2013.
 
 
For the Period from
October 6, 2009
(date of inception) to
(In thousands)
 
December 31, 2013
Distributions paid:
 
 
Preferred stockholders
 
$
2,158

Common stockholders in cash
 
21,786

Common stockholders pursuant to DRIP / offering proceeds
 
22,529

Total distributions paid
 
$
46,473

 
 
 

Reconciliation of net loss:
 
 

Revenues
 
$
81,221

Acquisition and transaction-related expenses
 
(26,493
)
Depreciation and amortization
 
(47,092
)
Other operating expenses
 
(20,536
)
Other non-operating expenses
 
(17,920
)
Net income attributable to non-controlling interests
 
20

Net loss (in accordance with GAAP) (1)
 
$
(30,800
)
__________________________________
(1)
Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as acquisition and transaction related costs.
Dilution
Our net tangible book value per share is a mechanical calculation using amounts from our balance sheet, and is calculated as (1) total book value of our assets less the net value of intangible assets, (2) minus total liabilities less the net value of intangible liabilities, (3) divided by the total number of shares of common and preferred stock outstanding. It assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common and preferred stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments, (ii) the funding of distributions from sources other than our cash flow from operations, and (iii) fees paid in connection with this offering, including commissions, dealer manager fees and other offering costs. As of December 31, 2013, our net tangible book value per share was $8.06. The offering price of shares under our primary portion of our IPO (ignoring purchase price discounts for certain categories of purchasers) at December 31, 2013 was $10.00.
Loan Obligations
The payment terms of our loan obligations require monthly principal and interest payments, with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of December 31, 2013, we were in compliance with the debt covenants under our loan agreements. 
Our Advisor may, with the approval of our independent directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third parties on a case-by-case basis as acquisition opportunities present themselves simultaneous with our capital raising efforts. We view the use of short-term borrowings, including advances under our credit facility, as an efficient and accretive means of acquiring real estate in advance of raising equity capital. Accordingly, we can take advantage of buying opportunities as we expand our fundraising activities. As additional equity capital is obtained, these short-term borrowings and credit facility advances will be repaid. Our secured debt leverage ratio was approximately 28.2% (total secured debt as a percentage of total real estate investments) as of December 31, 2013.

53

Contractual Obligations
Debt Obligations
The following is a summary of our contractual obligations as of December 31, 2013:
 
 
 
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
2014
 
2015 — 2016
 
2017 — 2018
 
Thereafter
Principal payments due:
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable
 
$
172,716

 
$
473

 
$
49,961

 
$
107,303

 
$
14,979

Credit facility
 
305,000

 
—

 
—

 
305,000

 
—

 
 
$
477,716

 
$
473

 
$
49,961

 
$
412,303

 
$
14,979

Interest payments due:
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable
 
$
22,883

 
$
6,141

 
$
11,153

 
$
4,558

 
$
1,031

Credit facility
 
30,974

 
6,682

 
13,363

 
10,929

 
—

 
 
$
53,857

 
$
12,823

 
$
24,516

 
$
15,487

 
$
1,031

Lease Obligations
We entered into lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base rental cash payments due from us over the next five years and thereafter under these arrangements. These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
 
 
 
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
2014
 
2015 — 2016
 
2017 — 2018
 
Thereafter
Lease payments due:
 
$
283,647

 
$
3,386

 
$
9,546

 
$
10,166

 
$
260,549


Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 2010. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax to the extent we distribute 90% of our REIT taxable income to our stockholders. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income. We believe we are organized and operated in such a manner as to continue to qualify to be taxed as a REIT.
Inflation
Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. In addition, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates of our Sponsor, whereby we have paid or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common ownership with our Advisor in connection with acquisition and financing activities, sales and maintenance of common stock under our offering, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 13 — Related Party Transactions and Arrangements to our financial statements included in this report for a discussion of the various related party transactions, agreements and fees.

54

In addition, the limited partnership agreement of the OP was amended as of December 31, 2013, to allow the special allocation, solely for tax purposes, of excess depreciation deductions of up to $50.0 million to our Advisor, a limited partner of the OP.  In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain officers and directors.
Off-Balance - Sheet Arrangements
In August 2013, we entered into a $220.0 million credit facility, which provided for aggregate revolving loan borrowings of up to $110.0 million and aggregate term loan borrowings of up to $110.0 million. On December 23, 2013, we amended the credit facility to decrease the aggregate revolving loan borrowings to $50.0 million and increased the aggregate term loan borrowings to $340.0 million. The term loan component of the credit facility matures in August 2018 and the revolving loan component matures in August 2016. The outstanding balance on the credit facility as of December 31, 2013 was $305.0 million and our unused borrowing capacity was $80.2 million, based on the value of the borrowing base properties as of December 31, 2013. Availability of borrowings is based on a pool of eligible unencumbered real estate assets.
On February 25, 2014, we received $240.0 million of additional commitments to increase the aggregate borrowings available under our credit facility to up to $630.0 million, subject to the satisfaction of certain conditions.
We have no other off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings and our credit facility, bears interest at fixed rates and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of December 31, 2013, our debt included fixed-rate secured mortgage notes payable and fixed-rate loans under our credit facility, with a carrying value of $252.7 million and a fair value of $253.4 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the notes, but it has no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2013 levels, with all other variables held constant.  A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $2.3 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $2.4 million. 
At December 31, 2013 our debt included a variable-rate revolving credit facility with a carrying and fair value of $225.0 million. Interest rate volatility associated with this variable-rate credit facility affects interest expense incurred and cash flow. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2012 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate credit facility would increase or decrease our interest expense by $0.2 million annually.
These amounts were determined by considering the impact of hypothetical interest rates changes on our borrowing costs, and assuming no other changes in our capital structure.
As the information presented above includes only those exposures that existed as of December 31, 2013, it does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

55

Item 9A.  Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting
Management's Annual Reporting on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act.
In connection with the preparation of our Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework.
Based on its assessment, our management concluded that, as of December 31, 2013, our internal control over financial reporting was effective.
The rules of the SEC do not require, and this annual report does not include an attestation report of our independent registered public accounting firm regarding, internal control over financial reporting.
Changes in Internal Control Over Financial Reporting.
During the fourth quarter of fiscal year ended December 31, 2013, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office – 405 Park Avenue – 15th Floor, New York, NY 10022, attention Chief Financial Officer.
The information required by this Item is incorporated by reference to our annual proxy statement to be filed with the SEC for the fiscal year ended December 31, 2013 (the "Proxy Statement").
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our Proxy Statement.

56

PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-35 of this report:
Schedule III – Real Estate and Accumulated Depreciation
(b)Exhibits
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2013 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No.
 
Description
 3.1 (10)
 
Amended and Restated Charter of American Realty Capital New York Recovery REIT, Inc.
3.2 (1)
 
Bylaws of American Realty Capital New York Recovery REIT, Inc.
  3.3 (4)
 
Certificate of Correction of American Realty Capital New York Recovery REIT, Inc.
4.1 (6)
 
Third Amended and Restated Agreement of Limited Partnership of New York Recovery Operating Partnership, L.P., dated as of November 12, 2012
4.2 (5)
 
First Amendment to Third Amended and Restated Agreement of Limited Partnership of New York Recover Operating Partnership, L.P., dated as of December 28, 2012
4.3 *
 
Second Amendment to Third Amended and Restated Agreement of Limited Partnership of New York Recover Operating Partnership, L.P., dated as of December 31, 2013
10.1 (3)
 
Amended and Restated Management Agreement, among American Realty Capital New York Recovery REIT, Inc., New York Recovery Operating Partnership, L.P. and New York Recovery Properties, LLC, dated as of September 2, 2010
10.2 (2)
 
Employee and Director Incentive Restricted Share Plan Adopted as of September 22, 2010
10.3 (2)
 
2010 Stock Option Plan Adopted as of September 22, 2010
10.4 (6)
 
Assignment, Assumption and Allocation Agreement between American Realty Capital New York Recovery REIT, Inc. and New York Recovery Operating Partnership, L.P., dated as of November 12, 2012
10.5 (7)
 
Sale-Purchase Agreement, dated June 28, 2013, by and among 333W34 SLG OWNER LLC and ARC NY333W3401, LLC
10.6 (8)
 
Credit Agreement, dated as of August 20, 2013, by and among New York Recovery Operating Partnership, L.P., American Realty Capital New York Recovery REIT, Inc., the lenders party thereto, and Capital One, National Association
10.7 (8)
 
Contribution and Admission Agreement, dated as of October 8, 2013, between WWP Sponsor, LLC and ARC NYWWPJV001, LLC
10.8 (8)
 
Sale-Purchase Agreement, dated as of October 21, 2013, by and between 1440 Broadway Owner, LLC and ARC NY1440BWY1, LLC
10.9 (9)
 
Second Amended and Restated Limited Liability Company Agreement of WWP Holdings, LLC, dated October 31, 2013, by and among NYWWPJV001, LLC and WWP Sponsor, LLC
14 (5)
 
Code of Ethics
21.1 (6) 
 
Subsidiaries of American Realty Capital New York Recovery REIT, Inc.
31.1 *
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 *
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital New York Recovery REIT, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934
______________________________________
*
Filed herewith

(1)
Previously filed with the Registration Statement on Form S-11 filed by the Company with the SEC on November 12, 2009.

57

(2)
Previously filed with the Post-Effective Amendment No. 1 to the Registration Statement on Form S-11 filed by the Company with the SEC on March 2, 2011.
(3)
Previously filed with the Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 3 to the Registration Statement on July 26, 2011.
(4)
Previously filed with the Quarterly Report on Form 10-Q filed by the Company with the SEC on November 14, 2011.
(5)
Previously filed with the Annual Report on Form 10-K filed by the Company with the SEC on March 7, 2013.
(6)
Previously filed with the Quarterly Report on Form 10-Q filed by the Company with the SEC on November 13, 2012.
(7)
Previously filed with the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 13, 2013.
(8)
Previously filed with the Quarterly Report on Form 10-Q filed by the Company with the SEC on November 13, 2013.
(9)
Previously filed with the Current Report on Form 8-K/A filed by the Company with the SEC on November 27, 2013.
(10)
Previously filed with the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 13, 2013.

58

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 28th day of February, 2014.
 
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.
 
By:
/s/ NICHOLAS S. SCHORSCH
 
 
NICHOLAS S. SCHORSCH
 
 
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
 
Capacity
 
Date
 
 
 
 
 
/s/ Nicholas S. Schorsch
 
Chief Executive Officer and
Chairman of the Board of Directors
(and Principal Executive Officer)
 
February 28, 2014
Nicholas S. Schorsch
 
 
 
 
 
 
 
 
/s/ Edward M. Weil, Jr.
 
