KBS RIII 2014_Prospectus

Tenant Origination and
Absorption Costs

Above-Market
Lease Assets

Below-Market
Lease Liabilities

424B3 1 kbsriiisupp.htm FORM 424B3 KBS RIII 2014_Prospectus_Supp no.8

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-164703

KBS REAL ESTATE INVESTMENT TRUST III, INC.

SUPPLEMENT NO. 8 DATED JULY 25, 2014

TO THE PROSPECTUS DATED APRIL 25, 2014

This document supplements, and should be read in conjunction with, the prospectus of KBS Real Estate Investment Trust III, Inc. dated April 25, 2014, supplement no. 1 dated April 25, 2014 and supplement no. 3 dated May 6, 2014. Supplement no. 1, supplement no. 3 and this supplement no. 8, together, supersede and replace all prior supplements to the April 25, 2014 prospectus. As used herein, the terms “we,” “our” and “us” refer to KBS Real Estate Investment Trust III, Inc. and, as required by context, KBS Limited Partnership III, which we refer to as our “Operating Partnership,” and to their subsidiaries. Capitalized terms used in this supplement have the same meanings as set forth in the prospectus. The purpose of this supplement is to disclose:


•	the status of the offering;


•	information with respect to our real estate and real estate-related investments;


•	updated risks related to an investment in us;


•	selected financial data;


•	funds from operations and modified funds from operations for the three months ended March 31, 2014 and 2013 and for the years ended December 31, 2013, 2012 and 2011;


•	distributions declared and paid for the year ended December 31, 2013 and the three months ended March 31, 2014;


•	distributions declared for the period from April 2014 through August 2014;


•	fees earned by and expenses reimbursable to our advisor and the dealer manager;


•	information regarding our share redemption program;


•	information regarding the net tangible book value of our shares;


•	information regarding our indebtedness;


•	information related to shares sold net of commissions and volume discount purchases;


•	quantitative and qualitative disclosures about market risk;


•	“Management’s Discussion and Analysis of Financial Condition and Results of Operations” similar to that filed in our quarterly report on Form 10-Q for the period ended March 31, 2014;


•	information incorporated by reference;


•	our unaudited financial statements and the notes thereto as of and for the period ended March 31, 2014; and


•	our statement of revenues over certain operating expenses and the notes thereto of 222 Main for the year ended December 31, 2013.

Table of Contents

Status of the Offering

We commenced this offering of up to 280,000,000 shares, or up to $2,760,000,000 of shares, of common stock on October 26, 2010. As of July 7, 2014, we had accepted aggregate gross offering proceeds of $907.2 million related to the sale of 91,155,167 shares of common stock, including 3,509,514 shares of common stock sold under our dividend reinvestment plan for gross offering proceeds of $33.5 million. Accordingly, as of July 7, 2014, there were $1,852.8 million of shares of common stock available for sale in this offering, including $726.5 million of shares under our dividend reinvestment plan.

Our board of directors has extended the closing date of this primary initial public offering until the earlier of the sale of up to 200,000,000 shares, or up to $2,000,000,000 of shares, or the date the registration statement relating to our proposed follow-on offering (the “Follow-on Offering”) is declared effective by the Securities and Exchange Commission (the “SEC”).

Our dealer manager has recommended that our offering stage last no longer than September 2015. Our offering stage will be based on a number of considerations, including our goal of raising sufficient proceeds to continue to acquire a diverse portfolio of real estate investments prior to seeking a liquidity event, the expected pace of sales of our common stock during 2014 and 2015, the current and anticipated composition and quality of our portfolio and the condition of the commercial real estate market. We will continue to monitor these factors and may adjust our anticipated offering stage as necessary based on these and other factors.

We plan to continue to offer shares under our dividend reinvestment plan beyond the termination of the offering stage for our primary offering. In some states, we will need to renew the registration statement annually or file a new registration statement to continue the dividend reinvestment plan offering.

We may terminate this primary initial public offering or the dividend reinvestment plan offering at any time.

Real Estate and Real Estate-Related Investments Summary

Real Estate Investments

As of March 31, 2014, we owned 12 office properties encompassing in the aggregate approximately 5.3 million rentable square feet. We acquired each of these properties from third parties unaffiliated with us or our advisor. The following table is a summary of our real estate portfolio as of March 31, 2014:



Property	Location	Rentable Square Feet	Date Acquired	Property Type	Purchase Price ⁽¹⁾ (in thousands)		Annualized Base Rent ⁽²⁾ (in thousands)		Average Annualized Base Rent per Sq. Ft. ⁽³⁾		Average Remaining Lease Term in Years	Occupancy



Domain Gateway	Austin, TX	173,962	09/29/2011	Office	$	48,114	$	3,716	$	21.36	5.4	100.0	%
Town Center	Plano, TX	522,043	03/27/2012	Office	113,991		12,353		24.82		4.6	95.3	%
McEwen Building	Franklin, TN	175,262	04/30/2012	Office	40,740		4,412		25.87		4.5	97.3	%
Gateway Tech Center	Salt Lake City, UT	198,446	05/09/2012	Office	30,726		4,480		22.58		4.3	100.0	%
Tower on Lake Carolyn	Irving, TX	364,336	12/21/2012	Office	46,426		6,470		20.61		3.6	86.2	%
RBC Plaza	Minneapolis, MN	678,045	01/31/2013	Office	125,560		8,765		15.96		5.8	82.8	%
One Washingtonian Center	Gaithersburg, MD	314,175	06/19/2013	Office	86,220		9,198		30.40		7.1	96.3	%
Preston Commons	Dallas, TX	427,799	06/19/2013	Office	110,379		11,162		29.26		4.4	89.2	%
Sterling Plaza	Dallas, TX	313,609	06/19/2013	Office	74,284		7,270		27.16		3.2	85.4	%
201 Spear Street	San Francisco, CA	246,563	12/03/2013	Office	121,975		8,554		41.49		2.7	83.6	%
500 West Madison	Chicago, IL	1,457,724	12/16/2013	Office	428,932		33,958		25.42		5.6	92.3	%
222 Main	Salt Lake City, UT	426,657	02/27/2014	Office	171,768		13,163		36.22		9.6	85.2	%
		5,298,621			$	1,399,115	$	123,501	$	25.94	5.3	90.3	%

_____________________

⁽¹⁾Purchase price includes acquisition fees and closing costs.

⁽²⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

⁽³⁾ Average annualized base rent per square foot is calculated as the annualized base rent divided by the leased square feet.

Table of Contents

Other than the RBC Plaza and 500 West Madison, we do not intend to make significant renovations or improvements to our real estate investments listed above in the near term. At acquisition, we projected an investment of approximately $26.6 million for renovations and improvements to the RBC Plaza over the next four years, including the conversion of approximately 32,000 rentable square feet of retail space into office space. At acquisition, we projected an investment of approximately $70.0 million for renovations and improvements to 500 West Madison over the next six years. We expect to fund these renovations and improvements with proceeds from debt financing, proceeds from our primary offering and proceeds from our dividend reinvestment plan.

We believe that our real estate investments are suitable for their respective intended purposes and adequately insured.

Significant Tenants

As of March 31, 2014, no tenant represented more than 10% of our annualized base rent and our portfolio’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent


Finance	95	$	34,342	27.8	%

____________________

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

As of March 31, 2014, no other tenant industries accounted for more than 10% of our annualized base rent. No material tenant credit issues have been identified at this time.

Portfolio Lease Expirations

The following table sets forth a schedule of expiring leases for our real estate portfolio by number of leases, annualized base rent and rentable square feet as of March 31, 2014:



Year of Expiration	Number of Leases Expiring	Annualized Base Rent ⁽¹⁾ (in thousands)		% of Portfolio Annualized Base Rent		Leased Rentable Square Feet Expiring	% of Portfolio Rentable Square Feet Expiring


Month to Month	10	$	294	0.2	%	68,161	1.4	%
2014	60	6,220		5.0	%	283,149	5.9	%
2015	60	9,934		8.0	%	375,665	7.9	%
2016	60	13,880		11.2	%	503,265	10.5	%
2017	69	17,035		13.8	%	618,247	12.9	%
2018	51	9,185		7.4	%	316,792	6.6	%
2019	38	18,035		14.6	%	736,120	15.4	%
2020	20	8,992		7.3	%	349,527	7.3	%
2021	14	8,466		7.0	%	424,976	8.9	%
2022	23	7,200		5.8	%	279,241	5.9	%
2023	14	11,793		9.5	%	448,572	9.4	%
Thereafter	10	12,467		10.2	%	379,044	7.9	%
Total	429	$	123,501	100.0	%	4,782,759	100.0	%

___________________

Table of Contents

Real Estate Investment Subsequent to March 31, 2014

Anchor Centre

On May 22, 2014, we, through an indirect wholly owned subsidiary (the “Anchor Centre Buyer”), acquired an office property consisting of two office buildings containing an aggregate of 333,284 rentable square feet located on approximately 7.3 acres of land in Phoenix, Arizona (“Anchor Centre”). The seller is not affiliated with us or our advisor.

The contractual purchase price of Anchor Centre was $85.1 million plus closing costs. We funded the purchase of Anchor Centre with proceeds from the Anchor Centre Mortgage Loan (discussed below) and proceeds from this offering.

Anchor Centre was built in 1984 and renovated between 2011 and 2012. At acquisition, Anchor Centre was approximately 79% leased to 27 tenants. The aggregate annualized base rent for the tenants of Anchor Centre was approximately $7.0 million. The weighted-average remaining lease term for the tenants was approximately 5.9 years. The average annualized base rent was $27.87 per square foot.

We believe that Anchor Centre is suitable for its intended purpose and is adequately insured. We do not intend to make significant renovations or improvements to Anchor Centre.

Real Estate-Related Investment

As of March 31, 2014, we, through an indirect wholly owned subsidiary, had originated a real estate loan receivable as follows (dollars in thousands):

Date Acquired / Originated

Property Type

Loan

Type

Payment Type

Outstanding

Principal

Balance as

of March 31,

2014⁽¹⁾

Purchase/

Origination

Price ⁽²⁾

Book Value

as of

March 31,

2014 ⁽³⁾

Book Value

as of

December 31,

2013 ⁽³⁾

Loan-to-

Value

Contractual

Interest

Rate ⁽⁴⁾

Annualized

Effective

Interest

Rate ⁽⁴⁾

Maturity

Date

Loan Name

Location of Related Property or Collateral

Aberdeen First Mortgage Loan

Dallas, Texas

06/24/2011

Office

Mortgage

⁽⁵⁾

17,431

17,492

17,190

⁽⁶⁾

7.5

07/01/2016

____________________

⁽¹⁾Outstanding principal balance as of March 31, 2014 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns, and does not include closing costs and direct acquisition and origination fees.

⁽²⁾ Purchase/origination price represents the amount funded by us to acquire or originate the loan, increased for any subsequent fundings, decreased for any principal repayments, and does not include closing costs and direct acquisition and origination fees. The purchase/origination price as of March 31, 2014 is net of $111,000 of principal repayments.

⁽³⁾ Book value represents outstanding principal balance, adjusted for unamortized origination fees and direct acquisition and origination expenses.

⁽⁴⁾Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2014, using the interest method, divided by the average amortized cost basis of the investment. The annualized effective interest rate and contractual interest rate presented are as of March 31, 2014.

⁽⁵⁾Monthly payments were interest only for the first 23 months of the term of the loan, and as of July 2013 became payments of principal and interest, with principal calculated using an amortization schedule of 30 years and with the remaining principal balance and all accrued and unpaid interest and all other charges due at maturity. As of July 1, 2014, $18.1 million was outstanding under the Aberdeen First Mortgage Loan.

⁽⁶⁾At origination, the Aberdeen First Mortgage Loan loan-to-value ratio was 44.1%, based upon the amount funded at origination (excluding closing costs and certain other fees) and the “as-is” appraised value of the building securing the loan. At origination, we estimated the fully-funded loan to value ratio of the Aberdeen First Mortgage Loan would be approximately 57%, based upon funding the full $23.9 million under the loan, excluding closing costs and certain other fees and expenses, and assuming the “stabilized” appraised value of the building. The loan-to-value ratio will vary over time as the borrower makes draws on the loan, tenant leases are signed and tenant and capital improvements are made to the building. We can give no assurance if or when the building will reach the “stabilized” appraised value. As of the origination date, the building was 4% leased and as of March 31, 2014, the building was 38% leased. Appraisals are based on numerous estimates, judgments and assumptions that significantly affect the appraised value of the underlying property. An appraisal of a non-stabilized property, in particular, involves a high degree of subjectivity due to high vacancy levels, uncertainties with respect to future market rental rates and the timing of lease-up and stabilization, and such appraisal may not reflect the actual fair value of the property. Different assumptions may materially change the appraised value of the property. In addition, the value of the property will change over time.

Table of Contents

Outstanding Debt Obligations

As of March 31, 2014, our borrowings and other liabilities were approximately 56% of both the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets. The following table details our outstanding debt as of March 31, 2014 (dollars in thousands):



	Outstanding Principal Balance		Contractual Interest Rate ⁽¹⁾	Effective Interest Rate ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾	% of Total Indebtedness
	Outstanding Principal Balance		Contractual Interest Rate ⁽¹⁾	Effective Interest Rate ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾	% of Total Indebtedness
Town Center Mortgage Loan	$	75,000	One-month LIBOR +1.85%	2.9%	Interest Only	03/27/2018	10	%
Portfolio Loan ⁽³⁾	130,000		One-month LIBOR +1.75%	1.9%	Interest Only	04/01/2018	16	%
RBC Plaza Mortgage Loan ⁽⁴⁾	68,730		One-month LIBOR +1.80%	2.6%	Interest Only	02/01/2017	9	%
National Office Portfolio Mortgage Loan ⁽⁵⁾	161,960		One-month LIBOR +1.50%	2.8%	Interest Only	07/01/2017	20	%
500 West Madison Mortgage Loan ⁽⁶⁾	255,000		One-month LIBOR +1.65%	2.9%	Interest Only	12/16/2018	32	%
222 Main Mortgage Loan	102,700		3.97%	4.0%	⁽⁷⁾	03/01/2021	13	%
	$	793,390					100	%

____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2014. Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable), using interest rate indices as of March 31, 2014, where applicable.

⁽²⁾ Represents the maturity date as of March 31, 2014; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

⁽³⁾ As of March 31, 2014, the Portfolio Loan was secured by Domain Gateway, the McEwen Building, Gateway Tech Center, the Tower on Lake Carolyn and 201 Spear Street. The face amount of the Portfolio Loan is $200.0 million, of which $130.0 million is term debt and $70.0 million is revolving debt. As of July 1, 2014, the outstanding balance under the loan was $130.0 million and was composed of $130.0 million of term debt. As of July 1, 2014, an additional $37.3 million of revolving debt remained available for immediate future disbursements, subject to certain conditions set forth in the loan agreement. The remaining $32.7 million of revolving debt is available for future disbursements upon us meeting certain financial coverage ratios and subject to certain conditions set forth in the loan agreement. During the term of the Portfolio Loan, we have an option, which may be exercised up to three times, to increase the loan amount to a maximum of $350.0 million, of which 65% would be non-revolving debt and 35% would be revolving debt, with the addition of one or more properties to secure the Portfolio Loan, subject to certain conditions contained in the loan documents.

⁽⁴⁾ As of July 1, 2014, $68.7 million had been disbursed to us and $7.2 million remained available for future disbursements, subject to certain conditions set forth in the loan agreement.

⁽⁵⁾ The National Office Portfolio Mortgage Loan is secured by One Washingtonian Center, Preston Commons and Sterling Plaza. As of July 1, 2014, $162.0 million had been disbursed to us and $8.8 million remained available for future disbursements, subject to certain conditions set forth in the loan agreement.

⁽⁶⁾ The 500 West Madison Mortgage Loan consists of $215.0 million of term debt, $20.0 million of non-revolving debt (the “First Non-Revolver Tranche”) and another $20.0 million of non-revolving debt (the “Second Non-Revolver Tranche”). At closing, the entire $255.0 million of the 500 West Madison Mortgage Loan was funded. We are obligated to pay down and have $20.0 million of availability under the First Non-Revolver Tranche by December 16, 2015 to be used for tenant improvements and leasing commissions, subject to certain terms and conditions contained in the loan documents.

⁽⁷⁾ Monthly payments are initially interest-only. Beginning April 1, 2016, monthly payments include principal and interest with principal payments calculated using an amortization schedule of 30 years for the balance of the loan term, with the remaining principal balance, all accrued and unpaid interest and any other amounts due at maturity.

We and KBS REIT Properties III, LLC (“REIT Properties III”), our wholly owned subsidiary, are providing a limited guaranty of the Town Center Mortgage Loan with respect to certain potential costs, expenses, losses, damages and other sums which may result from certain intentional acts committed by us, the borrower under the Town Center Mortgage Loan, REIT Properties III, our advisor and/or any of their affiliates in violation of the loan documents. REIT Properties III is also providing a guaranty of the principal balance and any interest or other sums outstanding under the Town Center Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the borrower under the loan.

REIT Properties III is providing a guaranty of up to 25% of the outstanding principal balance under the Portfolio Loan, as such amount may be adjusted from time to time pursuant to the terms of the loan documents. Additionally, REIT Properties III is providing a guaranty of any deficiency, loss or damage suffered by the lender under the Portfolio Loan that may result from certain intentional acts committed by the borrowers under the loan, or that may result from certain bankruptcy or insolvency proceedings involving the borrowers, pursuant to the terms of the repayment guaranty.

REIT Properties III is providing a limited guaranty of the RBC Plaza Mortgage Loan with respect to certain potential deficiencies, losses or damages suffered by the lender resulting from certain intentional acts committed by the borrower under the loan or REIT Properties III in violation of the loan documents. REIT Properties III is also providing a guaranty of the principal balance and any interest or other sums outstanding under the RBC Plaza Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the borrower under the loan.

Table of Contents

REIT Properties III is providing a limited guaranty of the National Office Portfolio Mortgage Loan with respect to certain potential deficiencies, losses or damages suffered by the lender as a result of certain intentional actions committed by any borrower under the National Office Portfolio Mortgage Loan or REIT Properties III in violation of the loan documents. REIT Properties III is also providing a guaranty of the principal balance and any interest or other sums outstanding under the National Office Portfolio Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving any borrower under the National Office Portfolio Mortgage Loan.

