10-Q 1 arcnycr930201610-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________
Commission file number: 000-55393
arcnycsmalllogotransa05.jpg
American Realty Capital New York City REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
  
46-4380248
(State or other  jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
405 Park Ave., 14th Floor, New York, NY      
  
10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

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

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

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

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

As of October 31, 2016, the registrant had 30,701,001 shares of common stock outstanding.



AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

INDEX TO FINANCIAL STATEMENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

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


 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
(Unaudited)
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
133,380

 
$
133,380

Buildings and improvements
 
497,915

 
336,582

Acquired intangible assets
 
113,994

 
80,407

Total real estate investments, at cost
 
745,289

 
550,369

Less accumulated depreciation and amortization
 
(33,383
)
 
(18,045
)
Total real estate investments, net
 
711,906

 
532,324

Cash and cash equivalents
 
53,150

 
182,700

Restricted cash
 
2,866

 

Investment securities, at fair value
 
508

 
472

Prepaid expenses and other assets (including amounts due from related parties of $95 and $819 at September 30, 2016 and December 31, 2015, respectively)
 
13,303

 
7,635

Deferred leasing costs, net
 
3,475

 
3,284

Total assets
 
$
785,208

 
$
726,415

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Mortgage note payable, net of deferred financing costs
 
$
190,672

 
$
93,176

Accounts payable, accrued expenses and other liabilities (including amounts due to related parties of $2 and $184 at September 30, 2016 and December 31, 2015, respectively)
 
5,341

 
4,889

Below-market lease liabilities, net
 
29,471

 
26,644

Deferred revenue
 
3,383

 
1,651

Distributions payable
 
3,800

 
3,916

Total liabilities
 
232,667

 
130,276

 
 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding at September 30, 2016 and December 31, 2015
 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, 30,632,079 and 30,410,467 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
 
306

 
304

Additional paid-in capital
 
675,517

 
670,279

Accumulated other comprehensive income
 
32

 

Accumulated deficit
 
(123,314
)
 
(74,444
)
Total stockholders' equity
 
552,541

 
596,139

Total liabilities and stockholders' equity
 
$
785,208

 
$
726,415


The accompanying notes are an integral part of these unaudited consolidated financial statements.


3

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

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



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
13,441

 
$
7,329

 
$
30,759

 
$
16,929

Operating expense reimbursements and other revenue
 
967

 
550

 
2,208

 
1,207

Total revenues
 
14,408

 
7,879

 
32,967

 
18,136

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Property operating
 
6,357

 
3,514

 
13,871

 
7,586

Operating fees incurred from related parties
 
1,525

 
128

 
3,676

 
128

Acquisition and transaction related
 
24

 

 
4,327

 
6,012

General and administrative
 
1,268

 
639

 
3,770

 
2,301

Depreciation and amortization
 
7,272

 
4,822

 
16,776

 
11,598

Total operating expenses
 
16,446

 
9,103

 
42,420

 
27,625

Operating loss
 
(2,038
)
 
(1,224
)
 
(9,453
)
 
(9,489
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(2,387
)
 
(1,158
)
 
(5,027
)
 
(2,378
)
Income from investment securities and interest
 
56

 
77

 
305

 
141

Total other expense
 
(2,331
)
 
(1,081
)
 
(4,722
)
 
(2,237
)
Net loss
 
$
(4,369
)
 
$
(2,305
)
 
$
(14,175
)
 
$
(11,726
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities
 
10

 
(21
)
 
32

 
(49
)
Comprehensive loss
 
$
(4,359
)
 
$
(2,326
)
 
$
(14,143
)
 
$
(11,775
)
 
 
 
 
 
 
 
 
 
Basic and diluted weighted average shares outstanding
 
30,556,494

 
29,867,646

 
30,634,400

 
26,657,732

Basic and diluted net loss per share
 
$
(0.14
)
 
$
(0.08
)
 
$
(0.46
)
 
$
(0.44
)
Dividends declared per common share
 
$
0.38

 
$
0.38

 
$
1.13

 
$
1.13


The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2016
(In thousands, except for share data)
(Unaudited)



 
Common Stock
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional
Paid-in
Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Stockholders' Equity
Balance, December 31, 2015
30,410,467