President, Chief Operating Officer and Secretary
 
February 28, 2014
Edward M. Weil, Jr.
 
 
 
 
 
 
 
 
 
/s/ Nicholas A. Radesca
 
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 
February 28, 2014
Nicholas A. Radesca
 
 
 
 
 
 
 
 
/s/ William M. Kahane
 
Director
 
February 28, 2014
William M. Kahane
 
 
 
 
 
 
 
 
 
/s/ Scott J. Bowman
 
Independent Director
 
February 28, 2014
Scott J. Bowman
 
 
 
 
 
 
 
 
 
/s/ William G. Stanley
 
Independent Director
 
February 28, 2014
William G. Stanley
 
 
 
 
 
 
 
 
 
/s/ Robert H. Burns
 
Independent Director
 
February 28, 2014
Robert H. Burns
 
 
 
 

59
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
American Realty Capital New York Recovery REIT, Inc.
We have audited the accompanying consolidated balance sheets of American Realty Capital New York Recovery REIT, Inc. (a Maryland Corporation) and subsidiaries (the "Company") as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for each of the three years ended December 31, 2013. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Realty Capital New York Recovery REIT, Inc. and subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the three years ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania
February 28, 2014



F-2
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 
 
December 31,
 
 
2013
 
2012
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
425,814

 
$
92,648

Buildings, fixtures and improvements
 
989,145

 
229,557

Acquired intangible lease assets
 
127,846

 
38,652

Total real estate investments, at cost
 
1,542,805

 
360,857

Less accumulated depreciation and amortization
 
(41,183
)
 
(12,263
)
Total real estate investments, net
 
1,501,622

 
348,594

Cash and cash equivalents
 
233,377

 
5,354

Restricted cash
 
1,122

 
962

Investment securities, at fair value
 
1,048

 
—

Investments in unconsolidated joint ventures
 
234,774

 
—

Preferred equity investment
 
30,000

 
—

Derivatives, at fair value
 
490

 
—

Receivable for sale of common stock
 
11,127

 
1,123

Due from affiliate, net
 
—

 
325

Prepaid expenses and other assets
 
21,404

 
4,624

Deferred costs, net
 
13,341

 
6,868

Total assets
 
$
2,048,305

 
$
367,850

LIABILITIES AND EQUITY
 
 

 
 

Mortgage notes payable
 
$
172,716

 
$
185,569

Credit facility
 
305,000

 
19,995

Market lease liabilities, net
 
73,029

 
6,235

Derivatives, at fair value
 
875

 
1,710

Accounts payable and accrued expenses
 
30,703

 
10,058

Deferred rent and other liabilities
 
7,997

 
866

Distributions payable
 
8,726

 
986

Total liabilities
 
599,046

 
225,419

Preferred stock, $0.01 par value; 40,866,376 shares authorized, none issued and outstanding
 
—

 
—

Convertible preferred stock, $0.01 par value, 9,133,624 shares authorized, none issued and outstanding
 
—

 
—

Common stock, $0.01 par value; 300,000,000 shares authorized, 174,120,408 and 19,930,772 shares issued and outstanding at December 31, 2013 and 2012, respectively
 
1,741

 
199

Additional paid-in capital
 
1,533,698

 
164,972

Accumulated other comprehensive loss
 
(613
)
 
(1,693
)
Accumulated deficit
 
(86,008
)
 
(22,338
)
Total stockholders' equity
 
1,448,818

 
141,140

Non-controlling interests
 
441

 
1,291

Total equity
 
1,449,259

 
142,431

Total liabilities and equity
 
$
2,048,305

 
$
367,850


The accompanying notes are an integral part of these financial statements

F-3
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)

 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Revenues:
 
 
 
 
 
 
Rental income
 
$
49,532

 
$
14,519

 
$
6,891

Operating expense reimbursements and other revenue
 
6,355

 
903

 
644

Total revenues
 
55,887

 
15,422

 
7,535

Operating expenses:
 
 

 
 
 
 
Property operating
 
14,918

 
2,398

 
1,039

Operating fees to affiliates
 
—

 
—

 
—

Acquisition and transaction related, net
 
17,417

 
6,066

 
1,586

General and administrative
 
1,019

 
226

 
220

Depreciation and amortization
 
33,912

 
8,097

 
4,043

Total operating expenses
 
67,266

 
16,787

 
6,888

Operating income (loss)
 
(11,379
)
 
(1,365
)
 
647

Other income (expenses):
 
 

 
 
 
 
Interest expense
 
(10,673
)
 
(4,994
)
 
(3,910
)
Income from unconsolidated joint venture
 
2,066

 
—

 
—

Income from preferred equity investment and investment securities
 
649

 
—

 
—

Interest income
 
21

 
1

 
1

Gain (loss) on derivative instruments
 
5

 
(14
)
 
(3
)
Total other expenses
 
(7,932
)
 
(5,007
)
 
(3,912
)
Net loss
 
(19,311
)
 
(6,372
)
 
(3,265
)
Net loss (income) attributable to non-controlling interests
 
32

 
33

 
(154
)
Net loss attributable to stockholders
 
$
(19,279
)
 
$
(6,339
)
 
$
(3,419
)
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
Designated derivatives, fair value adjustment
 
1,320

 
(1,492
)
 
(201
)
Unrealized loss on investment securities
 
(240
)
 
—

 
—

Comprehensive loss attributable to stockholders
 
$
(18,199
)
 
$
(7,831
)
 
$
(3,620
)
 
 
 
 
 
 
 
Basic and diluted net loss per share available to stockholders
 
$
(0.26
)
 
$
(0.52
)
 
$
(2.31
)

The accompanying notes are an integral part of these financial statements


F-4
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share data)


 
Convertible Preferred
Stock
 
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par
value
 
Number
of
Shares
 
Par
Value
 
Additional
Paid-In
Capital
 
 
Accumulated
Deficit
 
Stockholders'
Equity
 
Non-
controlling
Interests
 
Total
Equity
Balance, December 31, 2010
1,966,376

 
$
20

 
327,499

 
$
3

 
$
13,789

 
$
—

 
$
(2,578
)
 
$
11,234

 
$
12,891

 
$
24,125

Issuances of common stock
—

 
—

 
4,296,134

 
44

 
42,710

 
—

 
—

 
42,754

 
—

 
42,754

Common stock, offering costs, commissions and dealer manager fees
—

 
—

 
—

 
—

 
(9,340
)
 
—

 
—

 
(9,340
)
 
—

 
(9,340
)
Common stock issued through distribution reinvestment plan
—

 
—

 
44,117

 
—

 
419

 
—

 
—

 
419

 
—

 
419

Common stock repurchases
—

 
—

 
(2,538
)
 
—

 
(25
)
 
—

 
—

 
(25
)
 
—

 
(25
)
Preferred stock converted to common stock
(1,966,376
)
 
(20
)
 
1,966,376

 
20

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
—

 
—

 
27,315

 
—

 
218

 
—

 
—

 
218

 
—

 
218

Contributions from Advisor
—

 
—

 
—

 
—

 
15

 
—

 
—

 
15

 
—

 
15

Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(909
)
 
(909
)
Distributions declared
—

 
—

 
—

 
—

 
—

 
—

 
(2,600
)
 
(2,600
)
 
—

 
(2,600
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(201
)
 
—

 
(201
)
 
—

 
(201
)
Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
(3,419
)
 
(3,419
)
 
154

 
(3,265
)
Balance, December 31, 2011
—

 
—

 
6,658,903

 
67

 
47,786

 
(201
)
 
(8,597
)
 
39,055

 
12,136

 
51,191

Issuances of common stock
—

 
—

 
12,985,794

 
130

 
128,747

 
—

 
—

 
128,877

 
—

 
128,877

Common stock offering costs, commissions and dealer manager fees, net of reimbursements
—

 
—

 
—

 
—

 
(13,027
)
 
—

 
—

 
(13,027
)
 
—

 
(13,027
)
Common stock issued though distribution reinvestment plan
—

 
—

 
343,069

 
3

 
3,255

 
—

 
—

 
3,258

 
—

 
3,258

Common stock repurchases
—

 
—

 
(81,661
)
 
(1
)
 
(780
)
 
—

 
—

 
(781
)
 
—

 
(781
)
Share-based compensation
—

 
—

 
24,667

 
—

 
180

 
—

 
—

 
180

 
—

 
180

Increase in interest in Bleecker Street

 


 
—

 
—

 
(1,189
)
 
—

 
—

 
(1,189
)
 
(10,811
)
 
(12,000
)
Non-controlling interests issued

 


 
—

 
—

 
—

 
—

 
—

 
—

 
480

 
480

Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(481
)
 
(481
)
Distributions declared
—

 
—

 
—

 
—

 
—

 
—

 
(7,402
)
 
(7,402
)
 
—

 
(7,402
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(1,492
)
 
—

 
(1,492
)
 
—

 
(1,492
)
Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(6,339
)
 
(6,339
)
 
(33
)
 
(6,372
)
Balance, December 31, 2012
—

 
—

 
19,930,772

 
199

 
164,972

 
(1,693
)
 
(22,338
)
 
141,140

 
1,291

 
142,431

Issuances of common stock
—

 
—

 
152,371,933

 
1,524

 
1,501,003

 
—

 
—

 
1,502,527

 
—

 
1,502,527

Common stock offering costs, commissions and dealer manager fees
—

 
—

 
—

 
—

 
(149,210
)
 
—

 
—

 
(149,210
)
 
—

 
(149,210
)
Common stock issued through distribution reinvestment plan
—

 
—

 
1,984,370

 
20

 
18,832

 
—

 
—

 
18,852

 
—

 
18,852

Common stock repurchases
—

 
—

 
(195,395
)
 
(2
)
 
(1,884
)
 
—

 
—

 
(1,886
)
 
—

 
(1,886
)
Share-based compensation
—

 
—

 
28,728

 
—

 
232

 
—

 
—

 
232

 
—

 
232

Increase in interest in Bleecker Street
—

 
—

 
—

 
—

 
(247
)
 
—

 
—

 
(247
)
 
(753
)
 
(1,000
)
Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(65
)
 
(65
)
Distributions declared
—

 
—

 
—

 
—

 
—

 
—

 
(44,391
)
 
(44,391
)
 
—

 
(44,391
)
Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(19,279
)
 
(19,279
)
 
(32
)
 