REIT Properties III is providing a limited guaranty of the 500 West Madison Mortgage Loan with respect to certain potential fees, costs, expenses, losses or damages incurred or suffered by the lender as a result of certain intentional actions committed by us, the borrower under the 500 West Madison Mortgage Loan, REIT Properties III, our advisor and/or any affiliates of us or REIT Properties III in violation of the loan documents. REIT Properties III is also providing a guaranty of the principal balance and any interest or other sums outstanding under the 500 West Madison Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the borrower under the 500 West Madison Mortgage Loan or REIT Properties III.

REIT Properties III is providing a limited guaranty of the 222 Main Mortgage Loan with respect to certain potential fees, costs, expenses, losses or damages incurred or suffered by the lender as a result of certain intentional actions committed by the borrower under the 222 Main Mortgage Loan in violation of the loan documents. REIT Properties III is also providing a guaranty of the principal balance and any interest or other sums outstanding under the 222 Main Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the borrower under the 222 Main Mortgage Loan, certain direct or indirect transfers or financings of 222 Main in violation of the loan documents and the violation of certain other terms of the loan documents by the borrower under the 222 Main Mortgage Loan.

Debt Financings Subsequent to March 31, 2014

Anchor Centre Mortgage Loan

On May 22, 2014, in connection with the acquisition of Anchor Centre, the Anchor Centre Buyer entered into a three-year secured mortgage loan with an unaffiliated lender for borrowings of up to $53.2 million secured by Anchor Centre (the “Anchor Centre Mortgage Loan”). At closing, $50.0 million of the loan had been funded and the remaining $3.2 million was available for future disbursements to be used for tenant improvements and leasing commissions, subject to certain terms and conditions contained in the loan documents. The Anchor Centre Mortgage Loan matures on June 1, 2017, with three one-year extension options, subject to certain terms and conditions contained in the loan documents. The Anchor Centre Mortgage Loan bears interest at a floating rate of 150 basis points over one-month LIBOR. Monthly payments are initially interest-only. Monthly payments during the second and third extension periods would consist of principal and interest, with monthly principal payments of $50,365. The Anchor Centre Buyer has the right to repay the loan in part and in whole subject to an exit fee, in certain circumstances, and other fees, expenses and conditions, all as described in the loan documents.

REIT Properties III is providing a limited guaranty of the Anchor Centre Mortgage Loan with respect to certain potential fees, costs, expenses, losses or damages incurred or suffered by the lender as a result of certain intentional actions committed by the Anchor Centre Buyer or REIT Properties III in violation of the loan documents. REIT Properties III is also providing a guaranty of any deficiency, loss or damage suffered by the lender in the event of certain bankruptcy or insolvency proceedings involving the Anchor Centre Buyer.

Table of Contents

Risk Factors

The following risk factors supplement the risk factors appearing in the prospectus.

We have paid distributions in part from financings and expect that in the future we may not pay distributions solely from our cash flow from operations. To the extent that we pay distributions from sources other than our cash flow from operations, we will have less funds available for investment in properties and other assets, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

Our organizational documents permit us to pay distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We have paid distributions in part from financings (including with an advance from KBS Capital Advisors, LLC, our advisor, that we have repaid with debt financing) and expect that in the future we may not pay distributions solely from our cash flow from operations, in which case distributions may be paid in whole or in part from debt financing. We may also fund such distributions from the sale of assets or from the maturity, payoff or settlement of debt investments. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operations available for distribution in future periods. If we fund distributions from the sale of assets or the maturity, payoff or settlement of debt investments, this will affect our ability to generate cash flow from operations in future periods. To the extent that we pay distributions from sources other than our cash flow from operations, we will have fewer funds available with which to make real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain. There is no limit on the amount of distributions we may fund from sources other than from cash flow from operations.

During our offering stage, when we may raise capital in this offering (and possibly future offerings) more quickly than we acquire income-producing assets, and from time to time during our operational stage, we may not pay distributions solely from our cash flow from operations.

For the year ended December 31, 2013, we paid aggregate distributions of $26.2 million, including $13.8 million of distributions paid in cash and $12.4 million of distributions reinvested through our dividend reinvestment plan. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $20.2 million (77%) of cash flow from operations and $6.0 million (23%) of debt financing. For the year ended December 31, 2013, our cash flow from operations to distributions paid coverage ratio was 77% and our funds from operations to distributions paid coverage ratio was 52%.

For the three months ended March 31, 2014, we paid aggregate distributions of $11.0 million, including $5.4 million of distributions paid in cash and $5.6 million of distributions reinvested through our dividend reinvestment plan. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $11.0 million (100%) of debt financing. For the three months ended March 31, 2014, we did not generate cash flow from operations and our funds from operations to distributions paid coverage ratio was 119%.

See “Funds from Operations and Modified Funds from Operations” and “Information with Respect to Distributions for the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014” in this supplement.

To the extent that we buy core real estate properties with occupancy of less than 95% or that have significant rollover during the expected hold period, we may incur significant costs for capital expenditures and tenant improve costs to lease-up the building, which increases the risk of loss associated with these properties compared to other properties.

We have invested in, and may make additional investments in, core properties that have an occupancy rate of less than 95%, significant rollover during the expected hold period, or other characteristics that could provide an opportunity for us to achieve appreciation by increasing occupancy, negotiating new leases with higher rental rates and/or executing enhancement projects. We likely will need to fund reserves or maintain capacity under our credit facilities to fund capital expenditures, tenant improvements and other improvements in order to attract new tenants to these properties. To the extent we do not maintain adequate reserves to fund these costs, we may use our cash flow from operations, which will reduce the amount of cash flow available for distribution to our investors. If we are unable to execute our business plan for these investments, the overall return on these investments will decrease.

Table of Contents

Selected Financial Data

The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein for the three months ended March 31, 2014 and contained in our Annual Report on Form 10-K for the year ended December 31, 2013, incorporated by reference into the prospectus (in thousands, except share and per share amounts):



	March 31, 2014			December 31, 2013			December 31, 2012			December 31, 2011			December 31, 2010
Balance sheet data
Total real estate and real estate-related investments, net	$	1,364,737		$	1,247,319		$	318,661		$	92,639		$	—
Total assets	1,488,159			1,311,394			349,384			130,858			200
Notes payable	793,390			730,690			119,800			42,250			—
Total liabilities	855,836			796,163			137,359			45,847			—
Redeemable common stock	17,466			12,414			4,804			740			—
Total stockholders’ equity	614,857			502,817			207,221			84,271			200

	For the Three Months Ended						For the Years Ended
	March 31, 2014			March 31, 2013			December 31, 2013			December 31, 2012			December 31, 2011

Operating data
Total revenues	$	41,736		$	13,666		$	80,423		$	27,283		$	2,512
Net income (loss)	6,727			(2,376		)	(21,637		)	(7,682		)	(2,440		)
Net income (loss) per common share - basic and diluted	0.09			(0.08		)	(0.50		)	(0.40		)	(0.66		)

Other data
Cash flows (used in) provided by operating activities	$	(194	)	$	1,498		$	20,164		$	7,657		$	724
Cash flows used in investing activities	(131,211		)	(119,710		)	(938,610		)	(233,423		)	(93,527		)
Cash flows provided by financing activities	173,593			141,623			928,117			212,105			129,782

Distributions declared	$	11,661		$	4,761		$	28,309		$	12,525		$	2,195
Distributions declared per common share ⁽¹⁾	0.16			0.16			0.650			0.650			0.340

Weighted-average number of common shares outstanding, basic and diluted	72,753,222			29,700,001			43,547,227			19,253,338			3,724,745
	72,753,222			29,700,001			43,547,227			19,253,338			3,724,745

Reconciliation of funds from operations ⁽²⁾
Net income (loss)	$	6,727		$	(2,376	)	$	(21,637	)	$	(7,682	)	$	(2,440	)
Depreciation of real estate assets	6,222			1,877			11,445			4,150			387
Amortization of lease-related costs	11,047			4,261			23,935			9,715			713
Gain on sale of real estate, net	(10,895		)	—			—			—			—
FFO	$	13,101		$	3,762		$	13,743		$	6,183		$	(1,340	)

_____________________

⁽¹⁾ Distributions declared per common share assumes each share was issued and outstanding each day for the periods presented. Distributions for the periods from June 24, 2011 through February 28, 2012 and March 1, 2012 through March 31, 2014 were based on daily record dates and calculated at a rate of $0.00178082 per share per day.

⁽²⁾We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO includes adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization. Investors should exercise caution when using non-GAAP performance measures, such as FFO, to make investment decisions. Accordingly, FFO should not be considered as an alternative to net income as an indicator of our operating performance.

Table of Contents

Funds from Operations and Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. Items such as acquisition fees and expenses, which had previously been capitalized prior to 2009, are currently expensed and accounted for as operating expenses. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses; adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above and below market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark‑to‑market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO also excludes non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO provides investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. However, MFFO has limitations as a performance measure during the offering stage for non-traded REITs where the price of a share of common stock is a stated value and the net asset value is not established during the offering stage and for a period thereafter. As a result, MFFO should not be used as a metric to determine or evaluate the net asset value.

FFO and MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO and MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO and MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO and MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO and MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Table of Contents

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases and acquisition fees and expenses are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

•

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we hope to receive in a future period or rent that was received in a prior period;

•

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate; and

•

Acquisition fees and expenses. Acquisition fees and expenses related to the acquisition of real estate are expensed. Although these amounts reduce net income, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis. Additionally, acquisition costs have been funded from the proceeds of this offering and debt financings and not from our operations. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance.

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculation of MFFO, for the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Three Months Ended						For the Years Ended
	March 31, 2014			March 31, 2013			December 31, 2013			December 31, 2012			December 31, 2011
Net income (loss)	$	6,727		$	(2,376	)	$	(21,637	)	$	(7,682	)	$	(2,440	)
Depreciation of real estate assets	6,222			1,877			11,445			4,150			387
Amortization of lease-related costs	11,047			4,261			23,935			9,715			713
Gain on sale of real estate, net	(10,895		)	—			—			—			—
FFO	13,101			3,762			13,743			6,183			(1,340		)
Straight-line rent and amortization of above- and below-market leases	(3,228		)	(911		)	(7,054		)	(2,664		)	(280		)
Amortization of discounts and closing costs	6			6			24			22			2
Real estate acquisition fees to affiliates	1,705			1,255			9,423			2,296			836
Real estate acquisition fees and expenses	303			306			5,677			1,069			432
MFFO	$	11,887		$	4,418		$	21,813		$	6,906		$	(350	)

FFO and MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO and MFFO to improve as we continue to acquire additional real estate and real estate-related assets.

Table of Contents

Information with Respect to Distributions for the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014

During 2013 and 2014, we declared distributions based on daily record dates for each day during the periods from January 1, 2013 through March 31, 2014. Until we have fully invested the proceeds of this offering (and possible future offerings), and from time to time during our operational stage, we may not pay distributions solely from our cash flow provided by operating activities or FFO, in which case distributions may be paid in whole or in part from debt financing. Distributions declared, distributions paid and cash flow provided by operating activites were as follows for the year ended December 31, 2013 and the three months ended March 31, 2014 (in thousands, except per share amounts):



	Distributions Declared ⁽¹⁾		Distributions Declared Per Share^{(1) (2)}		Distributions Paid ⁽³⁾						Cash Flow Provided by (Used in) Operating Activities			Sources of Distributions Paid
Period	Distributions Declared ⁽¹⁾		Distributions Declared Per Share^{(1) (2)}		Cash		Reinvested		Total		Cash Flow Provided by (Used in) Operating Activities			Amount Paid from Cash Flow Provided by (Used in) Operating Activities/Percentage of Distributions Paid			Amount Paid from Borrowings/Percentage of Distributions Paid
First Quarter 2013	$	4,761	$	0.160	$	2,427	$	2,056	$	4,483	$	1,498		$	1,498	/ 33%	$	2,985	/ 67%
Second Quarter 2013	5,934		0.162		2,951		2,602		5,553		4,173			4,173		/ 75%	1,380		/ 25%
Third Quarter 2013	7,688		0.164		3,769		3,301		7,070		11,350			7,070		/ 100%	—		/ 0%
Fourth Quarter 2013	9,926		0.164		4,626		4,455		9,081		3,143			7,423		/ 82%	1,658		/ 18%
First Quarter 2014	11,661		0.160		5,392		5,576		10,968		(194		)	—		/ 0%	10,968		/ 100%
	$	39,970	$	0.810	$	19,165	$	17,990	$	37,155	$	19,970		$	20,164		$	16,991

____________________

⁽¹⁾ Distributions for the periods from January 1, 2013 through March 31, 2014 were based on daily record dates and were calculated at a rate of $0.00178082 per share per day.

⁽²⁾ Assumes share was issued and outstanding each day during the periods presented.

⁽³⁾ Distributions are paid on a monthly basis. Distributions for all record dates for a given month are paid on or about the first business day of the following month.

For the year ended December 31, 2013, we paid aggregate distributions of $26.2 million, including $13.8 million of distributions paid in cash and $12.4 million of distributions reinvested through our dividend reinvestment plan. Our net loss for the year ended December 31, 2013 was $21.6 million. FFO for the year ended December 31, 2013 was $13.7 million and cash flow provided by operating activities was $20.2 million. See the reconciliation of FFO to net loss above. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $20.2 million of cash flow provided by operating activities and $6.0 million of debt financing. For purposes of determining the source of our distributions paid, we assume first that we use cash flow provided by operating activities from the relevant or prior periods to fund distribution payments.

For the three months ended March 31, 2014, we paid aggregate distributions of $11.0 million, including $5.4 million of distributions paid in cash and $5.6 million of distributions reinvested through our dividend reinvestment plan. Our net income for the three months ended March 31, 2014 was $6.7 million. FFO for the three months ended March 31, 2014 was $13.1 million and cash flow used in operating activities was $0.2 million. See the reconciliation of FFO to net income above. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with debt financing.

From inception through March 31, 2014, we paid cumulative distributions of $50.4 million and our cumulative net loss during the same period was $25.0 million. To the extent that we pay distributions from sources other than our cash flow provided by operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

Table of Contents

Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flow provided by operating activities and FFO (except with respect to distributions related to sales of our assets and distributions related to the repayment of principal under real estate-related investments). During our offering stage, when we may raise capital in this offering (and possibly future offerings) more quickly than we acquire income-producing assets, and from time to time during our operational stage, we may not pay distributions solely from our cash flow provided by operating activities. Further, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including those discussed under “Risk Factors” herein and in the prospectus. Those factors include: our ability to continue to raise capital to make additional investments; the future operating performance of our current and future real estate investments in the existing real estate and financial environment; our advisor’s ability to identify additional real estate investments that are suitable to execute our investment objectives; the success and economic viability of our tenants; the ability of our borrowers and their sponsors to continue to make their debt service payments and/or to repay their loans upon maturity; our ability to refinance existing indebtedness at comparable terms; changes in interest rates on any variable rate debt obligations we incur; and the level of participation in our dividend reinvestment plan. In the event our FFO and/or cash flow provided by operating activities decrease in the future, the level of our distributions may also decrease. In addition, future distributions declared and paid may exceed FFO and/or cash flow provided by operating activities.

Distributions Declared for the Period from April 2014 through August 2014

On March 5, 2014, our board of directors declared distributions based on daily record dates for the period from April 1, 2014 through April 30, 2014, which we paid on May 1, 2014, and distributions based on daily record dates for the period from May 1, 2014 through May 31, 2014, which we paid on June 1, 2014. On May 5, 2014, our board of directors declared distributions based on daily record dates for the period from June 1, 2014 through June 30, 2014, which we paid on July 1, 2014, and distributions based on daily record dates for the period from July 1, 2014 through July 31, 2014, which we expect to pay in August 2014. On July 8, 2014, our board of directors declared distributions based on daily record dates for the period from August 1, 2014 through August 31, 2014, which we expect to pay in September 2014. Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.

Distributions for these periods are calculated based on stockholders of record each day during these periods at a rate of $0.00178082 per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on the prior offering price of $10.00 per share or a 6.26% annualized rate based on the current offering price of $10.39 per share in this primary offering.

Table of Contents

Fees Earned by and Expenses Reimbursable to Our Advisor and the Dealer Manager

Summarized below are the fees earned by and expenses reimbursable to our advisor and our dealer manager for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively, and any related amounts payable as of March 31, 2014 and December 31, 2013, respectively (in thousands):



	Incurred				Payable as of
	Three Months Ended March 31, 2014		Year Ended December 31, 2013		March 31, 2014		December 31, 2013
Form of Compensation
Organization and Offering Stage
Selling commissions	$	8,202	$	23,323	$	—	$	—
Dealer manager fees	3,955		11,340		—		—
Reimbursable other offering costs ⁽¹⁾	1,122		2,726		440		57
Acquisition and Development Stage
Acquisition and origination fees	1,705		9,423		—		—
Acquisition and origination expenses	—		—		—		—
Operational Stage
Asset management fees ⁽²⁾	2,459		4,653		910		—
Reimbursable operating expenses ⁽³⁾	27		137		—		—
Operational and Liquidation/Listing Stage
Disposition fee	—		—		—		—
Subordinated participation in net cash flows	—		—		—		—
Subordinated incentive listing fee	—		—		—		—
	$	17,470	$	51,602	$	1,350	$	57

_____________________

⁽¹⁾ Amounts include $0.2 million incurred by our dealer manager related to the Follow-on Offering for the three months ended March 31, 2014. We may not reimburse our dealer manager for these expenses to the extent that total organization and offering expenses incurred by us exceed 15% of the aggregate gross proceeds from the Follow-on Offering. As of March 31, 2014, we had not commenced the Follow-on Offering, and as such we recorded all offering costs incurred related to the Follow-on Offering, including the $0.2 million incurred by our dealer manager, as deferred financing costs, prepaid expenses and other assets on our consolidated balance sheet.

⁽²⁾ As of March 31, 2014, we had accrued and deferred payment of $0.9 million of asset management fees. See below.