 
$
304

 
$
670,279

 
$

 
$
(74,444
)
 
$
596,139

Common stock issued through distribution reinvestment plan
677,835

 
7

 
16,091

 

 

 
16,098

Common stock repurchases
(461,555
)
 
(5
)
 
(10,902
)
 

 

 
(10,907
)
Share-based compensation
5,332

 

 
49

 

 

 
49

Distributions declared

 

 

 

 
(34,695
)
 
(34,695
)
Net loss

 

 

 

 
(14,175
)
 
(14,175
)
Unrealized gain on investment securities

 

 

 
32

 

 
32

Balance, September 30, 2016
30,632,079

 
$
306

 
$
675,517

 
$
32

 
$
(123,314
)
 
$
552,541


The accompanying notes are an integral part of these unaudited consolidated financial statements.



5

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(14,175
)
 
$
(11,726
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
16,776

 
11,598

Amortization of deferred financing costs
1,823

 
1,170

Accretion of below- and amortization of above-market lease liabilities and assets, net
(1,868
)
 
(1,525
)
Share-based compensation
49

 
19

Changes in assets and liabilities:
 
 
 
Prepaid expenses, other assets and deferred costs
(6,323
)
 
(10,267
)
Accounts payable, accrued expenses and other liabilities
1,399

 
1,902

Deferred revenue
1,732

 
591

Net cash used in operating activities
(587
)
 
(8,238
)
Cash flows from investing activities:
 
 
 
Investments in real estate
(79,162
)
 
(157,029
)
Purchase of investment securities
(4
)
 
(15
)
Acquisition funds released from escrow

 
2,068

Capital expenditures
(12,401
)
 
(7,898
)
Net cash used in investing activities
(91,567
)
 
(162,874
)
Cash flows from financing activities:
 
 
 

Payments of offering costs and fees related to common stock issuances

 
(30,426
)
Payments of financing costs
(3,327
)
 
(4,574
)
Proceeds from issuance of common stock

 
230,600

Distributions paid
(18,713
)
 
(14,281
)
Repurchases of common stock
(12,490
)
 
(1,601
)
Restricted cash
(2,866
)
 

Net cash provided by (used in) financing activities
(37,396
)
 
179,718

Net change in cash and cash equivalents
(129,550
)
 
8,606

Cash and cash equivalents, beginning of period
182,700

 
184,341

Cash and cash equivalents, end of period
$
53,150

 
$
192,947

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
2,914

 
$
1,012

 
 
 
 
Non-Cash Investing and Financing Activities
 
 
 