(19,311
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
1,080

 
—

 
1,080

 
—

 
1,080

Balance, December 31, 2013
—

 
$
—

 
174,120,408

 
$
1,741

 
$
1,533,698

 
$
(613
)
 
$
(86,008
)
 
$
1,448,818

 
$
441

 
$
1,449,259


The accompanying notes are an integral part of these financial statements


F-5
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
 
 
Net loss attributable to stockholders
 
$
(19,279
)
 
$
(6,339
)
 
$
(3,419
)
Adjustments to reconcile net loss attributable to stockholders to net cash provided by operating activities:
 
 

 
 

 
 

Depreciation
 
25,566

 
6,368

 
2,609

Amortization of intangibles
 
8,346

 
1,729

 
1,434

Amortization of deferred financing costs
 
2,369

 
889

 
502

Accretion of market lease liabilities and amortization of above-market lease assets, net
 
(2,681
)
 
(433
)
 
(239
)
Net loss (income) attributable to non-controlling interests
 
(32
)
 
(33
)
 
154

Equity in income of unconsolidated joint ventures
 
(2,066
)
 
—

 
—

Bad debt expense
 
481

 
—

 
—

Share-based compensation
 
232

 
180

 
218

Loss (gain) on derivative instruments
 
(5
)
 
14

 
3

Non-controlling interest issued
 
—

 
100

 
—

Changes in assets and liabilities:
 
 

 
 

 
 
Prepaid expenses and other assets
 
(18,749
)
 
(3,320
)
 
(1,160
)
Accounts payable and accrued expenses
 
7,790

 
3,236

 
136

Due from affiliated entities
 
325

 
—

 
—

Deferred rent and other liabilities
 
7,131

 
639

 
25

Net cash provided by operating activities
 
9,428

 
3,030

 
263

Cash flows from investing activities:
 
 

 
 

 
 
Investment in real estate and other assets
 
(1,298,228
)
 
(144,750
)
 
(25,276
)
Capital expenditures
 
(12,089
)
 
(1,003
)
 
(460
)
Purchase of investment securities
 
(1,288
)
 
—

 
—

Distributions from unconsolidated joint venture
 
2,097

 
—

 
—

Net cash used in investing activities
 
(1,309,508
)
 
(145,753
)
 
(25,736
)
Cash flows from financing activities:
 
 

 
 

 
 
Payments on notes payable
 
—

 
(5,933
)
 
—

Proceeds from mortgage notes payable
 
—

 
31,565

 
21,300

Payments on mortgage notes payable
 
(72,853
)
 
(434
)
 
(14,085
)
Proceeds from credit facility
 
305,000

 
48,495

 
—

Payments on credit facility
 
(19,995
)
 
(28,500
)
 
—

Proceeds from issuance of common stock
 
1,492,523

 
127,962

 
42,545

Repurchases of common stock
 
(1,763
)
 
(424
)
 
—

Payments of offering costs and fees related to stock issuances
 
(148,223
)
 
(13,618
)
 
(10,050
)
Payments of deferred financing costs
 
(7,562
)
 
(4,582
)
 
(1,992
)
Distributions paid
 
(17,799
)
 
(3,445
)
 
(2,025
)
Payments to affiliate
 
—

 
33

 
(19
)
Distributions to non-controlling interest holders
 
(65
)
 
(481
)
 
(909
)
Payments to non-controlling interest holder
 
(1,000
)
 
(12,000
)
 
—

Restricted cash
 
(160
)
 
(783
)
 
581

Net cash provided by financing activities
 
1,528,103

 
137,855

 
35,346

Net increase (decrease) in cash and cash equivalents
 
228,023

 
(4,868
)
 
9,873

Cash and cash equivalents, beginning of period
 
5,354

 
10,222

 
349

Cash and cash equivalents, end of period
 
$
233,377

 
$
5,354

 
$
10,222



F-6
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Supplemental Disclosures:
 
 
 
 
 
 
Cash paid for interest
 
$
7,946

 
$
4,016

 
$
2,541

Non-Cash Investing and Financing Activities:
 
 

 
 

 
 
Mortgage notes payable used to acquire investments in real estate
 
$
60,000

 
$
79,188

 
$
32,650

Liabilities assumed in acquisition of real estate
 
12,206

 
4,760

 
—

Non-controlling interest issued to seller
 
—

 
380

 
—

Conversion of preferred stock to common stock
 
—

 
—

 
16,954

Common stock issued through distribution reinvestment plan
 
18,852

 
3,258

 
419


The accompanying notes are an integral part of these financial statements


F-7
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013



Note 1 — Organization
American Realty Capital New York Recovery REIT, Inc. (the "Company"), incorporated on October 6, 2009, is a Maryland corporation that qualified as a real estate investment trust for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2010.  On September 2, 2010, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, 0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-163069) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covers up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which the Company's common stockholders may elect to have their distributions reinvested in additional shares of the Company's common stock at the greater of 9.50 per share or 95% of the estimated value of a share of common stock. On August 2, 2013, the Company filed a Registration Statement on Form S-11 with the SEC to register a follow-on offering of up to 12.5 million shares of common stock at a price of $10.00 per share on a “reasonable best efforts” basis and 1.25 million shares of common stock pursuant to the DRIP at $9.50 per share.
On November 27, 2013, the Company registered an additional 25.0 million shares to be used under the DRIP (including a direct stock component) pursuant to a registration statement on Form S-3D (File No. 333-192576). The new DRIP, including the direct stock component, became effective December 6, 2013 and, as permitted by the IPO prospectus, the Company reallocated the remaining DRIP shares from its IPO to the IPO’s primary offering. As of December 11, 2013, the Company closed the IPO following the successful achievement of its target equity raise.
As of December 31, 2013, the Company had 174.1 million shares of common stock outstanding, including unvested restricted shares, converted shares of convertible preferred stock (the "Preferred Shares") and shares issued under the DRIP. As of December 31, 2013, the Company had received total proceeds from the IPO and the DRIP of $1.7 billion from the sale of 172.1 million shares of common stock, including shares issued under the DRIP.  In addition, the Company sold 2.0 million Preferred Shares for gross proceeds of $17.0 million in a private placement pursuant to Rule 506 of Regulation D of the Securities Act (the "Preferred Offering"), which terminated on September 2, 2010, the effective date of the Registration Statement. On December 15, 2011, the Company exercised its option to convert the Preferred Shares into 2.0 million shares of common stock on a one-for-one basis. As of December 31, 2013, the aggregate value of all issuances and subscriptions of common stock outstanding was $1.7 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP).
The Company was formed to acquire income-producing commercial real estate in the New York metropolitan area, and, in particular, properties located in New York City, with a focus on office and retail properties. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate.  The Company purchased its first property and commenced active operations in June 2010.  As of December 31, 2013, the Company owned 23 properties and real estate-related assets.
Substantially all of the Company's business is conducted through New York Recovery Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company has no employees.  The Company has retained New York Recovery Advisors, LLC (the "Advisor") to manage its affairs on a day-to-day basis. New York Recovery Properties, LLC (the "Property Manager") serves as the Company's property manager, unless services are performed by a third party for specific properties.  Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO.  The Advisor and the Property Manager are wholly owned entities of, and the Dealer Manager is under common ownership with, American Realty Capital III, LLC (the "Sponsor"), as a result of which, they are related parties and receive compensation, fees and expense reimbursements for services related to the IPO and for the investment and management of the Company's assets. These entities receive fees during the offering, acquisition, operational and liquidation stages.
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP").

F-8
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and consolidated joint venture arrangements in which the Company has controlling financial interests. The portions of the consolidated joint venture arrangements not owned by the Company are presented as noncontrolling interests as of and during the period consolidated. All inter-company accounts and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, its form of ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures based on standards set forth in GAAP. In determining whether the Company has a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, power to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a VIE for which the Company is the primary beneficiary.
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. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, real estate taxes and derivative financial instruments and hedging activities, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five to 15 years for fixtures and capital improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company is required to make subjective assessments as to the useful lives of the Company's properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company's investments in real estate. These assessments have a direct impact on the Company's net income because if the Company were to shorten the expected useful lives of the Company's investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.

F-9
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Purchase Price Allocations
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings, fixtures and tenant improvements are based on cost segregation studies performed by independent third-parties or the Company's analysis of comparable properties in its portfolio. Identifiable intangibles include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 12 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease.  The capitalized below-market lease values are amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, the Company initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option.  The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationships, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 29 years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.

F-10
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Intangible assets and acquired lease liabilities consist of the following:
 
 
December 31,
(In thousands)
 
2013
 
2012
Intangible lease assets:
 
 
 
 
In-place leases, net of accumulated amortization of $8,344 and $2,705 at December 31, 2013 and 2012, respectively
 
$
99,885

 
$
26,647

Above-market leases, net of accumulated amortization of $1,124 and $82 at December 31, 2013 and 2012, respectively
 
18,493

 
9,218

Total intangible lease assets, net
 
$
118,378

 
$
35,865

Intangible liabilities:
 
 

 
 

Below-market leases, net of accumulated amortization of $4,428 and $829 at December 31, 2013 and 2012, respectively
 
$
55,115

 
$
6,235

Above-market ground lease, net of accumulated amortization of $54 and $0 at December 31, 2013 and 2012, respectively
 
17,914

 
—

Total intangible lease liabilities, net
 
$
73,029

 
$
6,235

The following table provides the weighted-average amortization and accretion periods as of December 31, 2013, for intangible assets and liabilities and the projected amortization expense and adjustments to revenues for the next five years:
(Dollar amounts in thousands)
 
Weighted-
Average
Amortization
Period
 
2014
 
2015
 
2016
 
2017
 
2018
In-place leases
 
8.9
 
$
20,063

 
$
16,511

 
$
9,065

 
$
7,983

 
$
7,038

 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market lease assets
 
11.3
 
$
(2,682
)
 
$
(2,587
)
 
$
(1,244
)
 
$
(1,236
)
 
$
(1,236
)
Below-market lease liabilities
 
8.8
 
11,394

 
7,986

 
5,692

 
4,901

 
4,103

Total to be included in rental income
 
 
 
$
8,712

 
$
5,399

 
$
4,448

 
$
3,665

 
$
2,867

 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market ground lease liability
 
36.9
 
$
449

 
$
449

 
$
449

 
$
449

 
$
449

Investments in unconsolidated joint venture
The Company accounts for investments in unconsolidated joint ventures under the equity method of accounting in cases where the Company exercises significant influence over, but does not control, the entities and is not considered to be the primary beneficiary. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of these investments on the Company's balance sheet and the underlying equity in net assets is depreciated and amortized over the estimated useful lives of the assets and liabilities and included in depreciation and amortization in the accompanying consolidated statements of operations. Equity income (loss) from unconsolidated joint ventures is allocated based on the Company's ownership or economic interest in each joint venture.
A loss in the value of a joint venture investment that is determined to be other than temporary is recognized in the period in which the loss occurs. No such impairment losses were recorded for the year ended December 31, 2013. As of December 31, 2013, the Company had $234.8 million in investments in unconsolidated joint ventures. As of December 31, 2012, the Company had no such investments.