⁽³⁾ Our advisor may seek reimbursement for certain employee costs under the advisory agreement. We have reimbursed our advisor for our allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to us. These amounts totaled $27,000 and $131,000 for the three months ended March 31, 2014 and for the year ended December 31, 2013, and were the only employee costs reimbursed under the advisory agreement for the three months ended March 31, 2014 the year ended December 31, 2013. We will not reimburse for employee costs in connection with services for which our advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits our advisor or its affiliates may pay to our executive officers.

Offering Costs

In connection with this offering, our sponsors agreed to provide additional indemnification to one of the participating broker dealers. We agreed to add supplemental coverage to our directors’ and officers’ insurance coverage to insure our sponsors’ obligations under this indemnification agreement in exchange for reimbursement to us by our sponsors for all costs, expenses and premiums related to this supplemental coverage. During the three months ended March 31, 2014, our advisor incurred $88,000 for the costs of the supplemental coverage obtained by us. During the year ended December 31, 2013, our advisor incurred $19,000 for the costs of the supplemental coverage obtained by us.

Through March 31, 2014, our advisor had incurred organization and other offering costs of approximately $4.8 million on our behalf. At the termination of this primary offering and at the termination of the offering under our dividend reinvestment plan, our advisor has agreed to reimburse us to the extent that selling commissions, dealer manager fees and other organization and offering expenses incurred by us exceed 15% of the gross offering proceeds. In addition, at the end of this primary offering and again at the end of the offering under our dividend reinvestment plan, our advisor has agreed to reimburse us to the extent that organization and offering expenses excluding underwriting compensation (which includes selling commissions, dealer manager fees and any other items viewed as underwriting compensation by FINRA) exceed 2% of the gross offering proceeds.

Table of Contents

Through March 31, 2014, our dealer manager had incurred offering costs of $5.5 million on our behalf. We reimburse our dealer manager for underwriting compensation as discussed in the prospectus for this offering, provided that within 30 days after the end of the month in which this primary offering terminates, our dealer manager must reimburse us to the extent that our reimbursements cause total underwriting compensation for this primary offering to exceed 10% of the gross offering proceeds from such offering. We also directly pay or reimburse our dealer manager for bona fide invoiced due diligence expenses of broker dealers.

However, no reimbursements made by us to our advisor or the dealer manager may cause total organization and offering expenses incurred by us (including selling commissions, dealer manager fees and all other items of organization and offering expenses) to exceed 15% of the aggregate gross proceeds from this primary offering and the offering under our dividend reinvestment plan as of the date of reimbursement. As of March 31, 2014, selling commissions, dealer manager fees, and organization and other offering costs did not exceed 15% of the gross offering proceeds. Through March 31, 2014, including shares issued through our dividend reinvestment plan, we had sold 80,584,260 shares in this offering for gross offering proceeds of $801.7 million and incurred selling commissions and dealer manager fees of $71.2 million and other offering costs of $15.5 million.

In addition, from inception through March 31, 2014, we had recorded $1.3 million of offering costs related to the Follow on Offering, of which approximately $0.2 million had been incurred by our dealer manager. Pursuant to the advisory agreement, our advisor would be obligated to reimburse us to the extent offering costs incurred by us in the Follow-on Offering exceed 15% of the gross offering proceeds of the offering. As of March 31, 2014, we had not commenced the Follow-on Offering and as such, we recorded $1.3 million as deferred financing costs, prepaid expenses and other assets on our consolidated balance sheet as of March 31, 2014. We may not reimburse our dealer manager for expenses it has incurred to the extent that total organization and offering expenses incurred by us exceed 15% of the aggregate gross proceeds from the Follow-on Offering. Since as of March 31, 2014, we had not commenced the Follow-on Offering we had not reimbursed any amounts to our dealer manager related to the Follow-on Offering.

Insurance

On January 6, 2014, we, together with KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust II, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc., our dealer manager, our advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by our advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. Our advisor’s and our dealer manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance.

Deferral of Asset Management Fees

Pursuant to a March 5, 2014 amendment to our advisory agreement, with respect to asset management fees accruing from March 1, 2014, our advisor defers, without interest, our obligation to pay asset management fees for any month in which our modified funds from operations (“MFFO”) for such month, as such term is defined in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010 and interpreted by us, excluding asset management fees, does not exceed the amount of distributions declared by us for record dates of that month. We remain obligated to pay our advisor an asset management fee in any month in which our MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an “MFFO Surplus”); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the amendment. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the amendment.

However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8.0% per year cumulative, noncompounded return on such net invested capital (the “Stockholders’ 8% Return”) and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program. The Stockholders’ 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to receive deferred asset management fees.

Table of Contents

Share Redemption Program

Our share redemption program contains numerous restrictions on your ability to redeem your shares. Among other restrictions, during each calendar year, redemptions are limited to the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year, provided that we may increase or decrease the funding available for the redemption of shares upon 10 business days’ notice. This restriction may significantly limit your ability to have your shares redeemed pursuant to our share redemption program. In 2012, our net proceeds from the dividend reinvestment plan were $5.2 million. During the year ended December 31, 2013, we redeemed $2.8 million of shares of common stock and funded these redemptions with the net proceeds from our dividend reinvestment plan, which reflected all redemption requests eligible for redemption under our share redemption program and received in good order. The average price paid by us to redeem shares during the year ended December 31, 2013 was $9.54 per share. In 2013, our net proceeds from our dividend reinvestment plan were $12.4 million. During the three months ended March 31, 2014, we redeemed $0.5 million of shares of common stock and $11.9 million was available for redemptions of shares eligible for redemption for the remainder of 2014. The average price paid by us to redeem shares during the three months ended March 31, 2014 was $9.54 per share. During the three months ended March 31, 2014, we funded redemptions under our share redemption program with the net proceeds from our dividend reinvestment plan, and we fulfilled all redemption requests eligible for redemption under our share redemption program.

Our board of directors may amend, suspend or terminate our share redemption program upon 30 days’ notice to our stockholders, provided that we may increase or decrease the funding available for the redemption of shares upon 10 business days’ notice.

Net Tangible Book Value Per Share

In connection with this offering of shares of our common stock, we are providing information about our net tangible book value per share. Our net tangible book value per share is a rough approximation of value calculated as total book value of assets minus total book value of liabilities, divided by the total number of shares of common stock outstanding. 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 of the company in accordance with our investment objectives. However, net tangible book value does reflect certain dilution in value of our common stock from the issue price as a result of (i) the substantial fees paid in connection with this offering, including selling commissions and marketing fees re-allowed by our dealer manager to participating broker dealers, (ii) the fees and expenses paid to our advisor and its affiliates in connection with the selection, acquisition, management and sale of our investments, (iii) general and administrative expenses and (iv) accumulated depreciation and amortization of real estate investments. As of December 31, 2013, our net tangible book value per share was $7.76. To the extent we are able to raise substantial proceeds in this offering, some of the expenses that cause dilution of the net tangible book value per share are expected to decrease on a per share basis, resulting in increases in the net tangible book value per share. This increase would be partially offset by increases in depreciation and amortization expenses related to our real estate investments.

On May 5, 2014, our board of directors established an updated offering price for shares of common stock to be sold in this primary offering of $10.39 per share (with discounts available to certain categories of purchasers) and an offering price for shares of common stock to be sold under our dividend reinvestment plan of $9.88 per share (which is 95% of the price to acquire a share in this primary offering). These updated offering prices for this primary offering and the dividend reinvestment plan offering were effective May 7, 2014. The updated offering price of shares of common stock to be sold in this primary offering was determined by adding certain offering costs to the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding, all as of March 31, 2014. As such, the offering price of our shares is not be a statement of our net asset value per share as the offering price takes into consideration the costs and expenses associated with raising capital in this offering. Moreover, the valuation methodologies used to establish the net asset value component of our updated offering price are based upon a number of estimates and assumptions that may not be accurate or complete. Our board of directors may adjust the offering price of the primary offering shares or dividend reinvestment plan shares during the course of this offering. For information related to the determination of our updated offering prices, see supplement no. 3 dated May 6, 2014 to the prospectus.

The factors described above with respect to the dilution in the value of our common stock are likely to cause our offering price to be higher than the amount you would receive per share if we were to liquidate at this time.

Table of Contents

Indebtedness

As of March 31, 2014, we had $793.4 million of mortgage debt outstanding consisting of five variable rate mortgage loans and one fixed rate mortgage loan maturing between 2015 and 2021, including principal amortization payments, with a weighted-average remaining term of 3.9 years. Also as of March 31, 2014, we had entered into interest rate swap agreements on approximately $506.7 million of our variable rate debt. The interest rate and weighted-average interest rate of our fixed rate debt and variable rate debt as of March 31, 2014 were 4.0% and 2.7%, respectively. The interest rate and weighted-average interest rate represent the actual interest rate in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable), using interest rate indices as of March 31, 2014 where applicable. As of March 31, 2014, our borrowings and other liabilities were approximately 56% of both the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets, respectively.

On May 22, 2014, in connection with our acquisition of Anchor Centre, we, through the Anchor Centre Buyer, entered into the Anchor Centre Mortgage Loan for borrowings of up to $53.2 million secured by Anchor Centre. The Anchor Centre Mortgage Loan matures on June 1, 2017, with three one-year extension options, subject to certain terms and conditions contained in the loan documents. See “Real Estate and Real Estate-Related Investments Summary - Debt Financings Subsequent to March 31, 2014 - Anchor Centre Mortgage Loan” above.

Shares Sold Net of Commissions and Volume Discount Purchases

Shares Sold Net of Commissions

Except as provided below and in the prospectus, KBS Capital Markets Group receives selling commissions of 6.5% of the gross offering proceeds for shares sold in this primary offering. KBS Capital Markets Group also receives 3% of the gross primary offering proceeds as compensation for acting as our dealer manager, except that a reduced dealer manager fee is paid with respect to certain volume discount sales. We do not pay any selling commissions or dealer manager fees for shares sold under our dividend reinvestment plan.

We may sell shares at a discount to the primary offering price (currently $10.39 per share) through the following distribution channels in the event that the investor:


•	pays a broker a single fee, e.g., a percentage of assets under management, for investment advisory and broker services, or a wrap fee;


•	has engaged the services of a registered investment adviser with whom the investor has agreed to pay compensation for investment advisory services or other financial or investment advice (other than a registered investment adviser that is also registered as a broker-dealer who does not have a fixed or wrap fee feature or other asset fee arrangement with the investor); or


•	is investing through a bank acting as trustee or fiduciary.

If an investor purchases shares through one of these channels in this primary offering, we will sell the shares at a 6.5% discount (e.g., currently at $9.7147 per share based on the primary offering price of $10.39 per share), reflecting that selling commissions will not be paid in connection with such purchases. We will receive substantially the same net proceeds for sales of shares through these channels.

Our dealer manager has agreed to sell up to 5% of the shares offered hereby in this primary offering to persons to be identified by us at a discount from the public offering price. We intend to use this “friends and family” program to sell shares to our directors, officers, business associates and others to the extent consistent with applicable laws and regulations. We will require all such purchasers to represent that they are purchasing shares for investment only and to enter into one-year lock-up agreements with respect to the purchased shares. We will sell shares under the “friends and family program” at a 6.5% discount (e.g., currently at $9.7147 per share based on the primary offering price of $10.39 per share), reflecting that selling commissions will not be paid in connection with such purchases. The net proceeds to us from the sales made net of commissions will be substantially the same as the net proceeds we receive from other sales of shares.

Table of Contents

We may sell shares to participating broker-dealers, their retirement plans, their representatives and the family members, IRAs and the qualified plans of their representatives at a 6.5% discount (e.g., currently at $9.7147 per share based on the primary offering price of $10.39 per share), reflecting that selling commissions will not be paid in connection with such purchases in consideration of the services rendered by such broker-dealers and representatives in this offering. For purposes of this discount, we consider a family member to be a spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in law or brother- or sister-in-law. The net proceeds to us from the sales of these shares will be substantially the same as the net proceeds we receive from other sales of shares.

Volume Discount Purchases

We are offering volume discounts to investors who purchase $1,000,001 or more of shares in this primary offering. The net proceeds to us from a sale eligible for a volume discount are the same, but the selling commissions and, in some cases, the dealer manager fees we pay are reduced. Because our dealer manager reallows all selling commissions, the amount of commissions participating broker-dealers receive for such sales is reduced.

The following table shows the discounted price per share and the reduced selling commissions and dealer manager fees payable for volume sales of our shares based on the primary offering price of $10.39 per share.



Dollar Volume Shares Purchased			Sales Commissions (Based on $10.39 Price Per Share)	Dealer Manager Fee (Based on $10.39 Price Per Share)	Price Per Share to Investor
$0	to	$1,000,000	6.5%	3.0%	$10.3900
$1,000,001	to	$2,000,000	5.5%	3.0%	$10.2861
$2,000,001	to	$3,000,000	4.5%	3.0%	$10.1822
$3,000,001	to	$4,000,000	3.5%	2.5%	$10.0264
$4,000,001	to	$10,000,000	2.0%	2.5%	$ 9.8705
$10,000,001	and above		1.0%	2.0%	$ 9.7147

We will apply the reduced selling price, selling commission and dealer manager fee to the entire purchase. All commission rates and dealer manager fees are calculated assuming a price per share of $10.39. For example, a purchase of 250,000 shares in a single transaction would result in a purchase price of $2,545,550 ($10.1822 per share), selling commissions of $116,887 and dealer manager fees of $77,925.

If an investor purchases $3,000,001 or more of shares in this primary offering through a distribution channel under which selling commissions are not paid, we will apply the reduced dealer manager fee available as set forth in the table above. The following table shows the discounted price per share and the reduced dealer manager fees payable for volume sales of our shares sold net of selling commissions.



Volume Discount Table for Purchases Made Net of Selling Commissions
Dollar Volume Shares Purchased			Dealer Manager Fee (Based on $10.39 Price Per Share)	Price Per Share to Investor*
$3,000,001	to	$10,000,000	2.5%	$9.6627
$10,000,001	and above		2.0%	$9.6108

*Price per share to investor assumes an initial discounted purchase price of $9.7147; the dealer manager fee is calculated based on the undiscounted offering price or 100% of the current offering price.

To qualify for a volume discount as a result of multiple purchases of our shares, you must mark the “Additional Investment” space on the subscription agreement. We are not responsible for failing to combine purchases if you fail to mark the “Additional Investment” space. Once you qualify for a volume discount, you will be eligible to receive the benefit of such discount for subsequent purchases of shares in this primary offering. If a subsequent purchase entitles an investor to an increased reduction in sales commissions and/or the dealer manager fee, the volume discount will apply only to the current and future investments.

Table of Contents

The following persons may combine their purchases as a “single purchaser” for the purpose of qualifying for a volume discount:


•	an individual, his or her spouse, their children under the age of 21 and all pension or trust funds established by each such individual;


•	a corporation, partnership, association, joint-stock company, trust fund or any organized group of persons, whether incorporated or not;


•	an employees’ trust, pension, profit-sharing or other employee benefit plan qualified under Section 401(a) of the Internal Revenue Code; and


•	all commingled trust funds maintained by a given bank.

In the event a person wishes to have his or her order combined with others as a “single purchaser,” that person must request such treatment in writing at the time of subscription setting forth the basis for the discount and identifying the orders to be combined. Any request will be subject to our verification that the orders to be combined are made by a single purchaser. If the subscription agreements for the combined orders of a single purchaser are submitted at the same time, then the commissions payable and discounted share price will be allocated pro rata among the combined orders on the basis of the respective amounts being combined. Otherwise, the volume discount provisions will apply only to the order that qualifies the single purchaser for the volume discount and the subsequent orders of that single purchaser.

Only shares purchased in this primary offering are eligible for volume discounts. Shares purchased through our dividend reinvestment plan are not eligible for a volume discount nor will such shares count toward the threshold limits listed above that qualify an investor for the different discount levels.

Volume discounts for California residents will be available in accordance with the foregoing table of uniform discount levels. However, with respect to California residents, no discounts will be allowed to any group of purchasers and no subscriptions may be aggregated as part of a combined order for purposes of determining the dollar amount of shares purchased.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. We are also exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage and other loans. Our profitability and the value of our real estate investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. We may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for the payment of distributions to our stockholders and that the losses may exceed the amount we invested in the instruments.

We expect to borrow funds and make investments at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt or fixed rate real estate loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of fixed rate instruments. As of March 31, 2014, the fair value and carrying value of our fixed rate real estate loan receivable was $17.2 million and $17.5 million, respectively. The fair value estimate of our real estate loan receivable is calculated using an internal valuation model that considers the expected cash flows for the loan, underlying collateral value and the estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. As of March 31, 2014, the fair value of our fixed rate debt was $102.0 million and the carrying value of our fixed rate debt was $102.7 million. The fair value estimate of our fixed rate debt is calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loan was originated as of March 31, 2014. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.

Table of Contents

Conversely, movements in interest rates on variable rate debt and loans receivable would change future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of March 31, 2014, we were exposed to market risks related to fluctuations in interest rates on $184.0 million of variable rate debt outstanding after giving consideration to the impact of interest rate swap agreements on approximately $506.7 million of our variable debt. Based on interest rates as of March 31, 2014, if interest rates were 100 basis points higher during the 12 months ending March 31, 2015, interest expense on our variable rate debt would increase by $1.8 million. As of March 31, 2014, one-month LIBOR was 0.152% and if this index was reduced to 0% during the 12 months ending March 31, 2015, interest expense on our variable rate debt would decrease by $0.3 million. As of March 31, 2014, we did not own any variable rate loans receivable.

The annual effective interest rate of our fixed rate real estate loan receivable as of March 31, 2014 was 7.5%. The effective interest rate represents the effective interest rate as of March 31, 2014, using the interest method, which we use to recognize interest income on our real estate loan receivable. The interest rate and weighted-average interest rate of our fixed rate debt and variable rate debt as of March 31, 2014 were 4.0% and 2.7%, respectively. The interest rate and weighted-average interest rate represent the actual interest rate in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable), using interest rate indices as of March 31, 2014 where applicable.

For a discussion of the interest rate risks related to the current capital and credit markets, see “Risk Factors” herein and in the prospectus, in Part I, Item 1, “Business ─ Real Estate Portfolio - Market Outlook - Real Estate and Real Estate Finance Markets” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Outlook - Real Estate and Real Estate Finance Markets” contained in our Annual Report on Form 10-K for the year ended December 31, 2013, incorporated by reference herein and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Outlook - Real Estate and Real Estate Finance Markets” herein.