Receivable for offering cost reimbursement
$

 
$
700

Mortgage note payable used to acquire investments in real estate
99,000

 
96,000

Accrued stock repurchase requests

 
1,100

Distributions payable
3,800

 
3,766

Accrued offering costs

 
178

Accrued capital expenditures
284

 
507

Other assets acquired in real estate transactions

 
458

Other liabilities assumed in real estate transactions
353

 
429

Common stock issued through distribution reinvestment plan
16,098

 
14,657

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


Note 1 — Organization
American Realty Capital New York City REIT, Inc. (including, as required by context, New York City Operating Partnership L.P., and its subsidiaries, the “Company”) was incorporated on December 19, 2013 as a Maryland corporation and elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with its taxable year ended December 31, 2014. On April 24, 2014, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 30.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, for total gross proceeds of up to $750.0 million, pursuant to a registration statement on Form S-11, as amended (File No. 333-194135) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 10.5 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which the Company's common stockholders could elect to have their distributions reinvested in additional shares of the Company's common stock at a price of $23.75 per share, which is equal to 95% of the offering price in the IPO.
On May 29, 2014, the Company received and accepted subscriptions in excess of the minimum offering amount for the IPO of $2.0 million in shares, broke general escrow and issued shares of common stock to initial investors who were admitted as stockholders of the Company. In February 2015, as permitted, the Company reallocated the remaining 10.0 million DRIP shares available under the Registration Statement to the primary offering. On May 22, 2015, the Company registered an additional 25.0 million shares to be issued pursuant to the DRIP pursuant to a registration statement on Form S-3 (File No. 333-204433). The Company closed its IPO on May 31, 2015, and continued to accept subscriptions in process as of that date. As of September 30, 2016, the Company had 30.6 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and DRIP of $759.8 million, inclusive of $41.0 million from the DRIP and net of repurchases.
On October 24, 2016, the Company's board of directors approved an estimated net asset value per share of the Company's common stock ("Estimated Per-Share NAV") as of June 30, 2016, which was published on October 26, 2016 ("NAV Pricing Date"). The Company intends to publish subsequent valuations of Estimated Per-Share NAV periodically at the discretion of the Company's board of directors, provided that such valuations will be made at least once annually. Until the NAV Pricing Date, the Company offered shares pursuant to the DRIP and has repurchased shares pursuant to the Share Repurchase Program ("SRP") at a price based on $23.75 per share, the offering price in the IPO. Beginning with the NAV Pricing Date, the Company began to offer shares pursuant to the DRIP and repurchase shares pursuant to its SRP at a price based on Estimated Per-Share NAV.
The Company was formed to invest its assets in properties in the five boroughs of New York City, with a focus on Manhattan. The Company may also purchase for investment purposes certain real estate investment assets that accompany office properties, including retail spaces and amenities, as well as hospitality assets, residential assets and other property types exclusively in New York City. All such properties may be acquired and owned by the Company alone or jointly with another party. As of September 30, 2016, the Company owned six properties consisting of 1,091,571 rentable square feet.
Substantially all of the Company’s business is conducted through New York City Operating Partnership, L.P., a Delaware limited partnership (the “OP”). The Company has no employees. New York City Advisors, LLC (the "Advisor") manages the Company's affairs on a day-to-day basis. New York City Properties, LLC (the “Property Manager”) manages our properties, unless services are performed by a third party for specific properties. The Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parent of the Company's sponsor, American Realty Capital III, LLC (the "Sponsor"), as a result of which they are related parties, and each of these entities has received or will receive compensation, fees and expense reimbursements for services related to the IPO and the investment and management of the Company's assets. The Advisor, New York City Special Limited Partner, LLC (the "Special Limited Partner"), which is also under common control with AR Global, and the Property Manager have also received or will also receive fees, distributions and other compensation during the offering, acquisition, operational and liquidation stages.

7

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP (“OP Units”). The Advisor contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP Units has the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP Units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
Note 2 — Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2015, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 16, 2016. There have been no significant changes to the Company's significant accounting policies during nine months ended September 30, 2016, other than the updates described below:
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.

8

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
Recently Adopted Accounting Pronouncements
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIE") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for the Company's fiscal year ended December 31, 2016. The Company has evaluated the impact of the adoption of the new guidance on its consolidated financial statements and has determined the OP is considered to be a VIE and continues to consolidate the OP as required under previous GAAP. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the Company’s partnership interest is considered a majority voting interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, the adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability and that the entity apply the new guidance on a retrospective basis. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for the Company's fiscal year ended December 31, 2016. As a result of adoption of the new guidance, the Company has reclassified deferred financing costs, net related to mortgage notes payable of $4.3 million and $2.8 million, respectively, as of September 30, 2016 and December 31, 2015 as a reduction of the carrying amount of its mortgage note payable. See Note 5 — Mortgage Note Payable.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the provisions of this guidance beginning January 1, 2016 and determined that there is no impact to the Company’s consolidated financial position, results of operations and cash flows. The Company's policy is to account for forfeitures as they occur.