F-11
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Cash and Cash Equivalents
Cash and cash equivalents includes cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less.
The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (the "FDIC") up to an insurance limit. At December 31, 2013 and 2012 the Company had deposits of $233.4 million and $5.4 million, respectively, of which $228.8 million and $3.3 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result.
Restricted Cash
Restricted cash primarily consists of reserves related to lease expirations as well as maintenance, structural, and debt service reserves as of December 31, 2013 and 2012.
Deferred Costs, Net
Deferred costs, net consists of deferred financing costs and deferred leasing costs. Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity.  Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Deferred leasing costs, consisting primarily of lease commissions and payments made to assume existing leases, are deferred and amortized over the term of the lease.
Share Repurchase Program
The Company's board of directors has adopted a Share Repurchase Program ("SRP") that enables stockholders to sell their shares to the Company in limited circumstances.  The SRP permits investors to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below.
Prior to the time that the Company's shares are listed on a national securities exchange and until the Company establishes an estimated value for the shares, the purchase price per share will depend on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $9.25 or 92.5% of the amount they actually paid for each share; after two years from the purchase date —the lower of $9.50 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $9.75 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $10.00 or 100% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations). The Company will begin establishing an estimated value for its shares based on the value of its real estate and real estate-related investments beginning 18 months after the close of its offering. Beginning 18 months after the completion of the last offering of the Company's shares (excluding offerings under the DRIP), the board of directors will determine the value of the properties and the other assets based on such information as the board determines appropriate, which may or may not include independent valuations of properties or of the Company as a whole, prepared by third-party service providers.
The Company is only authorized to repurchase shares pursuant to the SRP up to the value of the shares issued under the DRIP and will limit the amount spent to repurchase shares in a given quarter to the value of the shares issued under the DRIP in that same quarter. In addition, the board of directors may reject a request for redemption, at any time. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests. Purchases under the SRP by the Company will be limited in any calendar year to 5% of the weighted average number of shares outstanding during the prior year (or 1.25% per calendar quarter).

F-12
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


When a stockholder requests repurchases and the repurchases are approved by the Company's board of directors, it will reclassify such obligation from equity to a liability based on the settlement value of the obligation. The following table reflects
the number of shares repurchased for the years ended December 31, 2013, 2012 and 2011.
 
Number of Requests
 
Number of Shares Repurchased
 
Average Price per Share
Year ended December 31, 2011
1

 
2,538

 
$
9.85

Year ended December 31, 2012
10

 
81,661

 
9.55

Year ended December 31, 2013
24

 
195,395

 
9.65

Cumulative repurchase requests as of December 31, 2013 (1)
35

 
279,594

 
$
9.63

__________________________
(1)
Includes six unfulfilled repurchase requests consisting of 51,829 shares at an average price per share of $9.76, which were approved for repurchase as of December 31, 2013 and completed in February 2014.
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP.  Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the IPO. The board of directors may designate that certain cash or other distributions be excluded from the DRIP.  The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants.  Shares issued under the DRIP are recorded to equity in the accompanying consolidated balance sheet in the period distributions are declared. 
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations. If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.

F-13
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation.
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of operations.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
The Company’s hotel revenues are derived from room rentals and other sources such as charges to guests for telephone service, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned.
Offering and Related Costs
Offering costs (other than selling commissions and the dealer manager fee) of the Company may be paid by the Advisor, the Dealer Manager or their affiliates on behalf of the Company. Offering costs include all expenses to be paid by the Company in connection with its offering, including but not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse the bona fide diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for the salaries of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. The Company was obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on behalf of the Company, provided that the Advisor was obligated to reimburse the Company to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by the Company in its offering exceed 1.5% of gross offering proceeds. As a result, these costs would only be a liability of the Company to the extent selling commissions, the dealer manager fee and other organization and offering costs did not exceed 11.5% of the gross proceeds determined at the end of offering. As of the end of the IPO in December 2013, offering costs were less than 11.5% of the gross proceeds in the IPO (See Note 13 — Related Party Transactions and Arrangements).
Share-Based Compensation
The Company has a stock-based incentive award plan for its directors, which is accounted for under the guidance for share based payments.  The expense for such awards is included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met. (See Note 15 — Share-Based Compensation).
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the tax year ended December 31, 2011. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax to the extent it distributes its REIT taxable income to its stockholders, and so long as it distributes at least 90% of its REIT taxable income. The Company distributed to its shareholders 100% of its ordinary taxable income for each of the years ended December 31, 2013, 2012 and 2011. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income was recorded on the Company’s financial statements. REITs are subject to a number of other organizational and operational requirements. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.

F-14
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


During the year ended December 31, 2013, the Company purchased a hotel, which is owned by a taxable REIT subsidiary ("TRS"), which is owned by the OP. A TRS is subject to federal, state and local income taxes. The TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event the Company determines that it would not be able to realize the deferred income tax assets in the future in excess of the net recorded amount, the Company establishes a valuation allowance which offsets the previously recognized income tax benefit. Deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities of the TRSs for financial reporting purposes and the amounts used for income tax purposes. The Company had a deferred tax assets and a corresponding valuation allowance of $0.2 million as of December 31, 2013 and did not have any deferred tax assets as of December 31, 2012. The TRS had federal and state net operating loss carry forwards as of December 31, 2013 of $0.4 million, which will expire through 2034. The Company has concluded that it is more likely than not that the net operating loss carry forwards will not be utilized during the carry forward period and as such the Company has established a valuation allowance against these deferred tax assets. The Company had immaterial current and deferred federal and state income tax expense for the years ended December 31, 2013, 2012 and 2011.
As of December 31, 2013, the Company had no material uncertain income tax positions. The tax years subsequent to and including the year ended December 31, 2010 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Per Share Data
Income (loss) per basic share of common stock is calculated by dividing net income (loss) less distributions declared on Preferred Shares by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and unvested restricted stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.
Reportable Segments
The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company's investments in real estate generate rental revenue and other income through the leasing of properties, which comprised 100% of total consolidated revenues.  Management evaluates the operating performance of the Company's investments in real estate on an individual property level.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board ("FASB") issued guidance regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance was effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments allow an entity to initially assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity is no longer required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments were effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective for annual and interim periods beginning after December 15, 2012. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

F-15
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


In February 2013, the FASB issued new accounting guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In March 2013, the FASB issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity.  The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Note 3 — Real Estate Investments
The following table presents the allocation of the assets acquired and liabilities assumed during the years ended December 31, 2013, 2012, and 2011:
 
 
Year Ended December 31,
(Dollar amounts in thousands)
 
2013
 
2012
 
2011
Real estate investments, at cost:
 
 
 
 
 
 
Land
 
$
333,166

 
$
74,209

 
$
7,196

Buildings, fixtures and improvements
 
749,127

 
131,958

 
46,085

Total tangible assets
 
1,082,293

 
206,167

 
53,281

Acquired intangibles:
 
 
 
 
 
 
In-place leases
 
81,376

 
18,867

 
5,194

Above-market lease assets
 
10,389

 
9,194

 
—

Below-market lease liabilities
 
(70,589
)
 
(5,150
)
 
(549
)
Total acquired intangibles
 
21,176

 
22,911

 
4,645

Total assets acquired, net
 
1,103,469

 
229,078

 
57,926

Investment in unconsolidated joint venture
 
236,965

 
—

 
—

Preferred equity investment
 
30,000

 
—

 
—

Mortgage notes payable used to acquire investments in real estate
 
(60,000
)
 
(79,188
)
 
(32,650
)
Other liabilities assumed
 
(12,206
)
 
(4,760
)
 
—

Non-controlling interest retained by seller
 
—

 
(380
)
 
—

Cash paid for acquired real estate investments and other assets
 
$
1,298,228

 
$
144,750

 
$
25,276

Number of properties and other investments purchased
 
7

 
7

 
5


The following table presents unaudited pro forma information as if the acquisitions during the year ended December 31, 2013 had been consummated on January 1, 2011. Additionally, the unaudited pro forma net loss attributable to stockholders was adjusted to reclass acquisition and transaction related expenses of $17.8 million from the year ended December 31, 2013 to the year ended December 31, 2011.
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Pro forma revenues
 
$
115,332

 
$
98,021

 
$
90,134

Pro forma net income attributable to stockholders
 
$
2,513

 
$
(9,342
)
 
$
(24,246
)

F-16
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


The following table presents future minimum base cash rental payments due to the Company, excluding future minimum base cash rental payments related to unconsolidated joint ventures, subsequent to December 31, 2013.  These amounts exclude contingent rental payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum
Base Rental Cash Payments
2014
 
$
88,340

2015
 
86,551

2016
 
73,600

2017
 
71,003

2018
 
68,327

Thereafter
 
447,132

 
 
$
834,953


The following table lists the tenants whose annualized rental income on a straight-line basis represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis as of December 31, 2013, 2012 and 2011:
 
 
 
 
December 31,
Property Portfolio
 
Tenant
 
2013
 
2012
 
2011
Worldwide Plaza
 
Cravath, Swaine & Moore, LLP
 
18.2%
 
*
 
*
Worldwide Plaza
 
Nomura Holdings America, Inc.
 
12.4%
 
*
 
*
229 West 36th Street
 
American Language Communication Center, Inc.
 
*
 
13.5%
 
*
One Jackson Square
 
TD Bank, N.A.
 