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 consolidated financial statements of KBS Real Estate Investment Trust III, Inc. and the notes thereto, included in this supplement, as well as “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated balance sheets as of December 31, 2013 and December 31, 2012, the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2013, 2012 and 2011, the related notes thereto and the accompanying financial statement schedule, all included in our Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated by reference into the prospectus.

This discussion contains forward-looking statements that can be identified with the use of forward-looking terminology such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ from those described in forward-looking statements. For a discussion of the factors that could cause our actual results to differ from those anticipated, see “Risk Factors” in the prospectus and in this supplement.

Overview

We were formed on December 22, 2009 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2011 and we intend to continue to operate in such a manner. On February 4, 2010, we filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of up to 280,000,000 shares, or up to $2,760,000,000 of shares, of common stock for sale to the public in this offering, of which up to 200,000,000 shares, or up to $2,000,000,000 of shares, were registered in this primary offering and up to 80,000,000 shares, or up to $760,000,000 of shares, were registered under our dividend reinvestment plan. The SEC declared our registration statement effective on October 26, 2010 and we retained KBS Capital Markets Group LLC (“KBS Capital Markets Group”), an affiliate of our advisor, to serve as the dealer manager of this offering pursuant to a dealer manager agreement. The dealer manager is responsible for marketing our shares in this offering.

We intend to invest in a diverse portfolio of real estate investments. We expect our primary investment focus to be core and core plus real estate properties. The types of real estate properties that we may invest in include office, industrial and retail properties located throughout the United States. Although we may invest in any of these types of properties, we expect to invest primarily in office and industrial properties. All such real estate assets may be acquired directly by us or the Operating Partnership, though we may invest in other entities that make similar investments. We also currently expect to allocate between 0 and 20% of our portfolio to real estate-related investments such as mortgage loans. As of March 31, 2014, we owned 12 office properties and had originated one first mortgage loan.

On March 24, 2011, we broke escrow in this offering and through March 31, 2014, we had sold 80,584,260 shares of common stock for gross offering proceeds of $801.7 million, including 2,523,237 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $24.0 million.

Table of Contents

Our board of directors has extended the closing date of this offering until the earlier of the sale of up to 200,000,000 shares, or up to $2,000,000,000 of shares, or the date the registration statement relating to our proposed Follow-on Offering is declared effective by the SEC.

On February 14, 2013, we filed a registration statement on Form S-11 with the SEC to register the Follow-on Offering. Pursuant to the Follow-on Offering registration statement, we propose to register up to $2,000,000,000 of shares of common stock for sale to the public in the primary offering. We also expect to register up to $760,000,000 of shares of common stock pursuant to our dividend reinvestment plan in the Follow-on Offering. We can give no assurance that we will commence or complete the Follow-on Offering.

We may terminate our primary offering or our dividend reinvestment plan offering at any time.

Also as of March 31, 2014, we had redeemed 421,339 shares sold in this offering for $4.0 million.

As our advisor, KBS Capital Advisors manages our day-to-day operations and our portfolio of real estate investments. KBS Capital Advisors makes recommendations on all investments to our board of directors. All proposed investments must be approved by at least a majority of our board of directors, including a majority of the conflicts committee. Unless otherwise provided by our charter, the conflicts committee may approve a proposed investment without action by the full board of directors if the approving members of the conflicts committee constitute at least a majority of the board of directors. KBS Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. Our advisor owns 20,000 shares of our common stock. We have no paid employees.

Market Outlook – Real Estate and Real Estate Finance Markets

The following discussion is based on management's beliefs, observations and expectations with respect to the real estate and real estate finance markets.

In the wake of the sub-par recovery of the U.S. economy, and despite recent improvements regarding the pace of job growth, concerns persist regarding income growth and the overall economic health of domestic consumers, businesses and governments. The federal government has employed an array of fiscal and monetary policies to attempt to help get the U.S. economy onto a sound and sustainable growth path. The road to recovery has been anything but smooth, but early estimates indicate that the second half of 2013 saw U.S. GDP increase by over 3%.

In February of 2014, Congress ended a lengthy dispute with the White House and unconditionally extended the government’s borrowing limit until March 2015. While this action should provide some measure of stability, the federal government is still facing major policy issues, including passage of a federal budget. The federal government is currently working from a modified sequestration budget that was not intended to be a long-term solution.

The Federal Reserve has maintained an accommodative monetary policy since the introduction of quantitative easing (“QE”) in October of 2008. Using the U.S. treasury balance sheet to purchase U.S. treasury bonds and mortgage backed securities, the Federal Reserve injected trillions of U.S. dollars into the global financial markets. At this point in time, it is unclear what the final cost or impact of this program will be. In December 2013, the speculation as to the possible end of QE programs was finally ended with the announcement by the Federal Reserve of the tapering of government purchases of U.S. treasury securities and U.S. agency mortgages. The tapering of these purchases led to increased volatility in the emerging markets which has, in turn, triggered a global repricing of financial assets that has impacted stocks, bonds (both corporate and sovereign) and currencies.

Despite cuts to federal government spending, U.S. GDP has continued to grow at moderate level. In the third quarter of 2013, U.S. GDP increased at an annual rate of 4.1% and the third estimate of fourth quarter 2013 reflects an annual rate increase in U.S. GDP of 2.6%. A combination of pent-up U.S. consumer demand and global demand for U.S. equipment, machinery and airplanes has contributed to the strong growth.

Table of Contents

The U.S. dollar has remained a safe haven currency and the U.S. commercial property markets have benefited from an inflow of foreign capital. Gateway markets such as New York City and San Francisco continue to benefit from a strong bid for commercial properties. Over the past two years, transaction volumes increased and the re-emergence of the CMBS market and the availability of debt capital have contributed to the ongoing economic recovery. This trend continued into 2014 and the U.S. commercial real estate market gained favor as an alternative investment. Looking forward, however, the recovery in commercial real estate is expected to remain uneven across geographies and among property types.

The U.S. residential real estate market has been recovering. Low interest rates, pent-up demand from the consumer sector and the introduction of institutional investors in the form of buy-to-rent portfolios have all contributed to a broad recovery of home prices. Some markets have recovered to pre-recession levels, but the majority of U.S. housing markets still have not recaptured the equity lost as a result of the recent recession, which weighs on consumer confidence. Impediments to a continued recovery in this market include rising interest rates, more stringent underwriting standards for borrowers and a potential slowdown in demand by institutional investors. In addition, as referenced above, the Federal Reserve’s QE program, which peaked at $85 billion a month in purchases of long-term treasury securities and mortgage backed securities, is slowly being scaled down. It is anticipated that the removal of the Federal Reserve’s purchases in the mortgage backed securities market will contribute to increases in the cost of future mortgage financing.

In Europe, concerns remain regarding the economic burden of sovereign debt and the pace of economic recovery. Some European banks hold material quantities of sovereign debt on their balance sheets. The possible default or restructuring of the sovereign debt obligations of certain European Union countries and the resulting potential negative impact on the global financial markets remains of concern. The uncertainty surrounding the size of the problem and how regulators and governments intend to remedy the situation has caused many investors to reassess their pricing of sovereign risks. Europe has benefited from the emerging markets investor exodus and the yields on almost all European sovereign debt have declined.

Europe’s gain has come at the cost of emerging market countries such as South Africa, Turkey and Argentina. Capital outflows destabilized local markets for most of 2013, as investors struggled with the implications of the end of QE programs.

The global rating agencies continue to be vigilant in their analysis of the health of the global financial markets. In November 2012, Moody’s downgraded France’s sovereign debt rating to Aa1 from AAA and, in February 2013, Moody’s downgraded the U.K. government debt to Aa1 from AAA as well. In the past two years, Asia also has seen a number of ratings downgrades, with Fitch downgrading Japan to A+ in May of 2012 and China to A+ in April of 2013. The global ratings agencies continue to have a number of sovereign issuers on negative watch as governments have struggled to resolve their budget issues and face growing debt obligations. Beginning in late 2013, these credit issues shifted away from the European sovereign credits to Asia and to some emerging market nations, such as Turkey, Russia, South America, Brazil and Argentina.

Overall, despite indications of recovery both in the United States and abroad, uncertainties abound. China’s export-based economy slowed and Japan embarked upon a large scale QE program of its own in 2013. In the United States, the Federal Reserve announced the tapering of the current QE program which, when combined with the adversarial political climate at the federal level, has led to high levels of uncertainty and increased volatility in the capital markets. In the short-term, these conditions are expected to continue and, combined with a challenging macro-economic environment, may interfere with the implementation of our business strategy and/or force us to modify it.

Impact on Our Real Estate Properties

The economic events that have occurred since the onset of the recession in 2008 have no precedent. While current forecasts for the U.S. economy are positive, there is a level of uncertainty inherent to this outlook. Currently, both the investing and leasing environments are highly competitive. While there has been an increase in the amount of capital flowing into the U.S. real estate markets, which has resulted in an increase in real estate values in certain markets, the uncertainty regarding the economic environment has made businesses reluctant to make long-term commitments or changes in their business plans. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows. Historically low interest rates could help offset some of the impact of these potential decreases in operating cash flow for properties financed with variable rate mortgages; however, interest rates likely will not remain at these historically low levels for the remaining life of many of our investments. Interest rates became more volatile as the capital markets reacted to the December 2013 announcement of the tapering of QE.

Table of Contents

Impact on Our Real Estate‑Related Investment

Our real estate-related investment is directly secured by commercial real estate. As a result, our real estate-related investment in general has been and likely will continue to be impacted to some degree by the same factors impacting our real estate investments. The relatively high yields and the improving credit position of many U.S. tenants and borrowers have attracted global capital. However, the real estate and capital markets are fluid and the positive trends can reverse quickly. Economic conditions remain relatively unstable and can have a negative impact on the performance of collateral securing any loan investments we make, and therefore may impact the ability of some borrowers under any loans we make to make contractual interest payments to us.

As of March 31, 2014, we owned one fixed rate real estate loan receivable with a principal balance of $17.4 million and a carrying value of $17.5 million that matures in 2016.

Impact on Our Financing Activities

In light of the risks associated with potentially volatile operating cash flows from our real estate portfolio, we may have difficulty refinancing some of our debt obligations prior to or at maturity or we may not be able to refinance these obligations at terms as favorable as the terms of our existing indebtedness. Recent financial market conditions have improved from the bottom of the economic cycle, but material risks are still present. Market conditions can change quickly, potentially negatively impacting the value of our investments. As of March 31, 2014, we had debt obligations in the aggregate principal amount of $793.4 million, all of which mature between 2015 and 2021, including principal amortization payments. We have a total of $102.7 million of fixed rate notes payable and $690.7 million of variable rate notes payable. The interest rates on $506.7 million of our variable rate notes payable are effectively fixed through interest rate swap agreements. See “Indebtedness” above.

Liquidity and Capital Resources

We are dependent upon the net proceeds from this offering to conduct our proposed operations. We will obtain the capital required to purchase real estate investments and conduct our operations from: the proceeds of this offering, including our dividend reinvestment plan, and any future follow-on offerings we may conduct; secured or unsecured financings from banks and other lenders; and any undistributed funds from our operations.

On March 24, 2011, we broke escrow in this offering and through March 31, 2014, we had sold 80,584,260 shares for gross offering proceeds of $801.7 million, including 2,523,237 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $24.0 million. Also as of March 31, 2014, we had redeemed 421,339 shares sold in this offering for $4.0 million. If we do not raise significant funds in our public offerings, we will make fewer investments resulting in less diversification in terms of the type, number, size and geographic region and the value of an investment in us will be tied more closely to the performance of each individual asset we acquire. Further, we will have certain fixed operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we are able to raise significant funds in our public offerings. Our inability to raise significant funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions.

Our board of directors has extended the closing date of this offering until the earlier of the sale of up to 200,000,000 shares, or up to $2,000,000,000 of shares, or the date the registration statement relating to the Follow-on Offering is declared effective by the SEC.

On February 14, 2013, we filed a registration statement on Form S-11 with the SEC to register the Follow-on Offering. Pursuant to the Follow-on Offering registration statement, we propose to register up to $2,000,000,000 of shares of common stock for sale to the public in the primary Follow-on Offering. We also expect to register up to $760,000,000 of shares of common stock pursuant to our dividend reinvestment plan in the Follow-on Offering. We can give no assurance that we will commence or complete the Follow-on Offering.

Our dealer manager has recommended that our offering stage last no longer than September 2015. Our offering stage will be based on a number of considerations, including our goal of raising sufficient proceeds to continue to acquire a diverse portfolio of real estate investments prior to seeking a liquidity event, the expected pace of sales of our common stock during 2014 and 2015, the current and anticipated composition and quality of our portfolio and the current condition of the commercial real estate market. We will continue to monitor these factors and may adjust our anticipated offering stage as necessary based on these and other factors.

Table of Contents

We may terminate this offering or our dividend reinvestment plan offering at any time.

During the three months ended March 31, 2014, we acquired one office property. Our cash needs for that investment were met with proceeds from this offering, proceeds from the sale of real estate and debt financing. Operating cash needs during the same period were met through cash flow generated by our real estate properties and real estate-related investment.

Our real estate properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate properties is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of March 31, 2014, we owned 12 office properties that were collectively 90% occupied.

Our real estate-related investment generates cash flow in the form of interest income, which is reduced by loan servicing fees, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate-related investment is primarily dependent on the operating performance of the underlying collateral and the borrower’s ability to make its debt service payments. As of March 31, 2014, the borrower under our real estate loan receivable was current on all contractual debt service payments to us.

As of March 31, 2014, we had mortgage debt obligations in the aggregate principal amount of $793.4 million, all of which mature between 2015 and 2021, including principal amortization payments. As of March 31, 2014, we had $19.4 million of revolving debt available for immediate future disbursement under a portfolio loan, subject to certain conditions set forth in the loan agreement.

We made distributions to our stockholders during the three months ended March 31, 2014 using debt financing. We believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from the sale of real estate and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters ended March 31, 2014 did not exceed the charter-imposed limitation.

Cash Flows from Operating Activities

We commenced operations in connection with our first investment on June 24, 2011. As of March 31, 2014, we owned 12 office properties and one real estate loan receivable. During the three months ended March 31, 2014, net cash used in operating activities was $0.2 million, compared to net cash provided by operating activities of $1.5 million during the three months ended March 31, 2013. Net cash provided by operating activities decreased in 2014 primarily as a result of acquisition fees and expenses and timing of payments for operating expenses, but we expect that our cash flow from operating activities will increase in future periods as a result of owning the investment acquired in 2014 for an entire period and anticipated future acquisitions or originations of real estate investments.

Cash Flows from Investing Activities

Net cash used in investing activities was $131.2 million for the three months ended March 31, 2014 and primarily consisted of the following:


•	$169.4 million for the acquisition of one real estate property;


•	$42.7 million of net proceeds from the sale of real estate;


•	$4.3 million of improvements to real estate; and


•	$0.3 million of advances on our real estate loan receivable.

Table of Contents

Cash Flows from Financing Activities

Our cash flows from financing activities consist primarily of proceeds from this offering, debt financings and distributions paid to our stockholders. During the three months ended March 31, 2014, net cash provided by financing activities was $173.6 million and primarily consisted of the following:


•	$118.4 million of net cash provided by offering proceeds related to this offering, net of payments of commissions, dealer manager fees and other organization and offering expenses of $13.4 million, including $0.1 million of other organization and offering expenses related to the Follow-on Offering;


•	$61.1 million of net cash provided by debt financing as a result of proceeds from notes payable of $102.7 million, partially offset by principal payments on notes payable of $40.0 million and payments of deferred financing costs of $1.6 million;


•	$5.4 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $5.6 million; and


•	$0.5 million of cash used for redemptions of common stock.

Once we have fully invested the proceeds of our public offerings, we expect that our debt financing and other liabilities will be between 35% and 65% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). We expect our debt financing related to the acquisition of core and core plus real estate properties to be between 45% and 65% of the aggregate cost of all such assets. We expect our debt financing related to the acquisition or origination of real estate-related investments to be between 0% and 65% of the aggregate cost of all such assets, depending upon the availability of such financings in the marketplace. Though this is our target leverage, our charter does not limit our leverage until our total liabilities would exceed 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), and we may exceed this limit with the approval of the conflicts committee of our board of directors. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt in excess of this limit. As of March 31, 2014, our borrowings and other liabilities were approximately 56% of both the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets, respectively.

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our advisor and our dealer manager. Pursuant to the advisory agreement and the dealer manager agreement, we are obligated to pay fees to and reimburse our advisor, our dealer manager and/or their affiliates, as applicable, for organization and other offering costs related to this offering. See the discussion under “— Organization and Offering Costs” below. During our acquisition and development stage, we expect to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us. We also expect to pay fees to our advisor in connection with the disposition of properties.

Among the fees payable to our advisor is an asset management fee. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition expenses related thereto (but excludes acquisition fees paid or payable to our advisor). In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination expenses related thereto but is exclusive of acquisition or origination fees paid or payable to our advisor) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination expenses related to the acquisition or funding of such investment (excluding acquisition or origination fees paid or payable to our advisor), as of the time of calculation.

On March 5, 2014, we and our advisor entered into an amendment to the advisory agreement. Pursuant to the amendment, with respect to asset management fees accruing from March 1, 2014, our advisor defers, without interest, our obligation to pay asset management fees for any month in which our modified funds from operations (“MFFO”) for such month, as such term is defined in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010 and interpreted by us, excluding asset management fees, does not exceed the amount of distributions declared by us for record dates of that month. We remain obligated to pay our advisor an asset management fee in any month in which our MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an “MFFO Surplus”); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the amendment. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the amendment.

Table of Contents

As of March 31, 2014, we had accrued and deferred payment of $0.9 million of asset management fees under this amendment, as we believe the payment of this amount to our advisor is probable. These fees will be reimbursed in accordance with the terms noted above. The amount of asset management fees deferred will vary on a month-to-month basis, especially during our offering stage as we may raise capital in this offering (and possibly future offerings) more quickly than we acquire income-producing assets. The total amount of asset management fees deferred as well as the timing of the deferrals and repayments are difficult to predict as they will depend on the volume of capital raised in this offering, the speed with which we are able to deploy capital raised, the level of operating cash flow on future acquisitions, the performance of all of the properties in our portfolio and other factors. In addition, deferrals and repayments may occur in the same period, and it is possible that there could be additional deferrals even after the initial deferrals are fully repaid.