9

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 3 — Real Estate Investments
On June 15, 2016, the Company, through a wholly-owned subsidiary of the OP, completed its acquisition of the leasehold interest in an institutional-quality office building located at 1140 Avenue of the Americas in Manhattan, New York ("1140 Avenue of the Americas"). 1140 Avenue of the Americas comprises 249,703 square feet and is subject to a remaining 50.3 year ground lease that expires on December 31, 2066, held by 1140 Sixth Avenue LLC. The ground lease has a fixed annual rent of $0.3 million until January 1, 2017, at which time the fixed annual rent increases to $4.7 million through December 2041 and $5.1 million through the remainder of the term. The seller of 1140 Avenue of the Americas was BPGL Holdings LLC. The contract purchase price for 1140 Avenue of the Americas was $180.0 million, exclusive of closing costs. The Company funded the purchase price with proceeds from the Company's IPO and a mortgage loan from Ladder Capital Finance I LLC (see Note 5 — Mortgage Note Payable). The Company accounted for the purchase of 1140 Avenue of the Americas as a business combination and incurred acquisition related costs of $4.3 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
The following table presents the allocation of the real estate assets acquired and liabilities assumed during the nine months ended September 30, 2016 and 2015 as well as the weighted-average remaining amortization period (in years) as of the acquisition date for intangible assets acquired and liabilities assumed.
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
(Dollar amounts in thousands)
 
Total Assets Acquired
 
Weighted Average Amortization Period
 
Total Assets Acquired
Real estate investments, at cost:
 
 
 
 
 
 
Land
 
$

 
 
 
$
50,064

Building and improvements
 
148,647

 
 
 
182,917

Total tangible assets
 
148,647

 
 
 
232,981

Acquired intangibles:
 
 
 
 
 
 
In-place leases
 
27,433

 
6.5
 
33,380

Above-market lease assets
 
5,230

 
9.1
 
884

Below-market lease liabilities
 
(5,277
)
 
7.2
 
(14,245
)
Below-market ground lease asset
 
2,482

 
50.6
 

Total intangible assets, net
 
29,868

 
9.6
 
20,019

Total assets acquired, net
 
178,515

 
 
 
253,000

Mortgage notes payable used to acquire real estate investments
 
(99,000
)
 
 
 
(96,000
)
Other assets acquired
 

 
 
 
458

Other liabilities assumed
 
(353
)
 
 
 
(429
)
Cash paid for acquired real estate investment
 
$
79,162

 
 
 
$
157,029

Number of properties purchased
 
1

 
 
 
1


10

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table presents unaudited pro forma information as if the acquisition during the nine months ended September 30, 2016 had been consummated on January 1, 2015 and the acquisition during the nine months ended September 30, 2015 had been consummated on January 1, 2014. Accordingly, the pro forma net loss was adjusted to reclassify acquisition and transaction related expense of $4.3 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2015. Additionally, pro forma net loss was adjusted to reclassify acquisition and transaction related expense of $6.0 million from the nine months ended September 30, 2015 to January 1, 2014.
 
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
Pro forma revenues(1) 
 
$
41,932

 
$
37,312

Pro forma net loss attributable to stockholders(1)
 
$
(15,274
)
 
$
(9,153
)
Basic and diluted pro forma net loss per share attributable to stockholders
 
$
(0.50
)
 
$
(0.37
)
_______________
(1)    For the nine months ended September 30, 2016, aggregate revenues and net income (adjusted for acquisition and transaction costs) derived from the Company's acquisition for the Company's period of ownership were $6.0 million and $0.6 million, respectively.
Future Minimum Cash Rent
The following table presents future minimum base cash rental payments due to the Company subsequent to September 30, 2016. These amounts exclude contingent rent payments, as applicable, that may be collected based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items.
(In thousands)
 
Future Minimum Base Cash Rent Payments
October 1, 2016 - December 31, 2016
 
$
11,857

2017
 
44,940

2018
 
42,797

2019
 
41,040

2020
 
36,977

Thereafter
 
146,731

 
 
$
324,342

Significant Tenant
The following table lists the tenants whose annualized rental income on a straight-line basis represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis as of September 30, 2015. As of September 30, 2016 there were no tenants whose annualized rental income on a straight-line basis represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis.
Property
 
Tenant
 
September 30, 2015
123 William Street
 
Planned Parenthood Federation of America, Inc.
 
11.2%
The termination, delinquency or non-renewal of this lease by the above tenant may have a material adverse effect on the Company's revenues.