*
 
*
 
12.2%
Bleecker Street
 
Burberry Limited
 
*
 
*
 
10.7%
Duane Reade
 
Duane Reade
 
*
 
*
 
10.0%
__________________________
* Tenant's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
The termination, delinquency or non-renewal of any of the above tenants may have a material adverse effect on revenues. No other tenant represents more than 10% of annualized rental income as of December 31, 2013, 2012 and 2011.
Note 4 — Investment in Unconsolidated Joint Venture
On October 30, 2013, the Company purchased a 48.9% equity interest in WWP Holdings, LLC ("Worldwide Plaza") for a contract purchase price of $220.1 million. The purchase price reflected an agreed value for Worldwide Plaza of $1,325.0 million less $875.0 million of debt on the property. The debt on the property has a weighted average interest rate of 4.6% and matures in March 2023. The Company accounts for the investment in Worldwide Plaza using the equity method of accounting, since the Company exercises significant influence over, but does not control the entity. As of December 31, 2013, the carrying value of the Company's investment in Worldwide Plaza was $234.8 million.
Pursuant to the terms of the membership agreement relating to the Company’s purchase of the 48.9% equity interest in Worldwide Plaza, the Company retains an option to purchase the balance of the equity interest in Worldwide Plaza beginning 38 months following the closing of the acquisition at a price of $1.4 billion, subject to certain adjustments, including adjustments for certain loans that are outstanding at the time of any exercise.
At acquisition, the Company's investment in Worldwide Plaza exceeded the Company's share of the book value of the net assets of Worldwide Plaza by $260.6 million. This basis difference resulted from the excess of the Company's purchase price for the interest in the Worldwide Plaza over the book value of Worldwide Plaza's net assets. Substantially all of this basis difference was allocated, based on the Company's estimates of the fair values of Worldwide Plaza's assets and liabilities, to real estate (land and buildings). The Company amortizes the basis difference over the anticipated useful lives of the underlying tangible and intangible assets acquired and liabilities assumed.

F-17
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


During the year ended December 31, 2013, $2.2 million was recorded in depreciation and amortization expense in the consolidated statements of operations and comprehensive loss relating to the amortization of the basis difference. The basis difference related to the land will be recognized upon disposition of the Company's investment. During the year ended December 31, 2013, the Company recorded $2.1 million of income related to its investment in Worldwide Plaza, which represents the $2.7 million of preferred distributions earned, net of the Company's pro-rata share of Worldwide Plaza's net loss during the Company's period of investment. This income is included in other income (expenses) on the consolidated statement of operations and comprehensive loss.
The amounts reflected in the following tables (except for the Company’s share of equity and income) are based on the historical financial information of Worldwide Plaza. The Company does not record losses of the joint ventures in excess of its investment balances unless the Company is liable for the obligations of the joint venture or is otherwise committed to provide financial support to the joint venture.
The condensed balance sheet as of December 31, 2013 for Worldwide Plaza is as follows:
(In thousands)
 
December 31, 2013
Real estate assets, at cost
 
$
696,342

Less accumulated depreciation and amortization
 
(77,919
)
Total real estate assets, net
 
618,423

Other assets
 
248,048

Total assets
 
$
866,471

 
 
 
Debt
 
$
875,000

Other liabilities
 
9,923

Total liabilities
 
884,923

Deficit
 
(18,452
)
Total liabilities and deficit
 
$
866,471

 
 
 
Company's share of deficit (Company's basis)
 
$
234,774


F-18
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


The condensed statement of operations for the period from October 31, 2013 (date of acquisition) to December 31, 2013 for Worldwide Plaza is as follows:
(In thousands)
 
Period from October 31, 2013 (date of acquisition) to December 31, 2013
Rental income
 
$
18,736

Other revenue
 
837

Total revenue
 
19,573

Operating expenses:
 
 
Operating expense
 
7,288

Depreciation and amortization
 
4,025

Total operating expenses
 
11,313

Operating income
 
8,260

Interest expense
 
(6,808
)
Net income
 
1,452

Preferred distribution
 
(2,653
)
Net loss to members
 
$
(1,201
)
 
 
 
Company's preferred distribution
 
$
2,653

Company's share of net loss from Worldwide Plaza
 
(587
)
Company's income from Worldwide Plaza
 
$
2,066


Note 5 — Preferred Equity Investment
As of December 31, 2013, the Company held a preferred equity investment in an institutional quality office building located at 123 William Street in the Financial District of Downtown Manhattan. As of December 31, 2013, the preferred equity investment has a carrying amount of $30.0 million, a five-year term maturing in October 2018, a 0.75% origination fee, a 6.0% current pay rate, and a 2.0% accrual rate (the accrual rate will increase to 2.25% after year two, 2.75% after year three, and 3.25% after year four). The Company's preferred equity investment includes potential additional capital contributions not to exceed a total preferred equity investment of $40.0 million. The Company did not hold any preferred equity investments at December 31, 2012.
Note 6 — Investment Securities
As of December 31, 2013, the Company had investments in redeemable preferred stock, with a fair value of $1.0 million. These investments are considered available-for-sale securities and therefore increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income as a component of equity on the consolidated balance sheet unless the securities are considered to be permanently impaired at which time the losses would be reclassified to expense.
The following table details the unrealized losses on investment securities as of December 31, 2013. The Company did not have any such investments as of December 31, 2012.
 
 
December 31, 2013
(In thousands)
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Investment securities
 
$
1,288

 
$
—

 
$
(240
)
 
$
1,048

Unrealized losses as of December 31, 2013 were considered temporary and therefore no impairment was recorded during the year ended December 31, 2013.
The Company's preferred stock investments are redeemable at the respective issuer's option after five years from issuance.

F-19
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Note 7 — Credit Facility
On March 30, 2012, the Company entered into a senior unsecured revolving credit facility in the amount of $40.0 million. The credit facility generally bore interest at a floating rate equal to LIBOR plus 2.50%, subject to adjustment as set forth in the credit agreement, and included an unused commitment fee per annum of (a) 0.2% if the unused balance of the facility was equal to or less than 50% of the available facility and (b) 0.3% if the unused balance of the facility exceeded 50% of the available facility. The credit facility had a term of 36 months, however, it was superseded by the following facility described below.
On August 20, 2013, the Company entered into a $220.0 million credit facility, which provides for aggregate revolving loan borrowings of up to $110.0 million and aggregate term loan borrowings of up to $110.0 million. The credit facility contained an "accordion" feature to allow the Company, under certain circumstances, to increase the aggregate commitments under the credit facility to a maximum of $325.0 million. On December 23, 2013, the Company amended the credit facility to decrease the aggregate revolving loan borrowings to $50.0 million and increase the aggregate term loan borrowings to $340.0 million. The term loan component of the credit facility matures in August 2018 and the revolving loan component matures in August 2016.
The Company has the option, based upon its corporate leverage, its consolidated net worth and a minimum number of properties in the borrowing base, to have the credit facility priced at either: (a) LIBOR, plus an applicable margin that ranges from 1.50% to 2.75%; or (b) the Base Rate (as defined below), plus an applicable margin that ranges from 0.50% to 1.75%. Base Rate is defined in the credit facility as the greatest of (i) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate,” (ii) 0.50% above the federal funds effective rate and (iii) 1.00% above the applicable one-month LIBOR. The outstanding balance of the term loan component of the credit facility as of December 31, 2013 was $305.0 million with a weighted average interest rate of 2.19%, a portion of which is fixed with an interest rate swap. There was no outstanding balance under the revolving component of the credit facility as of December 31, 2013. The unused borrowing capacity, based on the value of the borrowing base properties as of December 31, 2013, was $80.2 million. Availability of borrowings is based on a pool of eligible unencumbered real estate assets.
The credit facility provides for monthly interest payments for each Base Rate loan and periodic payments for each LIBOR loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the maturity date. The credit facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the credit facility and to accelerate the payment on any unpaid principal amount of all outstanding loans.
The credit facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of December 31, 2013, the Company was in compliance with the debt covenants under the credit facility agreement.

F-20
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Note 8 — Mortgage Notes Payable
The Company's mortgage notes payable as of December 31, 2013 and 2012 consist of the following:
 
 
 
 
Outstanding Loan Amount
 
 
 
 
 
 
Portfolio
 
Encumbered
Properties
 
December 31, 2013
 
December 31, 2012
 
Effective
Interest Rate
 
Interest Rate
 
Maturity
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Interior Design Building
 
1
 
$
20,582

 
$
20,949

 
4.4
%
 
Fixed
 
Dec. 2021
Bleecker Street
 
3
 
21,300

 
21,300

 
4.3
%
 
Fixed
 
Dec. 2015
Foot Locker
 
1
 
3,250

 
3,250

 
4.6
%
 
Fixed
 
Jun. 2016
Regal Parking Garage
 
1
 
3,000

 
3,000

 
4.5
%
 
Fixed
 
Jul. 2016
Duane Reed
 
1
 
8,400

 
8,400

 
3.6
%
 
Fixed
 
Nov. 2016
Washington Street Portfolio
 
1
 
4,831

 
4,917

 
4.4
%
 
Fixed
 
Dec. 2021
One Jackson Square
 
1
 
13,000

 
13,000

 
3.4
%
(1) 
Fixed
 
Dec. 2016
350 West 42nd Street
 
1
 
11,365

 
11,365

 
3.4
%
 
Fixed
 
Aug. 2017
1100 Kings Highway
 
1
 
20,200

 
20,200

 
3.4
%
(1) 
Fixed
 
Aug. 2017
1623 Kings Highway
 
1
 
7,288

 
7,288

 
3.3
%
(1) 
Fixed
 
Nov. 2017
256 West 38th Street
 
1
 
24,500

 
24,500

 
3.1
%
(1) 
Fixed
 
Dec. 2017
256 West 38th Street
 
—
 
—

 
2,400

 
5.3
%
(2) 
Variable
 
Dec. 2013
229 West 36th Street
 
1
 
35,000

 
35,000

 
2.9
%
(1) 
Fixed
 
Dec. 2017
229 West 36th Street
 
—
 
—

 
10,000

 
5.3
%
(2) 
Variable
 
Dec. 2013
 
 
14
 
$
172,716

 
$
185,569

 
3.6
%
(3) 
 
 
 
______________________ 
(1)
Fixed through an interest rate swap agreement.
(2)
These variable rate mezzanine loans were repaid in full in January 2013.
(3)
Calculated on a weighted average basis for all mortgages outstanding as of December 31, 2013.

The following table summarizes the scheduled aggregate principal repayments subsequent to December 31, 2013:
(In thousands)
 
Future Minimum Principal Payments
2014
 
$
473

2015
 
21,794

2016
 
28,167

2017
 
102,730

2018
 
4,573

Thereafter
 
14,979

Total
 
$
172,716

Some of the Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of December 31, 2013 and 2012, the Company was in compliance with the financial covenants under its mortgage note agreements.