The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee. On September 27, 2013, we renewed the advisory agreement with our advisor.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2014 (in thousands):



			Payments Due During the Years Ended December 31,
Contractual Obligations	Total		Remainder of 2014		2015-2016		2017-2018		Thereafter
Outstanding debt obligations ⁽¹⁾	$	793,390	$	—	$	21,357	$	674,512	$	97,521
Interest payments on outstanding debt obligations ⁽²⁾	96,646		16,862		42,077		26,451		11,256

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts and interest rates in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable). We incurred interest expense of $4.8 million, excluding amortization of deferred financing costs totaling $0.5 million, during the three months ended March 31, 2014.

Results of Operations

Overview

Our results of operations as of March 31, 2014 are not indicative of those expected in future periods, as we broke escrow in this offering on March 24, 2011 and have since been raising money in and investing the proceeds from this offering. As of March 31, 2013, we owned seven office properties and one real estate loan receivable. As of March 31, 2014, we owned 12 office properties and one real estate loan receivable and had sold one office property. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of owning the investment acquired in 2014 for an entire period and anticipated future acquisitions of real estate investments. As a result, the results of operations presented for the three months ended March 31, 2014 and 2013 are not directly comparable.

Table of Contents

Comparison of the three months ended March 31, 2014 versus the three months ended March 31, 2013

The following table provides summary information about our results of operations for the three months ended March 31, 2014 and 2013 (dollar amounts in thousands):



	Three Months Ended March 31,				Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions and Dispositions ⁽¹⁾			$ Change Due to Properties or Loans Held Throughout Both Periods ⁽²⁾
	2014		2013		Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions and Dispositions ⁽¹⁾
Rental income	$	30,995	$	10,171	$	20,824		205	%	$	20,620		$	204
Tenant reimbursements	9,483		3,064		6,419			209	%	6,288			131
Interest income from real estate loan receivable	320		251		69			27	%	—			69
Other operating income	938		180		758			421	%	762			(4		)
Operating, maintenance and management costs	10,485		3,269		7,216			221	%	7,242			(26		)
Real estate taxes and insurance	7,655		2,410		5,245			218	%	5,029			216
Asset management fees to affiliate	2,459		764		1,695			222	%	1,679			16
Real estate acquisition fees to affiliate	1,705		1,255		450			36	%	450			n/a
Real estate acquisition fees and expenses	303		306		(3		)	(1	)%	(3		)	n/a
General and administrative expenses	734		457		277			61	%	277			n/a
Depreciation and amortization	17,269		6,138		11,131			181	%	11,260			(129		)
Interest expense	5,297		1,446		3,851			266	%	3,344			507
Gain on sale of real estate, net	10,895		—		10,895			100	%	10,895			n/a

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 related to real estate investments acquired and disposed of on or after January 1, 2013.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 with respect to real estate investments owned by us throughout both periods presented.

Rental income and tenant reimbursements from our real estate properties increased from $13.2 million for the three months ended March 31, 2013 to $40.5 million for the three months ended March 31, 2014 primarily as a result of the growth in our real estate portfolio and holding the real estate properties acquired in 2013 for an entire period, partially offset by the sale of one of our properties during the three months ended March 31, 2014. We expect that our rental income and tenant reimbursements will increase in future periods as a result of owning the real estate property acquired in 2014 for an entire period and anticipated future acquisitions of real estate properties.

Interest income from our real estate loan receivable, recognized using the interest method, increased from $251,000 during the three months ended March 31, 2013 to $320,000 during the three months ended March 31, 2014. The increase in interest income is a result of an increase in the overall loan balance as a result of advances made under the real estate loan receivable. We expect interest income to vary in future periods as we make advances under the real estate loan receivable, or receive principal repayments and to the extent we make any additional investments in real estate loans receivable.

Operating, maintenance and management costs increased from $3.3 million for the three months ended March 31, 2013 to $10.5 million for the three months ended March 31, 2014, primarily as a result of the growth in our real estate portfolio and holding the real estate properties acquired in 2013 for an entire period, partially offset by the sale of one of our properties during the three months ended March 31, 2014. We expect operating, maintenance and management costs to increase in future periods as a result of owning the real estate property acquired in 2014 for an entire period and anticipated future acquisitions of real estate properties.

Real estate taxes and insurance increased from $2.4 million for the three months ended March 31, 2013 to $7.7 million for the three months ended March 31, 2014, primarily as a result of the growth in our real estate portfolio and holding the real estate properties acquired in 2013 for an entire period, partially offset by the sale of one of our properties during the three months ended March 31, 2014. We expect real estate taxes and insurance to increase in future periods as a result of owning the real estate property acquired in 2014 for an entire period and anticipated future acquisitions of real estate properties.

Asset management fees with respect to our real estate investments increased from $0.8 million for the three months ended March 31, 2013 to $2.5 million for the three months ended March 31, 2014, primarily as a result of the growth in our real estate portfolio and holding the real estate properties acquired in 2013 for an entire period, partially offset by the sale of one of our properties during the three months ended March 31, 2014. We expect asset management fees to increase in future periods as a result of owning the real estate property acquired in 2014 for an entire period and anticipated future acquisitions of real estate properties. As of March 31, 2014, $0.9 million of asset management fees were payable. For a discussion of deferred asset management fees, see “Liquidity and Capital Resources - Cash Flows from Financing Activities” herein.

Table of Contents

Real estate acquisition fees and expenses to affiliate and non-affiliates increased from $1.6 million for the three months ended March 31, 2013 to $2.0 million for the three months ended March 31, 2014. The increase is primarily due to the difference in the total acquisition cost for the real estate property acquired during the three months ended March 31, 2013 of $124.0 million compared to the total acquisition cost for the real estate property acquired during the three months ended March 31, 2014 of $169.8 million. We expect real estate acquisition fees and expenses to vary in future periods based upon acquisition activity.

Depreciation and amortization increased from $6.1 million for the three months ended March 31, 2013 to $17.3 million for the three months ended March 31, 2014, primarily as a result of the growth in our real estate portfolio and holding the real estate properties acquired in 2013 for an entire period, partially offset by the sale of one of our properties during the three months ended March 31, 2014. We expect depreciation and amortization to increase in future periods as a result of owning the real estate property acquired in 2014 for an entire period and anticipated future acquisitions of real estate properties.

Interest expense increased from $1.4 million for the three months ended March 31, 2013 to $5.3 million for the three months ended March 31, 2014. Included in interest expense is the amortization of deferred financing costs of $0.3 million and $0.5 million for the three months ended March 31, 2013 and 2014, respectively. The increase in interest expense is primarily due to increased borrowings as a result of our use of debt in acquiring real estate assets in 2013 and 2014. We expect interest expense to increase in future periods as a result of additional borrowing for anticipated future acquisitions of real estate investments.

For the three months ended March 31, 2014, we sold one office property that resulted in a gain on sale of $10.9 million. During the three months ended March 31, 2013, we did not dispose of any properties.

Organization and Offering Costs

Our organization and offering costs (other than selling commissions and dealer manager fees) may be paid by our advisor, our dealer manager or their affiliates on our behalf, or we may pay these costs directly. Offering costs include all costs incurred or to be incurred by us in connection with this offering or Follow-on Offering. Organization costs include all costs incurred by us in connection with our formation, including but not limited to legal fees and other costs to incorporate. Organization costs are expensed as incurred and offering costs in this offering, which include selling commissions and dealer manager fees, are charged as incurred as a reduction to stockholders’ equity.

Pursuant to the advisory agreement and the dealer manager agreement, we are obligated to reimburse our advisor, our dealer manager and their affiliates for organization and offering costs they incur on our behalf. However, at the termination of this primary initial public offering and at the termination of the offering pursuant to our dividend reinvestment plan, our advisor has agreed to reimburse us to the extent that selling commissions, dealer manager fees and other organization and offering expenses incurred by us exceed 15% of the gross offering proceeds. In addition, at the end of this primary initial public offering and again at the end of the offering pursuant to our dividend reinvestment plan, our advisor has agreed to reimburse us to the extent that organization and offering expenses excluding underwriting compensation (which includes selling commissions, dealer manager fees and any other items viewed as underwriting compensation by the Financial Industry Regulatory Authority), exceed 2% of gross offering proceeds. We reimburse our dealer manager for underwriting compensation as discussed in the prospectus for this offering, provided that within 30 days after the end of the month in which this primary initial public offering terminates, our dealer manager must reimburse us to the extent that our reimbursements cause total underwriting compensation for this primary initial public offering to exceed 10% of the gross offering proceeds from this offering. We also directly pay or reimburse our dealer manager for bona fide invoiced due diligence expenses of broker-dealers. However, no reimbursements made by us to our advisor or our dealer manager may cause total organization and offering expenses incurred by us (including selling commissions, dealer manager fees and all other items of organization and offering expenses) to exceed 15% of the aggregate gross proceeds from this primary offering and the offering pursuant to our dividend reinvestment plan as of the date of reimbursement. As of March 31, 2014, selling commissions, dealer manager fees, and organization and other offering costs did not exceed 15% of the gross offering proceeds. Through March 31, 2014, including shares issued through our dividend reinvestment plan, we had sold 80,584,260 shares in our offering for gross offering proceeds of $801.7 million and incurred selling commissions and dealer manager fees of $71.2 million and organization and other offering costs of $15.5 million in this offering.

Table of Contents

In addition, from inception through March 31, 2014, we had recorded $1.3 million of offering costs related to the Follow-on Offering, of which approximately $0.2 million had been incurred by our dealer manager. Pursuant to the advisory agreement, our advisor would be obligated to reimburse us to the extent offering costs incurred by us in the Follow-on Offering exceed 15% of the gross offering proceeds of the offering. As of March 31, 2014, we had not commenced the Follow-on Offering and as such, we recorded $1.3 million as deferred financing costs, prepaid expenses and other assets on our consolidated balance sheet as of March 31, 2014. We may not reimburse our dealer manager for these expenses to the extent that total organization and offering expenses incurred by us exceed 15% of the aggregate gross proceeds from the Follow-on Offering. Since as of March 31, 2014, we had not commenced the Follow-on Offering we had reimbursed any amounts to our dealer manager related to the Follow-on Offering.

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC. There have been no significant changes to our policies during 2014.

Experts

The consolidated financial statements and financial statement schedule of KBS Real Estate Investment Trust III, Inc. appearing in its Annual Report on Form 10-K for the year ended December 31, 2013 have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon, included therein, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The (i) statement of revenues over certain operating expenses of 500 West Madison for the year ended December 31, 2012, incorporated by reference in this prospectus from KBS Real Estate Investment Trust III, Inc.’s Current Report on Form 8-K/A, filed with the SEC on February 6, 2014, (ii) statement of revenues over certain operating expenses of the National Office Portfolio for the year ended December 31, 2012, incorporated by reference in this prospectus from KBS Real Estate Investment Trust III, Inc.’s Current Report on Form 8-K/A, filed with the SEC on August 7, 2013, and (iii) statement of revenues over certain operating expenses of the RBC Plaza for the year ended December 31, 2012, incorporated by reference in this prospectus from KBS Real Estate Investment Trust III, Inc.’s Current Report on Form 8-K/A, filed with the SEC on April 15, 2013, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated herein by reference. Such statements of revenues over certain operating expenses are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.

The statement of revenues over certain operating expenses of 201 Spear Street for the year ended December 31, 2012, incorporated by reference in this prospectus from KBS Real Estate Investment Trust III, Inc.’s Current Report on Form 8-K/A, filed with the SEC on February 4, 2014 has been audited by Squar, Milner, Peterson, Miranda & Williamson, LLP, independent audit firm, as set forth in their report thereon, included therein, and incorporated herein by reference. Such statement of revenues over certain operating expenses is incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The statement of revenues over certain operating expenses of 222 Main for the year ended December 31, 2013, appearing in this supplement has been audited by Squar, Milner, Peterson, Miranda & Williamson, LLP, independent audit firm, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

Table of Contents

Incorporation of Certain Information by Reference

We have elected to “incorporate by reference” certain information into this prospectus. By incorporating by reference, we are disclosing important information to you by referring you to documents we have filed separately with the Securities and Exchange Commission (“SEC”). The information incorporated by reference is deemed to be part of this prospectus, except for information incorporated by reference that is superseded by information contained in this prospectus. You can access documents that are incorporated by reference into this prospectus at the website maintained for us, other KBS-sponsored programs and our advisor and its affiliates at www.kbsreits.com (URL for documents: https://www.kbs-cmg.com/~/REIT_III/kbs_reitIII_info.htm). There is additional information about us and our affiliates at our website, but unless specifically incorporated by reference herein as described in the paragraphs below, the contents of that site are not incorporated by reference in or otherwise a part of this prospectus.

The following documents filed with the SEC are incorporated by reference in this prospectus (Commission File No. 333-164703), except for any document or portion thereof deemed to be “furnished” and not filed in accordance with SEC rules:


•	Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 7, 2014;


•	Definitive Proxy Statement on Schedule 14A filed with the SEC on April 21, 2014;


•	Current Report on Form 8-K filed with the SEC on March 17, 2014;


•	Current Report on Form 8-K filed with the SEC on March 6, 2014;


•	Current Report on Form 8-K filed with the SEC on March 3, 2014;


•	Current Report on Form 8-K filed with the SEC on February 20, 2014;


•	Current Report on Form 8-K/A filed with the SEC on February 6, 2014;


•	Current Report on Form 8-K/A filed with the SEC on February 4, 2014;


•	Current Report on Form 8-K filed with the SEC on February 4, 2014;


•	Current Report on Form 8-K/A filed with the SEC on August 7, 2013;


•	Current Report on Form 8-K/A filed with the SEC on April 15, 2013; and


•	Registration Statement on Form 8-A filed with the SEC on April 30, 2012.

We hereby undertake to provide without charge to each person, including any beneficial owner, to whom a prospectus is delivered, upon written or oral request of that person, a copy of any document incorporated herein by reference (or incorporated into the documents that this prospectus incorporates by reference). To receive a free copy of any of the documents incorporated by reference in this prospectus, other than exhibits, unless they are specifically incorporated by reference in those documents, call or write us at:

KBS Capital Markets Group LLC

660 Newport Center Drive, Suite 1200

Newport Beach, California 92660

Telephone: (866) 527-4264

Fax: (949) 717-6201

www.kbs-cmg.com

The information relating to us contained in this prospectus does not purport to be comprehensive and should be read together with the information contained in the documents incorporated or deemed to be incorporated by reference in this prospectus.

Where You Can Find More Information

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any documents filed by us at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. Our filings with the SEC are also available to the public through the SEC’s Internet site at http://www.sec.gov. We have filed with the SEC a registration statement relating to the securities covered by this prospectus. This prospectus is a part of the registration statement and does not contain all the information in the registration statement. Whenever a reference is made in this prospectus to a contract or other document of ours, the reference is only a summary and you should refer to the exhibits that are a part of the registration statement for a copy of the contract or other document. You may review a copy of the registration statement at the SEC’s public reference room in Washington, D.C., as well as through the SEC’s Internet site.

Table of Contents

INDEX TO FINANCIAL STATEMENTS



Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	F-2
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2014 and 2013	F-3
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months Ended March 31, 2014 and 2013	F-4
Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014 (unaudited)	F-5
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2014 and 2013	F-6
Condensed Notes to Consolidated Financial Statements as of March 31, 2014 (unaudited)	F-7



222 Main

	Report of Independent Auditors	F-22
	Statement of Revenues Over Certain Operating Expenses for the Year Ended December 31, 2013	F-23
	Notes to the Statement of Revenues Over Certain Operating Expenses for the Year Ended December 31, 2013	F-24

Unaudited Pro Forma Financial Information

	Summary of Unaudited Pro Forma Financial Statements	F-26
	Unaudited Pro Forma Balance Sheet as of December 31, 2013	F-27
	Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 2013	F-29

F-1

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	March 31, 2014			December 31, 2013
	(unaudited)
Assets
Real estate:
Land	$	178,358		$	172,658
Buildings and improvements	1,084,334			944,440
Tenant origination and absorption costs	141,960			123,830
Total real estate held for investment, cost	1,404,652			1,240,928
Less accumulated depreciation and amortization	(57,407		)	(42,044		)
Total real estate held for investment, net	1,347,245			1,198,884
Real estate held for sale, net	—			31,245
Total real estate, net	1,347,245			1,230,129
Real estate loan receivable, net	17,492			17,190
Cash and cash equivalents	75,377			33,189
Rents and other receivables, net	12,873			8,370
Above-market leases, net	10,242			7,602
Assets related to real estate held for sale	—			1,027
Deferred financing costs, prepaid expenses and other assets	24,930			13,887
Total assets	$	1,488,159		$	1,311,394
Liabilities and stockholders’ equity
Notes payable
Notes payable	$	793,390		$	700,022
Notes payable related to real estate held for sale	—			30,668
Total notes payable	793,390			730,690
Accounts payable and accrued liabilities	19,014			24,783
Due to affiliates	1,350			57
Distributions payable	4,280			3,587
Below-market leases, net	25,969			27,120
Liabilities related to real estate held for sale	—			210
Other liabilities	11,833			9,716
Total liabilities	855,836			796,163
Commitments and contingencies (Note 12)
Redeemable common stock	17,466			12,414
Stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 80,182,921 and 66,430,888 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively	802			664
Additional paid-in capital	692,829			574,762
Accumulated other comprehensive income	948			2,179
Cumulative distributions and net losses	(79,722		)	(74,788		)
Total stockholders’ equity	614,857			502,817
Total liabilities and stockholders’ equity	$	1,488,159		$	1,311,394

See accompanying condensed notes to consolidated financial statements.

F-2

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)



	Three Months Ended March 31,
	2014			2013
Revenues:
Rental income	$	30,995		$	10,171
Tenant reimbursements	9,483			3,064
Interest income from real estate loan receivable	320			251
Other operating income	938			180
Total revenues	41,736			13,666
Expenses:
Operating, maintenance and management	10,485			3,269
Real estate taxes and insurance	7,655			2,410
Asset management fees to affiliate	2,459			764
Real estate acquisition fees to affiliate	1,705			1,255
Real estate acquisition fees and expenses	303			306
General and administrative expenses	734			457
Depreciation and amortization	17,269			6,138
Interest expense	5,297			1,446
Total expenses	45,907			16,045
Other income:
Other interest income	3			3
Total other income	3			3
Loss from continuing operations	(4,168		)	(2,376		)
Gain on sale of real estate, net	10,895			—
Net income (loss)	$	6,727		$	(2,376	)
Net income (loss) per common share, basic and diluted	$	0.09		$	(0.08	)
Weighted-average number of common shares outstanding, basic and diluted	72,753,222			29,700,001

See accompanying condensed notes to consolidated financial statements.

F-3

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)



	Three Months Ended March 31,
	2014			2013
Net income (loss)	$	6,727		$	(2,376	)
Other comprehensive loss:
Unrealized losses on derivative instruments	(1,231		)	(1,251		)
Total other comprehensive loss	(1,231		)	(1,251		)
Total comprehensive income (loss)	$	5,496		$	(3,627	)

See accompanying condensed notes to consolidated financial statements.

F-4

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014 (unaudited)

(dollars in thousands)



						Additional Paid-in Capital			Cumulative Distributions and Net Losses			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock
	Shares		Amounts
Balance, December 31, 2012	27,148,131		$	271		$	231,792		$	(24,842	)	$	—		$	207,221
Net loss	—		—			—			(21,637		)	—			(21,637		)
Other comprehensive income	—		—			—			—			2,179			2,179
Issuance of common stock	39,574,268		396			393,009			—			—			393,405
Transfers to redeemable common stock	—		—			(7,172		)	—			—			(7,172		)
Redemptions of common stock	(291,511	)	(3		)	(2,780		)	—			—			(2,783		)
Distributions declared	—		—			—			(28,309		)	—			(28,309		)
Commissions on stock sales and related dealer manager fees to affiliate	—		—			(34,663		)	—			—			(34,663		)
Other offering costs	—		—			(5,424		)	—			—			(5,424		)
Balance, December 31, 2013	66,430,888		$	664		$	574,762		$	(74,788	)	$	2,179		$	502,817
Net income	—		—			—			6,727			—			6,727
Other comprehensive loss	—		—			—			—			(1,231		)	(1,231		)
Issuance of common stock	13,806,949		139			137,244			—			—			137,383
Transfers to redeemable common stock	—		—			(5,052		)	—			—			(5,052		)
Redemptions of common stock	(54,916	)	(1		)	(523		)	—			—			(524		)
Distributions declared	—		—			—			(11,661		)	—			(11,661		)
Commissions on stock sales and related dealer manager fees to affiliate	—		—			(12,157		)	—			—			(12,157		)
Other offering costs	—		—			(1,445		)	—			—			(1,445		)
Balance, March 31, 2014	80,182,921		$	802		$	692,829		$	(79,722	)	$	948		$	614,857

See accompanying condensed notes to consolidated financial statements.

F-5

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Three Months Ended March 31,
	2014			2013
Cash Flows from Operating Activities:
Net income (loss)	$	6,727		$	(2,376	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	17,269			6,138
Noncash interest income on real estate-related investment	6			6
Deferred rents	(2,174		)	(728		)
Allowance for doubtful accounts	138			(59		)
Amortization of above- and below-market leases, net	(1,054		)	(183		)
Amortization of deferred financing costs	481			283
Gain on sale of real estate	(10,895		)	—
Changes in operating assets and liabilities:
Rents and other receivables	(2,465		)	(224		)
Deferred financing costs, prepaid expenses and other assets	(5,824		)	(1,193		)
Accounts payable and accrued liabilities	(5,373		)	(1,297		)
Other liabilities	2,060			1,131
Due to affiliates	910			—
Net cash (used in) provided by operating activities	(194		)	1,498
Cash Flows from Investing Activities:
Acquisitions of real estate	(169,369		)	(118,089		)
Improvements to real estate	(4,274		)	(1,491		)
Proceeds from sale of real estate, net	42,740			—
Advances on real estate loan receivable	(348		)	(130		)
Principal repayments on real estate loan receivable	40			—
Net cash used in investing activities	(131,211		)	(119,710		)
Cash Flows from Financing Activities:
Proceeds from notes payable	102,700			103,730
Principal payments on notes payable	(40,000		)	—
Payments of deferred financing costs	(1,560		)	(2,159		)
Proceeds from issuance of common stock	131,807			49,745
Payments to redeem common stock	(524		)	(570		)
Payments of commissions on stock sales and related dealer manager fees	(12,157		)	(4,560		)
Payments of other offering costs	(1,281		)	(2,136		)
Distributions paid to common stockholders	(5,392		)	(2,427		)
Net cash provided by financing activities	173,593			141,623
Net increase in cash and cash equivalents	42,188			23,411
Cash and cash equivalents, beginning of period	33,189			23,518
Cash and cash equivalents, end of period	$	75,377		$	46,929
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	4,165		$	912
Supplemental Disclosure of Noncash Transactions:
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	5,576		$	2,056
Increase in other offering costs payable	$	542		$	249
Increase in distributions payable	$	693		$	278
Liabilities assumed in connection with real estate acquisition	$	967		$	5,933
Increase in lease commissions payable	$	322		$	116

See accompanying condensed notes to consolidated financial statements.

F-6

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(unaudited)


1.	ORGANIZATION

KBS Real Estate Investment Trust III, Inc. (the “Company”) was formed on December 22, 2009 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2011. Substantially all of the Company’s business is expected to be conducted through KBS Limited Partnership III (the “Operating Partnership”), a Delaware limited partnership. The Company is the sole general partner of and owns a 0.1% partnership interest in the Operating Partnership. KBS REIT Holdings III LLC (“REIT Holdings III”), the limited partner of the Operating Partnership, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings III.

Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company entered into with the Advisor (the “Advisory Agreement”). On January 26, 2010, the Company issued 20,000 shares of its common stock to the Advisor at a purchase price of $10.00 per share. As of March 31, 2014, the Advisor owned 20,000 shares of the Company’s common stock.

The Company intends to invest in a diverse portfolio of real estate investments. The primary types of properties the Company expects to invest in include office, industrial and retail properties located throughout the United States. All such real estate assets may be acquired directly by the Company or the Operating Partnership, though the Company may invest in other entities that make similar investments. The Company expects its primary investment focus to be core properties. The Company also currently expects to allocate between 0 and 20% of its portfolio to real estate-related investments such as mortgage loans. As of March 31, 2014, the Company owned 12 office properties and one first mortgage loan secured by a deed of trust.

On February 4, 2010, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of up to 280,000,000 shares, or up to $2,760,000,000 of shares, of common stock for sale to the public (the “Offering”), of which up to 80,000,000 shares, or up to $760,000,000 of shares, are being offered pursuant to the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on October 26, 2010, and the Company retained KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Company, to serve as the dealer manager of the Offering pursuant to a dealer manager agreement, as amended and restated (the “Dealer Manager Agreement”). As described above, the Company intends to use substantially all of the net proceeds from the Offering to invest in a diverse portfolio of real estate investments.

On March 24, 2011, the Company broke escrow in the Offering and through March 31, 2014, the Company had sold 80,584,260 shares of common stock for gross offering proceeds of $801.7 million including 2,523,237 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $24.0 million. The Company’s board of directors has extended the closing date of the primary offering until the earlier of the sale of up to 200,000,000 shares, or up to $2,000,000,000 of shares, or the date the registration statement relating to the Company’s proposed follow-on offering (the “Follow-on Offering”) is declared effective by the SEC.

On February 14, 2013, the Company filed a registration statement on Form S-11 with the SEC to register the Follow-on Offering. Pursuant to the Follow-on Offering registration statement, the Company proposes to register up to $2,000,000,000 of shares of common stock for sale to the public in the primary Follow-on Offering. The Company also expects to register up to $760,000,000 of shares of common stock pursuant to the Company’s dividend reinvestment plan in the Follow-on Offering. The Company can give no assurance that it will commence or complete the Follow-on Offering.

The Dealer Manager has recommended that the Company’s offering stage last no longer than September 2015. The Company’s offering stage will be based on a number of considerations, including its goal of raising sufficient proceeds to continue to acquire a diverse portfolio of real estate investments prior to seeking a liquidity event, the expected pace of sales of its common stock during 2014 and 2015, the current and anticipated composition and quality of the Company’s portfolio and the condition of the commercial real estate market. The Company will continue to monitor these factors and may adjust its anticipated offering stage as necessary based on these and other factors.

F-7

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

The Company plans to offer shares under its dividend reinvestment plan beyond the termination of its offering stage. In some states, the Company will need to renew the registration statement annually or file a new registration statement to continue the dividend reinvestment plan offering.

The Company may terminate any of its offerings at any time.

As of March 31, 2014, the Company had redeemed 421,339 shares sold in the Offering for $4.0 million.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2013. During the three months ended March 31, 2014, the Company adopted ASU No. 2014-08 (defined below), which impacts the Company’s reporting of discontinued operations. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The consolidated financial statements include the accounts of the Company, REIT Holdings III, the Operating Partnership and their direct and indirect wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements and condensed notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. During the three months ended March 31, 2014, the Company disposed of one office property. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three months ended March 31, 2014 and 2013, respectively.

Distributions declared per common share were $0.160 for both the three months ended March 31, 2014 and 2013. Distributions declared per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2014 and 2013, respectively. For each day that was a record date for distributions during the three months ended March 31, 2014 and 2013, distributions were calculated at a rate of $0.00178082 per share per day. Each day during the period from January 1, 2013 through March 31, 2013 and January 1, 2014 through March 31, 2014 was a record date for distributions.

F-8

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

Segments

The Company invests in core real estate properties and real estate-related investments with the goal of acquiring a portfolio of income-producing investments. The Company’s real estate properties exhibit similar long-term financial performance and have similar economic characteristics to each other. As of March 31, 2014, the Company aggregated its investments in real estate properties into one reportable business segment. The Company considered both quantitative and qualitative thresholds and determined that its investment in a real estate loan receivable does not constitute a reportable segment. Prior to the reporting period commencing on January 1, 2014, the Company had identified two reportable business segments based on its investment types: real estate and real estate-related. However, based on the Company’s current investment portfolio and its future investment focus, the Company does not believe that its investment in a real estate-related investment is a reportable segment.

Recently Issued Accounting Standards Update

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”). ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: a) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; b) the component of an entity or group of components of an entity is disposed of by sale; and c) the component of an entity or group of components of an entity is disposed of other than by sale. ASU No. 2014-08 also requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective for reporting periods beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted ASU No. 2014-08 for the reporting period beginning January 1, 2014. As a result of the adoption of ASU No. 2014-08, results of operations for properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above. Additionally, any gain or loss on sale of real estate that does not meet the criteria for classification as a discontinued operation would be presented, on the statements of operations, below income from continuing operations and income from discontinued operations.


3.	RECENT ACQUISITIONS OF REAL ESTATE

During the three months ended March 31, 2014, the Company acquired the following property (in thousands):



								Intangibles
Property Name	City	State	Acquisition Date	Land		Building and Improvements		Tenant Origination and Absorption Costs		Above-Market Lease Assets		Below- Market Lease Liabilities			Other			Total Purchase Price
222 Main	Salt Lake City	UT	02/27/2014	$	5,700	$	137,660	$	19,182	$	3,108	$	(367	)	$	4,477	⁽¹⁾	$	169,760

_____________________

⁽¹⁾The property is subject to certain property tax reimbursements from the city’s redevelopment agency. The estimated fair value of the property tax reimbursements of $4.5 million is recorded as deferred financing costs, prepaid expenses and other assets on the Company’s consolidated balance sheet as of the acquisition date and is amortized over the projected property tax reimbursement period of approximately 9.5 years.

The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition as follows (in years):

F-9

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

The Company recorded the real estate acquisition as a business combination and expensed $2.0 million of acquisition costs. For the three months ended March 31, 2014, the Company recognized $1.4 million of total revenues and $0.8 million of operating expenses from this property.


4.	REAL ESTATE

As of March 31, 2014, the Company’s real estate portfolio was composed of 12 office properties encompassing in the aggregate approximately 5.3 million rentable square feet. As of March 31, 2014, the Company’s real estate portfolio was collectively 90% occupied. The following table summarizes the Company’s investments in real estate as of March 31, 2014 (in thousands):



Property	Date Acquired	City	State	Property Type	Total Real Estate at Cost		Accumulated Depreciation and Amortization			Total Real Estate, Net
Domain Gateway	09/29/2011	Austin	TX	Office	$	47,374	$	(5,468	)	$	41,906
Town Center	03/27/2012	Plano	TX	Office	118,637		(12,399		)	106,238
McEwen Building	04/30/2012	Franklin	TN	Office	40,326		(4,145		)	36,181
Gateway Tech Center	05/09/2012	Salt Lake City	UT	Office	29,483		(3,107		)	26,376
Tower on Lake Carolyn	12/21/2012	Irving	TX	Office	48,701		(4,064		)	44,637
RBC Plaza	01/31/2013	Minneapolis	MN	Office	129,064		(7,955		)	121,109
One Washingtonian Center	06/19/2013	Gaithersburg	MD	Office	88,929		(3,551		)	85,378
Preston Commons	06/19/2013	Dallas	TX	Office	116,043		(4,809		)	111,234
Sterling Plaza	06/19/2013	Dallas	TX	Office	76,982		(3,554		)	73,428
201 Spear Street	12/03/2013	San Francisco	CA	Office	126,630		(1,424		)	125,206
500 West Madison	12/16/2013	Chicago	IL	Office	419,941		(6,391		)	413,550
222 Main	02/27/2014	Salt Lake City	UT	Office	162,542		(540		)	162,002
					$	1,404,652	$	(57,407	)	$	1,347,245

As of March 31, 2014, the following properties represented more than 10% of the Company’s total assets:



Property	Location	Rentable Square Feet	Total Real Estate, Net (in thousands)		Percentage of Total Assets		Annualized Base Rent (in thousands) ⁽¹⁾		Average Annualized Base Rent per sq. ft.		Occupancy
500 West Madison	Chicago, IL	1,457,724	$	413,550	27.8	%	$	33,958	$	25.42	92.3	%
222 Main	Salt Lake City, UT	426,657	162,002		10.9	%	13,163		36.22		85.2	%

_____________________

⁽¹⁾Annualized base rent represents annualized contractual base rental income as of March 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Operating Leases

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2014, the leases had remaining terms, excluding options to extend, of up to 12.7 years with a weighted-average remaining term of 5.3 years. Some of the leases have provisions to extend the term of the leases, options for early termination for all or a part of the leased premises after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $4.6 million and $4.7 million as of March 31, 2014 and December 31, 2013, respectively.

F-10

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

During the three months ended March 31, 2014 and 2013, the Company recognized deferred rent from tenants of $2.2 million and $0.7 million, respectively. As of March 31, 2014 and December 31, 2013, the cumulative deferred rent balance was $10.0 million and $7.8 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $0.3 million and $0.3 million of unamortized lease incentives as of March 31, 2014 and December 31, 2013, respectively.

As of March 31, 2014, the future minimum rental income from the Company’s properties under its non-cancelable operating leases was as follows (in thousands):



April 1, 2014 through December 31, 2014	$	86,351
2015	111,214
2016	103,414
2017	88,832
2018	75,940
Thereafter	231,393
	$	697,144

As of March 31, 2014, the Company had approximately 500 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Finance	95	$	34,342	27.8	%

_____________________

As of March 31, 2014, no other tenant industries accounted for more than 10% of annualized base rent and no tenant accounted for more than 10% of the annualized base rent. No material tenant credit issues have been identified at this time.

Geographic Concentration Risk

As of March 31, 2014, the Company’s net investments in real estate in Illinois, Texas and Utah represented 28%, 25% and 13% of the Company’s total assets, respectively. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Illinois, Texas and Utah real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Recent Disposition

Las Cimas IV

On October 28, 2011, the Company, through an indirect wholly owned subsidiary, acquired a five-story office building containing 138,008 rentable square feet located on 9.7 acres of land in Austin, Texas (“Las Cimas IV”). The purchase price of Las Cimas IV was $35.7 million plus closing costs. On February 19, 2014, the Company sold Las Cimas IV for $43.2 million, resulting in a gain of $10.9 million, which includes reductions to the net book value of the property due to historical depreciation and amortization expense. The purchaser was not affiliated with the Company or the Advisor.

For the three months ended March 31, 2014 and 2013, Las Cimas IV had revenues of $0.6 million and $1.1 million, respectively. For the three months ended March 31, 2014 and 2013, Las Cimas IV had total expenses of $0.4 million and $1.2 million, respectively. The results of operations from Las Cimas IV were included in continuing operations on the Company’s consolidated statements of operations.

F-11

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)


5.	TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of March 31, 2014 and December 31, 2013, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	March 31, 2014			December 31, 2013			March 31, 2014			December 31, 2013			March 31, 2014			December 31, 2013
Cost	$	141,960		$	123,830		$	11,025		$	7,989		$	(30,058	)	$	(29,736	)
Accumulated Amortization	(21,438		)	(16,237		)	(783		)	(387		)	4,089			2,616
Net Amount	$	120,522		$	107,593		$	10,242		$	7,602		$	(25,969	)	$	(27,120	)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three months ended March 31, 2014 and 2013 were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2014			2013			2014			2013			2014		2013
Amortization	$	(6,252	)	$	(2,553	)	$	(469	)	$	(86	)	$	1,523	$	269


6.	REAL ESTATE LOAN RECEIVABLE

As of March 31, 2014 and December 31, 2013, the Company, through an indirect wholly owned subsidiary, had originated one real estate loan receivable as follows (dollars in thousands):

Loan Name

Location of Related Property or Collateral

Date Originated

Property Type

Loan Type

Outstanding Principal Balance as of March 31,

2014 ⁽¹⁾

Book Value

as of

March 31,

2014 ⁽²⁾

Book Value

as of

December 31,

2013 ⁽²⁾

Contractual Interest

Rate ⁽³⁾

Annualized Effective Interest

Rate ⁽³⁾

Maturity Date

Aberdeen First Mortgage Origination

Dallas, Texas

06/24/2011

Office

Mortgage

17,431

17,492

17,190

7.5%

07/01/2016

_____________________

⁽²⁾ Book value represents outstanding principal balance, adjusted for unamortized origination fees and direct origination and acquisition costs.