F-21
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Note 9 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of December 31, 2013 and 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
The Company has investments in redeemable preferred stock that are traded in active markets and therefore, due to the availability of quoted market prices in active markets, classified these investments as level 1 in the fair value hierarchy.
The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2013 and 2012, aggregated by the level in the fair value hierarchy within which those instruments fall:
(In thousands)
 
Quoted Prices in Active Markets
Level 1
 
Significant Other Observable Inputs
Level 2
 
Significant Unobservable Inputs
Level 3
 
Total
December 31, 2013
 
 
 
 
 
 
 
 
Interest rate swap, net
 
$
—

 
$
(385
)
 
$
—

 
$
(385
)
Investment securities
 
$
1,048

 
$
—

 
$
—

 
$
1,048

December 31, 2012
 
 
 
 
 
 
 
 
Interest rate swap
 
$
—

 
$
(1,710
)
 
$
—

 
$
(1,710
)
Investment securities
 
$
—

 
$
—

 
$
—

 
$
—

A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2013.

F-22
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, prepaid expenses and other assets, due from affiliates, notes payable, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheet due to their short-term nature. The fair values of the Company's financial instruments that are not reported at fair value on the consolidated balance sheet are reported below.
 
 
 
 
Carrying
Amount at
 
Fair Value at
 
Carrying
Amount at
 
Fair Value at
(In thousands)
 
Level
 
December 31, 2013
 
December 31, 2013
 
December 31, 2012
 
December 31, 2012
Mortgage notes payable
 
3
 
$
172,716

 
$
173,427

 
$
185,569

 
$
185,621

Credit facility
 
3
 
$
305,000

 
$
305,000

 
$
19,995

 
$
19,995

The fair value of mortgage notes payable and the fixed-rate portions of term loans on the credit facility are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements. Advances under the credit facility with interest rates which vary are considered to be reported at fair value.
Note 10 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, collars, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements will not be able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company may primarily use interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses such derivatives to hedge the variable cash flows associated with variable-rate debt.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $2.0 million will be reclassified from other comprehensive income as an increase to interest expense.

F-23
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


As of December 31, 2013 and 2012, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk.
 
 
December 31, 2013
 
December 31, 2012
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate swaps
 
6
 
$
179,988

 
5
 
$
99,988

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2013 and 2012:
 
 
 
 
December 31,
(In thousands)
 
Balance Sheet Location
 
2013
 
2012
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate swaps
 
Derivative assets, at fair value
 
$
490

 
$
—

Interest rate swaps
 
Derivative liabilities, at fair value
 
$
(875
)
 
$
(1,710
)
Derivatives in Cash Flow Hedging Relationships
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2013, 2012 and 2011:
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Amount of loss recognized in accumulated other comprehensive loss from interest rate derivatives (effective portion)
 
$
(16
)
 
$
(1,722
)
 
$
(214
)
Amount of loss reclassified from accumulated other comprehensive loss into income as interest expense (effective portion)
 
$
(1,336
)
 
$
(230
)
 
$
(13
)
Amount of income (loss) recognized in gain (loss) on derivative instruments (ineffective portion and amount excluded from effectiveness testing)
 
$
5

 
$
(14
)
 
$
(3
)
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of December 31, 2013 and 2012. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying balance sheets.
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 
Derivatives (In thousands)
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Recognized Liabilities
 
Net Amounts of Assets (Liabilities) presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Posted
 
Net Amount
December 31, 2013
 
$
490

 
$
(875
)
 
$
(385
)
 
$
—

 
$
—

 
$
(385
)
December 31, 2012
 
$
—

 
$
(1,710
)
 
$
(1,710
)
 
$
—

 
$
—

 
$
(1,710
)
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are not speculative. These derivatives are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. The Company does not have any hedging instruments that do not qualify for hedge accounting.

F-24
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of December 31, 2013, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $1.0 million. As of December 31, 2013, the Company has not posted any collateral related to its agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at the aggregate termination value of $1.0 million at December 31, 2013.
Note 11 — Common Stock
As of December 31, 2013 and 2012, the Company had 174.1 million and 19.9 million shares of common stock outstanding, respectively, including unvested restricted stock, converted Preferred Shares and shares issued under the DRIP.
In September 2010, the Company's board of directors authorized, and the Company declared, a distribution rate equal to $0.605 per annum per share of common stock, commencing December 1, 2010.  The distributions are paid by the fifth day following each month end to stockholders of record at the close of business each day during the prior month at a per share rate of 0.0016575342 per day. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Note 12 — Commitments and Contingencies
Future Minimum Lease Payments
The Company entered into lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base rental cash payments due from the Company over the next five years and thereafter under these arrangements. These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum Base Rent Payments
2014
 
$
3,386

2015
 
4,555

2016
 
4,991

2017
 
4,991

2018
 
5,175

Thereafter
 
260,549

 
 
$
283,647


F-25
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Litigation
On October 15, 2013, RXR WWP Owner LLC (“RXR”) filed a lawsuit in the Supreme Court of the State of New York, New York County, against American Realty Capital Properties, Inc. and the Company (collectively, the “ARC Parties”) alleging that, under an agreement that RXR entered into with the co-defendant WWP Sponsor LLC dated May 30, 2013 (the “May 30 Agreement”), RXR was entitled to acquire a 48.9% equity interest in the indirect owner of Worldwide Plaza. RXR claimed that the ARC Parties are liable for breach of a confidentiality agreement, tortious interference with the May 30 Agreement and tortious interference with prospective business relations. RXR moved for a preliminary injunction barring the defendants from consummating the Worldwide Plaza transaction. On October 30, 2013, the Court denied RXR’s preliminary injunction motion, and the transaction was thereafter consummated. On November 21, 2013 RXR filed an amended complaint adding the ARC Parties as parties to a permanent injunction claim that was previously asserted solely against the ARC Parties’ co-defendants. The ARC Parties filed a motion to dismiss the amended complaint on December 11, 2013. The motion will be fully briefed on February 28, 2014. RXR seeks damages against the ARC Parties of no less than $200.0 million. The Company believes that such lawsuit is without merit, but the ultimate outcome of such matter cannot be predicted. While losses and legal expenses may be incurred, an estimate of the range of potential losses cannot be made, and no provisions for such losses have been recorded in the accompanying consolidated financial statements for the year ended December 31, 2013. As of December 31, 2013, there were no other material legal proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the consolidated results of operations.
Hurricane Sandy
None of the properties owned by the Company suffered any structural damage as a result of Hurricane Sandy. The properties owned by the Company remained fully operational except for the four retail condominiums located at 416 Washington Street in the Tribeca neighborhood of Manhattan. The property remained without full electrical power capacity and its tenants were not permitted to operate until electrical power was fully restored and authorization to recommence operations was received by the applicable New York municipal authorities. Effective April 18, 2013, pursuant to such authorities, the tenants were allowed to reoccupy their units and recommence operations, with the exception of the garage which required additional repairs that were completed in September 2013. The Company recorded an insurance deductible expense of $0.1 million during the year ended December 31, 2012 and $0.4 million of bad debt expense during the year ended December 31, 2013 related to the lease termination of the garage tenant. Hurricane damage also resulted in the termination of another lease at this property, however, the Company expects, but cannot guarantee, insurance proceeds to cover lost rents related to this lease through April 17, 2014.

F-26
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Note 13 — Related Party Transactions and Arrangements
New York Recovery Special Limited Partnership, LLC, an entity wholly owned by the Sponsor, owned 20,000 shares of the Company's outstanding common stock as of December 31, 2013 and 2012.
Fees Paid in Connection with the IPO
The Dealer Manager and the Sponsor received fees and compensation in connection with the sale of the Company's common stock in the IPO. The Dealer Manager received a selling commission of up to 7.0% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. Alternatively, a participating broker-dealer may elect to receive a fee equal to 7.5% of gross proceeds from the sale of shares by such participating broker-dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. In addition, the Dealer Manager received up to 3.0% of the gross proceeds from the sale of common stock, before reallowance to participating broker-dealers, as a dealer manager fee. The Dealer Manager may re-allow its dealer manager fee to such participating broker-dealers, based on such factors as the volume of shares sold by respective participating broker-dealers and marketing support provided as compared to other participating broker-dealers. The following table details total selling commissions and dealer manager fees incurred and payable to the Dealer Manager related to the sale of common stock as of and for the periods presented:
 
 
Year Ended December 31,
 
Payable as of December 31,
(In thousands)
 
2013
 
2012
 
2011
 
2013
 
2012
Total commissions and fees from Dealer Manager
 
$
134,972

 
$
12,576

 
$
4,303

 
$
857

 
$
93

 The Advisor and its affiliates received compensation and reimbursement for services provided in connection with the IPO and Preferred Offering. Effective March 1, 2013, the Company began utilizing transfer agent services provided by an affiliate of the Dealer Manager. All offering costs incurred by the Company, or its affiliated entities, on behalf of the Company are charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details offering costs reimbursements incurred and payable to the Advisor and Dealer Manager related to the sale of common stock as of and for the periods presented:
 
 
Year Ended December 31,
 
Payable as of December 31,
(In thousands)
 
2013
 
2012
 
2011
 
2013
 
2012
Fees and expense reimbursements from the Advisor and Dealer Manager (1)
 
$
11,561

 
$
(1,240
)
 
$
3,269

 
$
416

 
$
83

__________________
(1) The Advisor elected to reimburse offering costs in excess of 15% of proceeds from the sale of common stock. This cash reimbursement of $4.7 million was received during the year ended December 31, 2012.
The Company is responsible for offering and related costs from its IPO up to a maximum of 1.5% of gross proceeds received from the IPO, excluding commissions and dealer manager fees, measured at the end of the IPO. Offering costs in excess of the 1.5% cap as of the end of the offering are the Advisor's responsibility. As of the end of the IPO in December 2013, offering and related costs did not exceed 1.5% of gross proceeds received from the IPO. Commencing in the first quarter of 2012, the Advisor elected to cap cumulative offering costs incurred by the Company, net of unpaid amounts, to 15% of common stock proceeds during the offering period. To comply with this policy, the Advisor reimbursed the Company $4.7 million in cash during the year ended December 31, 2012 for offering related costs. As of December 31, 2013, cumulative offering costs were $174.9 million.