⁽³⁾Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2014, using the interest method, divided by the average amortized cost basis of the investment. The contractual interest rate and annualized effective interest rate presented are as of March 31, 2014.

The following summarizes the activity related to the real estate loan receivable for the three months ended March 31, 2014 (in thousands):



Real estate loan receivable - December 31, 2013	$	17,190
Advances on real estate loan receivable	348
Principal repayments received on real estate loan receivable	(40		)
Amortization of closing costs and origination fees on originated real estate loan receivable	(6		)
Real estate loan receivable - March 31, 2014	$	17,492

F-12

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

For the three months ended March 31, 2014 and 2013, interest income from the real estate loan receivable consisted of the following (in thousands):



	Three Months Ended March 31,
	2014			2013
Contractual interest income	$	326		$	257
Amortization of closing costs and origination fees	(6		)	(6		)
Interest income from real estate loan receivable	$	320		$	251

As of March 31, 2014, the borrower under the Aberdeen First Mortgage Loan was current on its payments.


7.	NOTES PAYABLE

As of March 31, 2014 and December 31, 2013, the Company’s notes payable consisted of the following (dollars in thousands):



	Principal as of March 31, 2014		Principal as of December 31, 2013		Contractual Interest Rate as of March 31, 2014⁽¹⁾	Effective Interest Rate as of March 31, 2014 ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾
Town Center Mortgage Loan	$	75,000	$	75,000	One-month LIBOR + 1.85%	2.87%	Interest Only	03/27/2018
Portfolio Loan ⁽³⁾	130,000		170,000		One-month LIBOR + 1.75%	1.90%	Interest Only	04/01/2018
RBC Plaza Mortgage Loan ⁽⁴⁾	68,730		68,730		One-month LIBOR + 1.80%	2.59%	Interest Only	02/01/2017
National Office Portfolio Mortgage Loan ⁽⁵⁾	161,960		161,960		One-month LIBOR + 1.50%	2.80%	Interest Only	07/01/2017
500 West Madison Mortgage Loan ⁽⁶⁾	255,000		255,000		One-month LIBOR + 1.65%	2.94%	Interest Only	12/16/2018
222 Main Mortgage Loan ⁽⁷⁾	102,700		—		3.97%	3.97%	⁽⁷⁾	03/01/2021
Total Notes Payable	$	793,390	$	730,690

_____________________

⁽²⁾ Represents the maturity date as of March 31, 2014; subject to certain conditions, the maturity dates of certain loans may be extended beyond the dates shown.

⁽³⁾ As of March 31, 2014, the Portfolio Loan was secured by Domain Gateway, the McEwen Building, Gateway Tech Center, the Tower on Lake Carolyn and 201 Spear Street. The face amount of the Portfolio Loan is $200.0 million, of which $130.0 million is term debt and $70.0 million is revolving debt. As of March 31, 2014, the outstanding balance under the loan was $130.0 million and was composed of $130.0 million of term debt. As of March 31, 2014, an additional $19.4 million of revolving debt remained available for immediate future disbursements, subject to certain conditions set forth in the loan agreement. The remaining $50.6 million of revolving debt is available for future disbursements upon us meeting certain financial coverage ratios and subject to certain conditions set forth in the loan agreement. Also see “Recent Financing Transactions - Amendment and Restatement of Portfolio Loan.”

⁽⁴⁾ As of March 31, 2014, $68.7 million had been disbursed to the Company and $7.2 million remained available for future disbursements, subject to certain conditions set forth in the loan agreement.

⁽⁵⁾ The National Office Portfolio Mortgage Loan is secured by One Washingtonian Center, Preston Commons and Sterling Plaza. As of March 31, 2014, $162.0 million had been disbursed to the Company and $8.8 million remained available for future disbursements, subject to certain conditions set forth in the loan agreement.

⁽⁶⁾The 500 West Madison Mortgage Loan consists of $215.0 million of term debt, $20.0 million of non-revolving debt (the “First Non-Revolver Tranche”) and another $20.0 million of non-revolving debt (the “Second Non-Revolver Tranche”). At closing, the entire $255.0 million of the 500 West Madison Mortgage Loan was funded. The Company is obligated to pay down and have $20.0 million of availability under the First Non-Revolver Tranche by December 16, 2015 to be used for tenant improvements and leasing commissions, subject to certain terms and conditions contained in the loan documents.

⁽⁷⁾See “Recent Financing Transactions – 222 Main Mortgage Loan.”

F-13

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

As of March 31, 2014 and December 31, 2013, the Company’s deferred financing costs were $7.0 million and $5.9 million, respectively, net of amortization, and are included in deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets.

During the three months ended March 31, 2014 and 2013, the Company incurred $5.3 million and $1.4 million of interest expense, respectively. As of March 31, 2014 and December 31, 2013, $1.9 million and $1.2 million of interest expense were payable, respectively. Included in interest expense for the three months ended March 31, 2014 and 2013 were $0.5 million and $0.3 million of amortization of deferred financing costs, respectively. Included in interest expense for the three months ended March 31, 2014 and 2013 were $1.0 million and $0.1 million of interest incurred as a result of the Company’s interest rate swap agreements, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of March 31, 2014 (in thousands):



April 1, 2014 through December 31, 2014	$	—
2015	20,000
2016	1,357
2017	232,563
2018	441,949
Thereafter	97,521
	$	793,390

The Company’s notes payable contain financial debt covenants. As of March 31, 2014, the Company was in compliance with these debt covenants.

Recent Financing Transactions

222 Main Mortgage Loan

On February 27, 2014, in connection with the acquisition of 222 Main, the Company, through an indirect wholly owned subsidiary (the “222 Main Owner”), entered into a seven-year mortgage loan with an unaffiliated lender, for borrowings of $102.7 million secured by 222 Main (the “222 Main Mortgage Loan”). The 222 Main Mortgage Loan matures on March 1, 2021 and bears interest at a fixed rate of 3.97%. Monthly payments are initially interest-only. Beginning April 1, 2016, monthly payments include principal and interest with principal payments calculated using an amortization schedule of 30 years for the balance of the loan term, with the remaining principal balance, all accrued and unpaid interest and any other amounts due at maturity. The 222 Main Owner has the right to repay the loan in whole, but not in part, on or after September 1, 2017 subject to certain conditions and possible fees as described in the loan documents.

KBS REIT Properties III (“REIT Properties III”), the Company’s wholly owned subsidiary, is providing a limited guaranty of the 222 Main Mortgage Loan with respect to certain potential fees, costs, expenses, losses or damages incurred or suffered by the lender as a result of certain intentional actions committed by the 222 Main Owner in violation of the loan documents. REIT Properties III is also providing a guaranty of the principal balance and any interest or other sums outstanding under the 222 Main Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the 222 Main Owner, certain direct or indirect transfers or financings of 222 Main in violation of the loan documents and the violation of certain other terms of the loan documents by the 222 Main Owner.

Amendment and Restatement of Portfolio Loan

On April 30, 2012, the Company, through indirect wholly owned subsidiaries, entered into a two-year portfolio loan secured by Domain Gateway, Las Cimas IV and the McEwen Building with an unaffiliated lender, for an amount up to $100.0 million (the “Portfolio Loan”). Subsequently, the Company added Gateway Tech Center, the Tower on Lake Carolyn and 201 Spear Street as additional collateral for the Portfolio Loan. Additionally, the Company entered into a loan modification agreement to increase the face amount of the loan to $200.0 million, of which $80.0 million was non-revolving debt and $120.0 million was revolving debt, and to extend the initial maturity date to February 1, 2016, with two one-year extension options, subject to certain conditions contained in the loan agreement. On February 19, 2014, in connection with its disposition, Las Cimas IV was released as collateral to the Portfolio Loan.

F-14

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

On March 13, 2014, the Company entered into an amended and restated loan agreement to extend the initial maturity date of the Portfolio Loan to April 1, 2018, with a one-year extension option, subject to certain conditions contained in the loan agreement, and to modify the interest rate under the loan. The Portfolio Loan, as amended, bears interest at a floating rate of 175 basis points over one-month LIBOR and monthly payments are interest only with the entire balance due at maturity, assuming no prior prepayment. The Company has the right to prepay all or a portion of the Portfolio Loan, subject to certain fees and conditions contained in the loan agreement. The Portfolio Loan is composed of $130.0 million of non-revolving debt and $70.0 million of revolving debt. The availability of the revolving debt is subject to certain conditions contained in the loan documents. During the term of the Portfolio Loan, the Company has an option, which may be exercised up to three times, to increase the loan amount to a maximum of $350.0 million, of which 65% would be non-revolving debt and 35% would be revolving debt, with the addition of one or more properties to secure the Portfolio Loan, subject to certain conditions contained in the loan documents.


8.	DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into the derivatives for speculative purposes.

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

The following table summarizes the notional and fair value of the Company’s interest rate swaps designated as cash flow hedges as of March 31, 2014 and December 31, 2013. The notional value is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):



						Fair Value of Asset (Liability)			Fair Value of Asset (Liability)
Derivative Instruments	Effective Date	Maturity Date	Notional Value		Reference Rate	March 31, 2014			December 31, 2013
Interest Rate Swap	02/01/2013	02/01/2017	$	68,730	One-month LIBOR/ Fixed at 0.79%	$	(2	)	$	25
Interest Rate Swap	04/02/2013	03/27/2018	56,600		One-month LIBOR/ Fixed at 1.07%	552			631
Interest Rate Swap	05/01/2013	03/27/2018	18,400		One-month LIBOR/ Fixed at 0.86%	334			369
Interest Rate Swap ⁽¹⁾	07/01/2013	06/01/2018	148,000		One-month LIBOR/ Fixed at 1.41%	(776		)	(721		)
Interest Rate Swap	03/03/2014	12/16/2018	215,000		One-month LIBOR/ Fixed at 1.51%	840			1,875
Total derivatives designated as hedging instruments			$	506,730		$	948		$	2,179

_____________________

⁽¹⁾ The Company entered into an interest rate swap agreement with Bank of America, N.A., which effectively fixes the interest rate on a $148.0 million portion of the National Office Portfolio Mortgage Loan at 2.91% from July 1, 2013 through May 31, 2017, and which will effectively fix the interest rate on $100.0 million at 2.91% from June 1, 2017 through May 31, 2018.

F-15

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

Asset derivatives are recorded as deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets, and liability derivatives are recorded as other liabilities on the accompanying consolidated balance sheets. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) and accompanying consolidated statements of stockholders’ equity. The Company recorded unrealized losses of $1.2 million and $1.3 million on derivative instruments designated as cash flow hedges in accumulated other comprehensive income (loss) during the three months ended March 31, 2014 and 2013, respectively. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flows. As a result of utilizing derivative instruments designated as cash flow hedges to hedge its variable rate notes payable, the Company recognized an additional $1.0 million and $0.1 million of interest expense related to the effective portion of cash flow hedges during the three months ended March 31, 2014 and 2013, respectively. The change in fair value of the ineffective portion is recognized directly in earnings. During the three months ended March 31, 2014 and 2013, there was no ineffective portion related to the change in fair value of the cash flow hedges. During the next 12 months, the Company expects to recognize additional interest expense related to derivative instruments designated as cash flow hedges. The present value of the additional interest expense expected to be recognized over the next 12 months totaled $5.7 million as of March 31, 2014 and was included in accumulated other comprehensive income.


9.	FAIR VALUE DISCLOSURES

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model‑derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of assets and liabilities for which it is practicable to estimate the fair value:

Cash and cash equivalents, rent and other receivables, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

Real estate loan receivable: The Company’s real estate loan receivable is presented in the accompanying consolidated balance sheets at its amortized cost net of recorded loan loss reserves and not at fair value. The fair value of the real estate loan receivable was estimated using an internal valuation model that considered the expected cash flows for the loan, underlying collateral value and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.

F-16

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.

Notes payable: The fair values of the Company’s notes payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.

The following were the face values, carrying amounts and fair values of the Company’s real estate loan receivable and notes payable as of March 31, 2014 and December 31, 2013, which carrying amounts generally do not approximate the fair values (in thousands):



	March 31, 2014						December 31, 2013
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial assets:
Real estate loan receivable	$	17,431	$	17,492	$	17,205	$	17,123	$	17,190	$	16,877
Financial liabilities:
Notes payable	$	793,390	$	793,390	$	792,798	$	730,690	$	730,690	$	726,162

Disclosure of the fair values of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

During the three months ended March 31, 2014, the Company measured the following assets and liabilities at fair value (in thousands):



				Fair Value Measurements Using
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Recurring Basis:
Asset derivatives	$	1,726		$	—	$	1,726		$	—
Liability derivatives	(778		)	—		(778		)	—

F-17

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)


10.	RELATED PARTY TRANSACTIONS

The Company has entered into the Advisory Agreement with the Advisor and the Dealer Manager Agreement with the Dealer Manager. These agreements entitle the Advisor and/or the Dealer Manager to specified fees upon the provision of certain services with regard to the Offering and entitle the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate investments, the management of those investments, among other services, and the disposition of investments, as well as reimbursement of organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company, such as expenses related to the Offering and dividend reinvestment plan, and certain costs incurred by the Advisor in providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. The Company has also entered into a fee reimbursement agreement with the Dealer Manager pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the DTCC Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust II, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc. and KBS Strategic Opportunity REIT II, Inc.

On January 6, 2014, the Company, together with KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust II, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc., the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance.

During the three months ended March 31, 2014 and 2013, no other transactions occurred between the Company and KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust II, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc. and KBS Strategic Opportunity REIT II, Inc.

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2014 and 2013, respectively, and any related amounts payable as of March 31, 2014 and December 31, 2013 (in thousands):



	Incurred				Payable as of
	Three Months Ended March 31,				March 31,		December 31,
	2014		2013		2014		2013
Expensed
Asset management fees ⁽¹⁾	$	2,459	$	764	$	910	$	—
Reimbursement of operating expenses ⁽²⁾	27		25		—		—
Real estate acquisition fees	1,705		1,255		—		—
Additional Paid-in Capital
Selling commissions	8,202		3,072		—		—
Dealer manager fees	3,955		1,488		—		—
Reimbursable other offering costs ⁽³⁾	1,122		872		440		57
	$	17,470	$	7,476	$	1,350	$	57

_____________________

⁽¹⁾As of March 31, 2014, the Company had accrued and deferred payment of $0.9 million of asset management fees. See “Advisory Agreement Amendment” below.

⁽²⁾The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $27,000 and $25,000 for the three months ended March 31, 2014 and 2013, respectively, and were the only employee costs reimbursed under the Advisory Agreement for the three months ended March 31, 2014. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition or origination fees or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers.

⁽³⁾Amounts include $0.2 million incurred by the Dealer Manager related to the Follow-on Offering for the three months ended March 31, 2014. The Company may not reimburse the Dealer Manager for these expenses to the extent that total organization and offering expenses incurred by the Company exceed 15% of the aggregate gross proceeds from the Follow-on Offering. As of March 31, 2014, the Company had not commenced the Follow-on Offering, and as such the Company recorded all offering costs incurred related to the Follow-on Offering, including the $0.2 million incurred by the Dealer Manager, as deferred financing costs, prepaid expenses and other assets on its consolidated balance sheet.

F-18

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

In connection with the Offering, the Company’s sponsors agreed to provide additional indemnification to one of the participating broker dealers. The Company agreed to add supplemental coverage to its directors’ and officers’ insurance coverage to insure the sponsors’ obligations under this indemnification agreement in exchange for reimbursement by the sponsors to the Company for all costs, expenses and premiums related to this supplemental coverage. During the three months ended March 31, 2014, the Advisor incurred $88,000 for the costs of the supplemental coverage obtained by the Company.

Pursuant to the Advisory Agreement, the Advisor would be obligated to reimburse the Company to the extent organization and offering costs incurred by the Company in each of the Offering and the Follow-on Offering exceed 15% of the gross offering proceeds of the respective offering. As of March 31, 2014, organizational and offering costs in the Offering did not exceed 15% of the gross offering proceeds. From inception through March 31, 2014, the Company had recorded $1.3 million of offering costs related to the Follow-on Offering. As of March 31, 2014, the Company had not commenced the Follow-on Offering and as such, the Company recorded $1.3 million as deferred financing costs, prepaid expenses and other assets on its consolidated balance sheet, of which $0.2 million was incurred by the Dealer Manager.

Advisory Agreement Amendment

On March 5, 2014, the Company and the Advisor entered into an amendment to the advisory agreement between the parties. Pursuant to the amendment, with respect to asset management fees accruing from March 1, 2014, the Advisor defers, without interest, the Company’s obligation to pay asset management fees for any month in which the Company’s modified funds from operations (“MFFO”) for such month, as such term is defined in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010 and interpreted by the Company, excluding asset management fees, does not exceed the amount of distributions declared by the Company for record dates of that month. The Company remains obligated to pay the Advisor an asset management fee in any month in which the Company's MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an “MFFO Surplus”); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the amendment. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with this amendment.

However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as the Company's stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8.0% per year cumulative, noncompounded return on such net invested capital (the “Stockholders’ 8% Return”) and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to the Company's share redemption program. The Stockholders’ 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of the Company's stockholders to have received any minimum return in order for the Advisor to receive deferred asset management fees. As of March 31, 2014, the Company had accrued and deferred payment of $0.9 million of asset management fees under this amendment, as the Company believes the payment of this amount to the Advisor is probable. These fees will be reimbursed in accordance with the terms noted above.

F-19

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)

11. UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the three months ended March 31, 2014 and 2013. The Company acquired one office building during the three months ended March 31, 2014, which was accounted for as a business combination. The following unaudited pro forma information for the three months ended March 31, 2014 and 2013 has been prepared to give effect to the acquisition of 222 Main as if the acquisition occurred on January 1, 2013. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition occurred on this date, nor does it purport to predict the results of operations for future periods (in thousands, except share and per share amounts).



	For the Three Months Ended March 31,
	2014		2013
Revenues	$	43,838	$	17,003
Depreciation and amortization	$	18,252	$	7,699
Net income (loss)	$	8,467	$	(2,802	)
Net income (loss) per common share, basic and diluted	$	0.11	$	(0.08	)
Weighted-average number of common shares outstanding, basic and diluted	77,583,054		37,326,052

The unaudited pro forma information for the three months ended March 31, 2014 was adjusted to exclude $2.0 million of acquisition costs related to the above property incurred in 2014.


12.	COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common and, if applicable, preferred stock available for issue; the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor and the Dealer Manager are unable to provide the respective services, the Company will be required to obtain such services from other sources.

Legal Matters

From time to time, the Company may be party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of March 31, 2014.

F-20

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2014

(unaudited)


13.	SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Status of the Offering

The Company commenced the Offering on October 26, 2010. As of May 2, 2014, the Company had sold 88,335,764 shares of common stock in the Offering for gross offering proceeds of $878.7 million, including 2,998,558 shares of common stock sold under its dividend reinvestment plan for gross offering proceeds of $28.5 million. Also as of May 2, 2014, the Company had redeemed 477,725 of the shares sold in the Offering for $4.6 million.

Distributions Paid

On April 1, 2014, the Company paid distributions of $4.3 million, which related to distributions declared for daily record dates for each day in the period from March 1, 2014 through March 31, 2014. On May 1, 2014, the Company paid distributions of $4.5 million, which related to distributions declared for daily record dates for each day in the period from April 1, 2014 through April 30, 2014.

Distributions Declared

On May 5, 2014, the Company’s board of directors declared distributions based on daily record dates for the period from June 1, 2014 through June 30, 2014, which the Company expects to pay in July 2014, and distributions based on daily record dates for the period from July 1, 2014 through July 31, 2014, which the Company expects to pay in August 2014. Investors may choose to receive cash distributions or purchase additional shares through the Company’s dividend reinvestment plan.

Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082 per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on a purchase price of $10.00 per share.

F-21

Table of Contents

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

KBS Real Estate Investment Trust III, Inc.

We have audited the accompanying statement of revenues over certain operating expenses of 222 Main for the year ended December 31, 2013, and the related notes to the financial statement.

Management’s Responsibility for the Financial Statement

Management is responsible for the preparation and fair presentation of the statement of revenues over certain operating expenses in conformity with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the statement of revenues over certain operating expenses that is free of material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the statement of revenues over certain operating expenses based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenues over certain operating expenses is free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the statement of revenues over certain operating expenses. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the statement of revenues over certain operating expenses, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the statement of revenues over certain operating expenses in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the statement of revenues over certain operating expenses.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the statement of revenues over certain operating expenses referred to above presents fairly, in all material respects, the revenues and certain operating expenses described in Note 2 of 222 Main for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

Basis of Accounting

As described in Note 2, the statement of revenues over certain operating expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, and is not intended to be a complete presentation of the revenues and expenses of 222 Main. Our opinion is not modified with respect to this matter.

/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

Newport Beach, California

May 5, 2014

F-22

Table of Contents

222 MAIN

STATEMENT OF REVENUES OVER CERTAIN OPERATING EXPENSES

For the Year Ended December 31, 2013

(in thousands)




Revenues:
Rental income	$	10,951
Parking revenue and other income	1,460
Tenant reimbursements	370
Total revenues	12,781
Expenses:
Real estate taxes and insurance	1,581
Repairs and maintenance	915
General and administrative	624
Utilities	282
Total expenses	3,402
Revenues over certain operating expenses	$	9,379

See accompanying notes.

F-23

Table of Contents

222 MAIN

NOTES TO STATEMENT OF REVENUES OVER CERTAIN OPERATING EXPENSES

For the Year Ended December 31, 2013


1.	DESCRIPTION OF REAL ESTATE PROPERTY

On February 27, 2014, KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), through an indirect wholly owned subsidiary, acquired from 222 S. Main Investment LLC an office property containing 426,657 rentable square feet located on approximately 1.6 acres of land in Salt Lake City, Utah (“222 Main”). The seller is not affiliated with KBS REIT III or its external advisor, KBS Capital Advisors LLC. The purchase price (net of closing credits) of 222 Main was approximately $170.4 million plus closing costs.

KBS REIT III is a Maryland corporation formed to invest in and manage a diverse portfolio of real estate investments located throughout the United States.


2.	BASIS OF PRESENTATION

The accompanying statement of revenues over certain operating expenses has been prepared to comply with the rules and regulations of the Securities and Exchange Commission (“SEC”).

222 Main is not a legal entity and the accompanying statement of revenues over certain operating expenses is not representative of the actual operations for the periods presented, as certain revenues and expenses have been excluded that may not be comparable to the revenues and expenses KBS REIT III expects to incur in the future operations of 222 Main. Excluded items include interest expense, depreciation and amortization, and certain general and administrative costs not directly comparable to the future operations of 222 Main.

An audited statement of revenues over certain operating expenses is being presented for the most recent fiscal year available instead of the three most recent years based on the following factors: (i) 222 Main was acquired from an unaffiliated party and (ii) based on due diligence of 222 Main by KBS REIT III, management is not aware of any material factors relating to 222 Main that would cause this financial information not to be indicative of future operating results.

Square footage, acreage, occupancy and other measures used to describe real estate included in these notes to the statements of revenues over certain operating expenses are presented on an unaudited basis.


3.	SIGNIFICANT ACCOUNTING POLICIES

Rental Revenues

Minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, is recognized on a straight-line basis over the term of the related lease and amounts expected to be received in later years are recorded as deferred rent. The adjustment to record deferred rent increased rental revenue by $1.5 million for the year ended December 31, 2013.

Use of Estimates

The preparation of financial statements, as described in Note 2 and in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.


4.	DESCRIPTION OF LEASING ARRANGEMENTS

As of December 31, 2013, 222 Main was 85% leased to 16 tenants. For the year ended December 31, 2013, 222 Main earned approximately 75% of its rental income from a tenant in the investment banking industry and a tenant in the legal services industry.

The tenant in the investment banking industry occupied 176,373 rentable square feet, or approximately 41% of the total property rentable square feet as of December 31, 2013. Its lease expires on May 31, 2025, with three five-year extension options. The tenant also has a one-time option to terminate its entire lease or a portion of its lease, in whole-floor segments, effective May 31, 2021, upon submitting a written notice of termination no later than 12 months prior to the lease expiration date and no earlier than 24 months prior to such date, subject to a termination fee. For the year ended December 31, 2013, 222 Main earned 50% of its rental income from this tenant.

F-24

Table of Contents

222 MAIN

NOTES TO STATEMENT OF REVENUES OVER CERTAIN OPERATING EXPENSES (CONTINUED)

For the Year Ended December 31, 2013

The tenant in the legal services industry occupied 76,257 rentable square feet, or approximately 18% of the total rentable square feet as of December 31, 2013. Its lease expires on May 31, 2025, with three five-year extension options. For the year ended December 31, 2013, 222 Main earned 25% of its rental income from this tenant.

No other tenant lease represented more than 10% of rental income for the year ended December 31, 2013.


5.	FUTURE MINIMUM RENTAL COMMITMENTS

As of December 31, 2013, the future minimum rental receipts due under non-cancelable operating leases for the years ending December 31 and thereafter were as follows (in thousands):



2014	$	11,233
2015	11,668
2016	11,986
2017	12,256
2018	12,130
Thereafter	71,527
	$	130,800


6.	COMMITMENTS AND CONTINGENCIES

Tenant Lease Termination Options

Certain tenants have lease termination options built into their leases, which are subject to termination fees. In the event that a tenant does exercise its option to terminate its lease early and the terminated space is not subsequently leased out or is leased out at a lower rental rate, the total amount of future minimum rent received by 222 Main will be reduced.

Environmental

222 Main is subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws is not expected to have a material adverse effect on 222 Main’s financial condition and results of operations for the periods presented.


7.	SUBSEQUENT EVENTS

KBS REIT III evaluates subsequent events up until the date the statement of revenues over certain operating expenses is issued. The accompanying statement of revenues over certain operating expenses was issued on May 5, 2014.

F-25

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

SUMMARY OF UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The following pro forma information should be read in conjunction with the consolidated balance sheet of KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”) as of December 31, 2013, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2013, and the notes thereto. The consolidated financial statements of KBS REIT III as of and for the year ended December 31, 2013 have been included in KBS REIT III’s prior filings with the SEC. In addition, this pro forma information should be read in conjunction with the statement of revenues over certain operating expenses and notes thereto of 222 Main, which are included herein.

The unaudited pro forma balance sheet as of December 31, 2013 has been prepared to give effect to the acquisition of 222 Main as if the acquisition occurred on December 31, 2013.

The unaudited pro forma statement of operations for the year ended December 31, 2013 has been prepared to give effect to the acquisition of 222 Main as if the acquisition occurred on January 1, 2013.

These unaudited pro forma financial statements are prepared for informational purposes only and are not necessarily indicative of future results or of actual results that would have been achieved had the acquisition of 222 Main been consummated as of January 1, 2013. In addition, the pro forma balance sheet includes pro forma preliminary estimates of the fair value of the assets and liabilities acquired in connection with the acquisitions. These preliminary estimates may be adjusted in the future upon finalization of the purchase accounting.

F-26

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

UNAUDITED PRO FORMA BALANCE SHEET

As of December 31, 2013

(in thousands, except share and per share amount)



	KBS Real Estate Investment Trust III Historical (a)			Pro Forma Adjustments				Pro Forma Total
	KBS Real Estate Investment Trust III Historical (a)			222 Main (b)				Pro Forma Total
Assets
Real estate:
Land	$	177,308		$	5,700		(c)	$	183,008
Buildings and improvements	970,492			137,660			(c)	1,108,152
Tenant origination and absorption costs	128,937			19,182			(c)	148,119
Total real estate, cost	1,276,737			162,542				1,439,279
Less accumulated depreciation and amortization	(46,608		)	—				(46,608		)
Total real estate, net	1,230,129			162,542				1,392,671
Real estate loan receivable, net	17,190			—				17,190
Cash and cash equivalents	33,189			(33,189		)		—
Rents and other receivables, net	8,655			—				8,655
Above-market leases, net	7,607			3,108			(c)	10,715
Deferred financing costs, prepaid expenses and other assets	14,624			5,427			(c)(d)	20,051
Total assets	$	1,311,394		$	137,888			$	1,449,282
Liabilities and stockholders’ equity
Notes payable	$	730,690		$	102,700			$	833,390
Accounts payable and accrued liabilities	24,783			—				24,783
Due to affiliates	57			—				57
Distributions payable	3,587			—				3,587
Below-market leases, net	27,330			367			(c)	27,697
Other liabilities	9,716			—				9,716
Total liabilities	796,163			103,067				899,230
Commitments and contingencies
Redeemable common stock	12,414			—				12,414
Stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—			—				—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 66,430,888 shares issued and outstanding, and 70,565,942 pro forma shares	664			41			(e)	705
Additional paid-in capital	574,762			36,757			(e)	611,519
Accumulated other comprehensive income	2,179			—				2,179
Cumulative distributions and net losses	(74,788		)	(1,977		)	(f)	(76,765		)
Total stockholders’ equity	502,817			34,821				537,638
Total liabilities and stockholders’ equity	$	1,311,394		$	137,888			$	1,449,282

F-27

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

NOTES TO UNAUDITED PRO FORMA BALANCE SHEET

As of December 31, 2013


(a)	Historical financial information derived from KBS REIT III’s Annual Report on Form 10-K as of December 31, 2013.

(b)

Represents the acquisition of 222 Main. The purchase price (net of closing credits) of 222 Main was $170.4 million plus closing costs. This amount was funded with proceeds from a seven-year, $102.7 million mortgage loan from an unaffiliated lender, cash available from proceeds, net of offering costs, from KBS REIT III’s initial public offering through the acquisition date and proceeds from the sale of real estate.

(c)

KBS REIT III determined the cost of tangible assets, identifiable intangible assets and assumed liabilities (consisting of above and below-market leases and tenant origination and absorption costs) acquired in the business combination based on their estimated fair values. Additionally, the property is subject to certain property tax reimbursements from the city's redevelopment program. The estimated fair value of the property tax reimbursements from the city's redevelopment agency is $5.1 million and is recorded as deferred financing costs, prepaid and other assets. The purchase accounting for this acquisition is preliminary and subject to change.


(d)	Includes loan fees of $0.3 million incurred in conjunction with the financing of the property. Also, see note (c) above.

(e) Represents additional proceeds, net of offering costs, from KBS REIT III’s initial public offering necessary to fund the acquisition of 222 Main as of the pro forma date of December 31, 2013.


(f)	Represents direct and incremental closing costs (including acquisition fees and expenses) related to the acquisition which are not reflected in KBS REIT III’s historical balance sheet.

F-28

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

For the Year Ended December 31, 2013

(in thousands, except share and per share amounts)



	KBS Real Estate Investment Trust III Historical (a)			Pro Forma Adjustments				Pro Forma Total
	KBS Real Estate Investment Trust III Historical (a)			222 Main				Pro Forma Total
Revenues:
Rental income	$	61,253		$	11,519		(b)	$	72,772
Tenant reimbursements	16,612			370			(c)	16,982
Interest income from real estate loan receivable	1,082			—				1,082
Other operating income	1,476			1,460			(d)	2,936
Total revenues	80,423			13,349				93,772
Expenses:
Operating, maintenance, and management	20,870			1,821			(e)	22,691
Real estate taxes and insurance	14,134			1,581			(f)	15,715
Asset management fees to affiliate	4,653			1,279			(g)	5,932
Real estate acquisition fees to affiliates	9,423			—				9,423
Real estate acquisition fees and expenses	5,677			—				5,677
General and administrative expenses	2,234			—				2,234
Depreciation and amortization	35,380			6,242			(h)	41,622
Interest expense	9,751			4,128			(i)	13,879
Total expenses	102,122			15,051				117,173
Other income:
Other interest income	62			—				62
Net loss	$	(21,637	)	$	(1,702	)		$	(23,339	)
Net loss per common share, basic and diluted	$	(0.50	)					$	(0.46	)
Weighted-average number of common shares outstanding, basic and diluted	43,547,227							51,189,546			(j)

F-29

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.

NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

For the Year Ended December 31, 2013


(a)	Historical financial information derived from KBS REIT III’s Annual Report on Form 10-K for the year ended December 31, 2013.

(b)

Represents base rental income (not reflected in the historical statement of operations of KBS REIT III), including amortization of above-market lease assets and below-market lease liabilities, for the year ended December 31, 2013. Base rent is recognized on a straight-line basis beginning on the pro forma acquisition date of January 1, 2013. Above-market lease assets and below-market lease liabilities are amortized over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods.


(c)	Represents operating cost reimbursements from tenants (not reflected in the historical statement of operations of KBS REIT III) for the year ended December 31, 2013, based on historical operations of the previous owners.


(d)	Represents parking revenue and other operating income from tenants (not reflected in the historical statement of operations of KBS REIT III) for the year ended December 31, 2013, based on historical operations of the previous owners.


(e)	Represents property operating, maintenance and management expenses (not reflected in the historical statement of operations of KBS REIT III) for the year ended December 31, 2013, based on historical operations of the previous owners.


(f)	Represents real estate taxes and insurance expenses (not reflected in the historical statement of operations of KBS REIT III) for the year ended December 31, 2013, based on management’s estimate.

(g)

Represents asset management fees (not reflected in the historical statement of operations of KBS REIT III) for the year ended December 31, 2013 that would be due to an affiliate of KBS REIT III had the property been acquired on January 1, 2013. With respect to investments in real property, the asset management fee is a monthly fee paid to KBS REIT III’s affiliated advisor equal to one‑twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition expenses related thereto, but excludes acquisition fees payable to KBS REIT III’s affiliated advisor.

(h)

Represents adjustments to depreciation and amortization expense (not reflected in the historical statement of operations of KBS REIT III) for the year ended December 31, 2013. Depreciation expense on the purchase price of buildings is recognized using the straight-line method and a 39-year life. Depreciation expense on tenant improvements is recognized using the straight-line method over the shorter of the life of the lease or expected useful life of the improvement. Amortization expense on lease intangible costs is recognized using the straight-line method over the life of the lease. Amortization expense on the property tax reimbursements asset from the city's redevelopment agency is recognized using the straight-line method over the projected property tax reimbursement period.


(i)	Represents interest expense and loan fee amortization (not reflected in the historical statement of operations of KBS REIT III) incurred on a $102.7 million mortgage loan secured by 222 Main, which bears interest at a fixed rate of 3.97% and matures on March 1, 2021.


(j)	Represents pro forma weighted-average number of common shares, basic and diluted. The calculation assumes that proceeds, net of offering costs, from KBS REIT III’s initial public offering used to complete the acquisition were raised as of January 1, 2013 and KBS REIT III received a gross offering price of $10.00 per share.

F-30

Table of Contents

SUPPLEMENTAL INFORMATION - The prospectus of KBS Real Estate Investment Trust III, Inc. consists of this sticker, the prospectus dated April 25, 2014, supplement no. 1 dated April 25, 2014, supplement no. 3 dated May 6, 2014, supplement no. 8 dated July 8, 2014 and any supplements filed subsequent thereto.

Supplement no. 1 includes:


•	prior performance information through December 31, 2013.

Supplement no. 3 includes:


•	an updated offering price for shares of common stock to be sold in this primary offering and the offering under our dividend reinvestment plan.

Supplement no. 8 includes:


•	the status of the offering;


•	information with respect to our real estate and real estate-related investments;


•	updated risks related to an investment in us;


•	selected financial data;


•	funds from operations and modified funds from operations for the three months ended March 31, 2014 and 2013 and for the years ended December 31, 2013, 2012 and 2011;


•	distributions declared and paid for the year ended December 31, 2013 and the three months ended March 31, 2014;


•	distributions declared for the period from April 2014 through August 2014;


•	fees earned by and expenses reimbursable to our advisor and the dealer manager;


•	information regarding our share redemption program;


•	information regarding the net tangible book value of our shares;


•	information regarding our indebtedness;


•	information related to shares sold net of commissions and volume discount purchases;


•	quantitative and qualitative disclosures about market risk;


•	“Management’s Discussion and Analysis of Financial Condition and Results of Operations” similar to that filed in our quarterly report on Form 10-Q for the period ended March 31, 2014;


•	information incorporated by reference;


•	our unaudited financial statements and the notes thereto as of and for the period ended March 31, 2014; and


•	our statement of revenues over certain operating expenses and the notes thereto of 222 Main for the year ended December 31, 2013.