F-27
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Fees Paid in Connection With the Operations of the Company
The Advisor receives an acquisition fee of 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. Additionally, the Company reimburses the Advisor for expenses incurred for services provided by third parties and incurs acquisition expenses directly from third parties. The Company expects third-party acquisition expenses to be approximately 0.5% of the purchase price of each property and 0.5% of the amount advanced for a loan or other investment. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect to the Company's portfolio of investments or reinvestments exceed 4.5% of the contract purchase price of the Company's portfolio to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
The Company pays the Advisor an asset management fee equal to 0.75% per annum of the cost of the Company's assets (cost includes the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but excludes acquisition fees) plus costs and expenses incurred by the Advisor in providing asset management services; provided, however, that the asset management fee is reduced by any amounts payable to the Property Manager as an oversight fee, such that the aggregate of the asset management fee and the oversight fee does not exceed 0.75% per annum of the cost of the Company's assets plus costs and expenses incurred by the Advisor in providing asset management services. Prior to July 1, 2012, this fee was payable in monthly installments, at the discretion of the Company's board, in cash, common stock or restricted stock grants, or any combination thereof.  Effective July 1, 2012, the payment of asset management fees in monthly installments in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead the Company issues (subject to periodic approval by the board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B units," which are intended to be profits interests and will vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Such Class B units will be forfeited immediately if: (a) the advisory agreement is terminated other than by an affirmative vote of a majority of the Company's independent directors without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met. When and if approved by the board of directors, the Class B units issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. As of December 31, 2013, the Company cannot determine the probability of achieving the performance condition. The value of issued Class B units will be determined and expensed, when the Company deems the achievement of the performance condition to be probable. The Advisor receives distributions on unvested Class B units equal to the distribution rate received on the Company's common stock. Such distributions on issued Class B units are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss until the performance condition is considered probable to occur. During the years ended December 31, 2013 and 2012 the board of directors approved the issuance of 410,771 and 43,968 Class B units, respectively, to the Advisor in connection with this arrangement.
Unless the Company contracts with a third party, the Company will pay the Property Manager a property management fee equal to: (i) for non-hotel properties, 4.0% of gross revenues from the properties managed, plus market-based leasing commissions; and (ii) for hotel properties, a market-based fee based on a percentage of gross revenues.  The Company will also reimburse the Property Manager for property-level expenses.  The Property Manager may subcontract the performance of its property management and leasing services duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees and will pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire assets, or that is assumed, directly or indirectly, in connection with the acquisition of assets, the Company will pay the Advisor a financing coordination fee equal to 0.75% of the amount available or outstanding under such financing or such assumed debt.

F-28
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Effective March 1, 2013, the Company entered into an agreement with the Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees were amortized over six months, the estimated remaining term of the IPO as of the date of the agreement, and are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss.
The following table details amounts incurred, forgiven and contractually due in connection with the operations related services described above as of and for the periods presented:
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
2011
 
Payable December 31,
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
2013
 
2012
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements (1)
 
$
15,836

 
$
—

 
$
3,607

 
$
—

 
$
772

 
$
—

 
$
—

 
$
2,018

Financing coordination fees
 
6,584

 
—

 
1,166

 
—

 
405

 
—

 
—

 
539

Ongoing fees:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Asset management fees (2)
 
—

 
—

 
—

 
540

 
—

 
571

 
—

 
—

Property management and leasing fees
 
—

 
840

 
—

 
494

 
—

 
190

 
—

 
—

Strategic advisory fees
 
920

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Distributions on Class B units
 
139

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total related party operational fees and reimbursements
 
$
23,479

 
$
840

 
$
4,773

 
$
1,034

 
$
1,177

 
$
761

 
$
—

 
$
2,557

___________________________________________
(1)
During the year ended December 31, 2013, the Advisor elected to reimburse the Company $2.5 million for acquisition and legal expenses incurred.
(2)
Asset management fees through June 30, 2012, were waived.  Effective July 1, 2012, the Company began issuing to the Advisor restricted performance-based Class B units for asset management services, which will be forfeited immediately if certain conditions occur.
The Company will reimburse the Advisor's costs and expenses of providing services, subject to the limitation that it will not reimburse the Advisor for any amount by which the Company's total operating expenses (as defined in the Company's charter and advisory agreement) for the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non cash reserves and excluding any gain from the sale of assets for that period.  Additionally, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives a separate fee.  No reimbursement was incurred from the Advisor for providing administrative services for the years ended December 31, 2013, 2012 or 2011.

F-29
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor agreed to waive certain fees including asset management and property management fees. Because the Advisor waived certain fees, cash flow from operations that would have been paid to the Advisor was available to pay distributions to stockholders.  The fees that were forgiven are not deferrals and accordingly, will not be paid to the Advisor in cash. Additionally, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's expenses. The following table details property operating and general and administrative expenses absorbed by the Advisor during the years ended December 31, 2013, 2012 and 2011. These costs are presented net in the accompanying consolidated statements of operations and comprehensive loss.
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
Property operating expenses absorbed
 
$
—

 
$
270

General and administrative expenses absorbed
 
1,450

 
695

Total expenses absorbed
 
$
1,450

 
$
965

The Company had a receivable from affiliates of $0.3 million at December 31, 2012 related to absorbed property operating and general and administrative expenses. There were no receivables from affiliates related to absorbed costs at December 31, 2013.
As the Company's real estate portfolio matures, the Company expects cash flows from operations (reported in accordance with GAAP) to cover a more significant portion of distributions and over time to cover the entire distribution. As the cash flows from operations become more significant, the Advisor and Property Manager may discontinue their past practice of absorbing costs and forgiving fees and may charge the full fee owed to them in accordance with the Company's agreements with them.
Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
In December 2013, the Company entered into a transaction management agreement with RCS Advisory Services, LLC, an entity owned by the Dealer Manager, to provide strategic alternatives transaction management services through the occurrence of a liquidity event and a-la-carte services thereafter. The Company agreed to pay $3.0 million pursuant to this agreement. As of December 31, 2013, the Company has incurred an aggregate of $1.5 million of expenses pursuant to this agreement, which includes amounts for services provided as of that date, and is included in acquisition and transaction related costs on the consolidated statement of operations and comprehensive loss and in accounts payable and accrued expenses on the accompanying consolidated balance sheet.
In December 2013, the Company entered into an information agent and advisory services agreement with Realty Capital Securities and American National Stock Transfer, entities owned by the Dealer Manager, to provide in connection with a liquidity event, advisory services, educational services to external and internal wholesalers, communication support as well as proxy, tender offer or redemption and solicitation services. The Company agreed to pay $1.9 million pursuant to this agreement. As of December 31, 2013, the Company has incurred an aggregate of $0.6 million of expenses pursuant to this agreement, which includes amounts for services provided as of that date, and is included in acquisition and transaction related costs on the consolidated statement of operations and comprehensive loss and in accounts payable and accrued expenses on the accompanying consolidated balance sheet.
In December 2013, the Company entered into an agreement with RCS Capital, LLC, the investment banking and capital markets division of the Dealer Manager, for strategic and financial advice and assistance in connection with (i) a possible sale transaction involving the Company (ii) the possible listing of the Company’s securities on a national securities exchange, and (iii) a possible acquisition transaction involving the Company. The Dealer Manager will receive a transaction fee equal to 0.25% of the transaction value in connection with the possible sale transaction, listing or acquisition. No such amounts were incurred during year ended December 31, 2013. 

F-30
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


For substantial assistance in connection with the sale of properties, the Company will pay the Advisor a property disposition fee, not to exceed the lesser of 2.0% of the contract sale price of the property and 50% of the competitive real estate commission paid if a third party broker is also involved; provided, however that in no event may the property disposition fee paid to the Advisor when added to real estate commissions paid to unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a competitive real estate commission. For purposes of the foregoing, "competitive real estate commission" means a real estate brokerage commission for the purchase or sale of a property which is reasonable, customary and competitive in light of the size, type and location of the property. No such fees were incurred or paid for the years ended December 31, 2013, 2012 or 2011.
An affiliate of the Advisor will receive from time to time, when available, a subordinated participation in the net sales proceeds from the sale of assets of 15.0% of the remaining net sale proceeds after return of capital contributions to investors plus payment to investors of an annual 6.0% cumulative, pre-tax non-compounded return on the capital contributed by investors.  No such amounts were incurred or paid for the years ended December 31, 2013, 2012 or 2011.
Upon the listing of the Company's common stock, an affiliate of the Advisor will receive a non-interest-bearing promissory note equal to 15.0% of the amount, if any, by which the sum of the Company's market value plus distributions paid by the Company prior to listing exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, non-compounded return to investors. No such amounts were incurred or paid for the years ended December 31, 2013, 2012 or 2011.
Upon termination of the advisory agreement, an affiliate of the Advisor shall be entitled to a subordinated termination fee payable in the form of a non-interest-bearing promissory note. In addition, the affiliate of the Advisor may elect to defer its right to receive a subordinated termination amount until either a listing or other liquidity event occurs.
Note 14 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common ownership with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, transfer agency services as well as other administrative responsibilities for the Company including accounting services, transaction management and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 15 — Share-Based Compensation
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be fixed at $10.00 per share until the termination of the IPO, and thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. Upon a change in control, unvested options will become fully vested and any performance conditions imposed with respect to the options will be deemed to be fully achieved.  A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of December 31, 2013 and 2012, no stock options were issued under the Plan.

F-31
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP") that provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder's meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary of the date of grant in increments of 20% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company.  The total number of shares of common stock granted under the RSP shall not exceed 5.0% of the Company's outstanding shares on a fully diluted basis at any time, and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in common shares shall be subject to the same restrictions as the underlying restricted shares.
The following table displays restricted share award activity during the years ended December 31, 2013, 2012, and 2011:
 
Number of Common Shares
 
Weighted-Average Issue Price
Unvested, December 31, 2010
9,000

 
$
10.00

Granted
12,000

 
10.00

Vested
(7,200
)
 
10.00

Unvested, December 31, 2011
13,800

 
10.00

Granted
9,000

 
9.00

Vested
(3,000
)
 
10.00

Forfeited
—

 
—

Unvested, December 31, 2012
19,800

 
9.55

Granted
9,000

 
9.00

Vested
(4,800
)
 
9.63

Forfeited
—

 
—

Unvested, December 31, 2013
24,000

 
$
9.33

The fair value of the restricted shares, based on the per share price in the IPO, will be expensed over the vesting period of five years. Compensation expense related to restricted stock was $0.1 million, $39,000 and $0.1 million for the years ended December 31, 2013, 2012, and 2011, respectively.
As of December 31, 2013, the Company had $0.2 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company’s RSP. That cost is expected to be recognized over a weighted average period of 3.5 years.

F-32
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at the respective director's election. There are no restrictions on the shares issued. The following table reflects the shares of common stock issued to directors in lieu of cash compensation:
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Shares issued in lieu of cash
 
19,728

 
15,667

 
15,315

Value of shares issued in lieu of cash (in thousands)
 
$
177

 
$
141

 
$
138

Note 16 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computations for the periods presented:
 
 
Year Ended December 31,
(In thousands, except share and per share data)
 
2013
 
2012
 
2011
Net loss attributable to stockholders
 
$
(19,279
)
 
$
(6,339
)
 
$
(3,419
)
Less: distributions declared on Preferred Shares
 
—

 
—

 
(1,354
)
Net loss available to stockholders
 
$
(19,279
)
 
$
(6,339
)
 
$
(4,773
)
Weighted average common shares outstanding
 
73,074,872

 
12,187,623

 
2,070,184

Net loss per share available to stockholders, basic and diluted
 
$
(0.26
)
 
$
(0.52
)
 
$
(2.31
)

Diluted net income (loss) per share assumes the conversion of all common share equivalents into an equivalent number of common shares, unless the effect is antidilutive.  The Company considers unvested restricted stock, Preferred Shares, units of limited partner interests in the OP ("OP units") and Class B units to be common share equivalents. The following common stock equivalents were excluded from diluted income (loss) per share computations as their effect would have been antidilutive for the years ended December 31, 2013, 2012 and 2011:
 
 
December 31,
 
 
2013
 
2012
 
2011
Unvested restricted stock
 
24,000

 
19,800

 
13,800

OP units
 
200

 
200

 
200

Class B units
 
454,739

 
43,968

 
—

Total common share equivalents
 
478,939

 
63,968

 
14,000

Note 17 — Non-Controlling Interests
The Company is the sole general partner of the OP and holds the majority of OP units. The Advisor, a limited partner, holds 200 OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has the right to convert OP units for the cash value of a corresponding number of shares of the Company's common stock or, at the Company's option, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the holders of OP units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
In December 2010, an unrelated third party and a related party, American Realty Capital Operating Partnership, L.P., contributed $1.0 million and $12.0 million to acquire the Bleecker Street properties, respectively.  The Company had the sole voting rights and was the controlling member of the limited liability company that owns the Bleecker Street properties. The non-controlling members' aggregate initial investment balance of $13.0 million was reduced by the monthly distributions paid to each non-controlling member.  There were $0.1 million and $0.5 million of distributions to non-controlling members during the year ended December 31, 2013 and 2012, respectively. The Company fully redeemed the related party's and third party's non-controlling interest in Bleecker Street in June 2012 and December 2013, respectively.

F-33
AMERICAN REALTY CAPITAL NEW YORK RECOVERY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013


The Company is the controlling member of the limited liability company that owns the 163 Washington Avenue Apartments, acquired in September 2012. The Company has the sole voting rights under the operating agreement of this limited liability company. The non-controlling members' aggregate initial investment balance of $0.5 million will be reduced by the distributions paid to each non-controlling member. No distributions were paid during the years ended December 31, 2013 and 2012.
Note 18 — Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2013, 2012 and 2011:
 
 
Quarters Ended
(In thousands, except share and per share data)
 
March 31, 2013
 
June 30, 2013
 
September 30, 2013
 
December 31, 2013
Total revenues
 
$
8,327

 
$
10,905

 
$
15,728

 
$
20,927

Basic net income (loss) attributable to stockholders
 
$
(2,794
)
 
$
2,019

 
$
(5,373
)
 
$
(13,131
)
Adjustments to net income (loss) attributable to stockholders for common share equivalents
 
—

 
(223
)
 
—

 
—

Diluted net income (loss) attributable to stockholders
 
$
(2,794
)
 
$
1,796

 
$
(5,373
)
 
$
(13,131
)
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
23,217,358

 
41,982,278

 
83,841,078

 
141,836,952

Basic net income (loss) per share attributable to stockholders
 
$
(0.12
)
 
$
0.05

 
$
(0.06
)
 
$
(0.09
)
Diluted weighted average shares outstanding
 
23,217,358

 
42,001,432

 
83,841,078

 
141,836,952

Diluted net income (loss) per share attributable to stockholders
 
$
(0.12
)
 
$
0.04

 
$
(0.06
)
 
$
(0.09
)
 
 
Quarters Ended
(In thousands, except share and per share data)
 
March 31, 2012
 
June 30, 2012
 
September 30, 2012
 
December 31, 2012
Total revenues
 
$
2,725

 
$
3,632

 
$
4,120

 
$
4,945

Net loss attributable to stockholders
 
$
(619
)
 
$
(1,148
)
 
$
(1,270
)
 
$
(3,302
)
Weighted average shares outstanding
 
7,490,591

 
10,497,092

 
13,508,525

 
17,184,855

Basic and diluted net loss per share attributable to stockholders
 
$
(0.08
)
 
$
(0.11
)
 
$
(0.09
)
 
$
(0.19
)
 
 
Quarters Ended
(In thousands, except share and per share data)
 
March 31, 2011
 
June 30, 2011
 
September 30, 2011
 
December 31, 2011
Total revenues
 
$
1,690

 
$
1,723

 
$
1,787

 
$
2,335

Net loss attributable to stockholders
 
$
(341
)
 
$
(810
)
 
$
(205
)
 
$
(2,063
)
Weighted average shares outstanding
 
543,324

 
1,273,624

 
2,198,529

 
4,223,407

Basic and diluted net loss per share attributable to stockholders
 
$
(1.27
)
 
$
(0.91
)
 
$
(0.26
)
 
$
(0.56
)

Note 19 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements.


F-34
American Realty Capital New York Recovery REIT, Inc.

Real Estate and Accumulated Depreciation
Schedule III
December 31, 2013
(dollar amounts in thousands)

  
 
 
 
 
 
 
 
Initial Costs
 
 
 
 
 
 
Portfolio
 
State
 
Acquisition
Date
 
Encumbrances
at December 31,
 2013
 
Land
 
Building and
Improvements
 
Building and
Improvements
 
Gross Amount at
December 31,
2013(2) (3)
 
Accumulated
Depreciation (5)(6)
Design Center
 
NY
 
6/22/2010
 
$
20,582

 
$
11,243

 
$
18,884

 
$
1,820

 
$
31,947

 
$
3,005

Bleecker Street
 
NY
 
12/1/2010
 
21,300

 
—

 
31,167

 
—

 
31,167

 
4,102

Foot Locker
 
NY
 
4/18/2011
 
3,250

 
2,753

 
2,753

 
—

 
5,506

 
364

Regal Parking Garage
 
NY
 
6/1/2011
 
3,000

 
—

 
4,637

 
—

 
4,637

 
533

Duane Reed
 
NY
 
10/5/2011
 
8,400

 
4,443

 
8,252

 
—

 
12,695

 
1,114

Washington Street
 
NY
 
11/3/2011
 
4,831

 
—

 
8,979

 
580

 
9,559

 
1,052

One Jackson Square
 
NY
 
11/18/2011
 
13,000

 
—

 
21,466

 
66

 
21,532

 
2,262

350 West 42nd Street
 
NY
 
3/16/2012
 
11,365

 
—

 
19,869

 
83

 
19,952

 
1,684

1100 Kings Highway
 
NY
 
5/4/2012
 
20,200

 
17,112

 
17,947

 
—

 
35,059

 
1,388

163 Washington Avenue Apartments
 
NY
 
9/7/2012
 
—

(1) 
6,257

 
25,030

 
45

 
31,332

 
1,734

1623 Kings Highway
 
NY
 
10/9/2012
 
7,288

 
3,440

 
8,538

 
27

 
12,005

 
490

256 West 38th Street
 
NY
 
12/26/2012
 
24,500

 
20,000

 
26,483

 
1,653

 
46,970

(4) 
1,461

229 West 36th Street
 
NY
 
12/27/2012
 
35,000

 
27,400

 
22,308

 
—

 
49,247

(4) 
1,279

350 Bleecker Street
 
NY
 
12/31/2012
 
—

(1) 
—

 
11,783

 
—

 
11,783

 
568

218 West 18th Street
 
NY
 
3/27/2013
 
—

(1) 
17,500

 
90,869

 
2,028

 
110,397

 
3,655

50 Varick Street
 
NY
 
7/5/2013
 
—

 
—

 
77,992

 
7,250

 
85,242

 
2,158

333 W 34th Street
 
NY
 
8/9/2013
 
—

(1) 
98,600

 
120,908

 
—

 
219,508

 
4,390

Viceroy
 
NY
 
11/18/2013
 
—

 
—

 
169,945

 
—

 
169,945

 
476

1440 Broadway
 
NY
 
12/23/2013
 
—

(1) 
217,066

 
289,410

 
—

 
506,476

 
—

Total
 
 
 
 
 
$
172,716

 
$
425,814

 
$
977,220

 
$
13,552

 
$
1,414,959

 
$
31,715

___________________________________
(1)
These properties collateralize the credit facility, which had $305.0 million outstanding as of December 31, 2013.
(2)
Acquired intangible lease assets allocated to individual properties in the amount of $127.8 million are not reflected in the table above.
(3)
The tax basis of aggregate land, buildings and improvements as of December 31, 2013 is $1.5 billion.
(4)
Gross amount is net of tenant improvement and building improvement dispositions of $1.6 million due to tenant lease terminations.
(5)
The accumulated depreciation column excludes $9.5 million of amortization associated with acquired intangible lease assets.
(6)
Each of the properties has a depreciable life of: 40 years for buildings, 15 years for land improvements and five to 15 years for fixtures.

F-35
American Realty Capital New York Recovery REIT, Inc.

Real Estate and Accumulated Depreciation
Schedule III
December 31, 2013
(dollar amounts in thousands)

A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2013, 2012 and 2011:
 
 
December 31,
(In thousands)
 
2013
 
2012
 
2011
Real estate investments, at cost:
 
 
 
 
 
 
Balance at beginning of year
 
$
322,205

 
$
115,035

 
$
61,294

Additions-Acquisitions
 
1,082,292

 
206,167

 
53,281

Capital expenditures
 
12,089

 
1,003

 
460

Disposals
 
(1,627
)
 
—

 
—

Balance at end of the year
 
$
1,414,959

 
$
322,205

 
$
115,035

 
 
 

 
 
 
 
Accumulated depreciation:
 
 

 
 
 
 
Balance at beginning of year
 
$
9,476

 
$
3,109

 
$
500

Depreciation expense
 
23,405

 
6,367

 
2,609

Disposals
 
(1,166
)
 
—

 
—

Balance at end of the year
 
$
31,715

 
$
9,476

 
$
3,109


F-36