11

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Intangible Assets and Liabilities
Acquired intangible assets and lease liabilities consist of the following as of September 30, 2016 and December 31, 2015:
 
 
September 30, 2016
(In thousands)
 
Gross Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
Amount
Intangible assets:
 
 
 
 
 
 
In-place leases
 
$
70,040

 
$
14,048

 
$
55,992

Other intangibles
 
31,447

 
2,310

 
29,137

Below-market ground lease
 
2,482

 
14

 
2,468

Above-market leases
 
10,025

 
1,196

 
8,829

Acquired intangible assets
 
$
113,994

 
$
17,568

 
$
96,426

Intangible liabilities:
 
 
 
 
 
 
Below-market lease liabilities
 
$
34,659

 
$
5,188

 
$
29,471

 
 
December 31, 2015
(In thousands)
 
Gross Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
Amount
Intangible assets:
 
 
 
 
 
 
In-place leases
 
$
44,165

 
$
8,017

 
$
36,148

Other intangibles
 
31,447

 
1,436

 
30,011

Above-market leases
 
4,795

 
628

 
4,167

Acquired intangible assets
 
$
80,407

 
$
10,081

 
$
70,326

Intangible liabilities:
 
 
 
 
 
 
Below-market lease liabilities
 
$
29,504

 
$
2,860

 
$
26,644

The following table discloses amounts recognized within the consolidated statements of operations and comprehensive loss related to amortization of in-place leases and other intangibles and amortization and accretion of above- and below-market lease assets and liabilities, net, for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Amortization of in-place leases and other intangibles(1)
 
$
3,607

 
$
3,089

 
$
8,462

 
$
6,976

Amortization and (accretion) of above- and below-market leases, net(2)
 
$
(631
)
 
$
(648
)
 
$
(1,882
)
 
$
(1,525
)
Amortization of below-market ground lease(3)
 
$
14

 
$

 
$
14

 
$

_______________
(1)
Reflected within depreciation and amortization expense.
(2)
Reflected within rental income.
(3)
Reflected within property operating expense.

12

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table provides the projected amortization expense and adjustments to revenues for the next five years as of September 30, 2016:
(In thousands)
 
October 1, 2016 - December 31, 2016
 
2017
 
2018
 
2019
 
2020
In-place leases
 
$
3,118

 
$
10,800

 
$
9,502

 
$
8,744

 
$
6,842

Other intangibles
 
291

 
1,165

 
1,165

 
1,165

 
1,165

Total to be included in depreciation and amortization
 
$
3,409

 
$
11,965

 
$
10,667

 
$
9,909

 
$
8,007

 
 
 
 
 
 
 
 
 
 
 
Above-market lease assets
 
$
(308
)
 
$
(1,232
)
 
$
(1,135
)
 
$
(1,107
)
 
$
(1,038
)
Below-market lease liabilities
 
929

 
3,584

 
3,436

 
3,094

 
2,680

Total to be included in rental income
 
$
621

 
$
2,352

 
$
2,301

 
$
1,987

 
$
1,642

Note 4 — Investment Securities
As of September 30, 2016 and December 31, 2015, the Company had an investment in an equity security with a fair value of $0.5 million. The equity security consists of a mutual fund managed by an affiliate of the Sponsor. See Note 9 — Related Party Transactions and Arrangements. This investment is considered to be an available-for-sale security and therefore increases or decreases in the fair value of this investment are recorded in accumulated other comprehensive income (loss) as a component of equity on the consolidated balance sheets unless the security is considered to be other-than-temporarily impaired, at which time the losses would be reclassified to expense.
The following table details the unrealized gains and losses on the investment security by security type as of September 30, 2016 and December 31, 2015:
(In thousands)
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2016
 
 
 
 
 
 
 
 
Equity security
 
$
476

 
$
32

 
$

 
$
508

December 31, 2015
 
 
 
 
 
 
 
 
Equity security
 
$
472

 
$

 
$

 
$
472


13

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 5 — Mortgage Note Payable
The Company's mortgage note payable as of September 30, 2016 and December 31, 2015 is as follows:
 
 
 
 
Outstanding Loan Amount
 
 
 
 
 
 
 
Portfolio
 
Encumbered Properties
 
September 30,
2016
 
December 31,
2015
 
Effective Interest Rate
 
Interest Rate
 
Maturity
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
123 William Street(1)
 
1
 
$
96,000

 
$
96,000

 
2.81
%
(2) 
Variable
 
Mar. 2017
(3) 
1140 Avenue of the Americas
 
1
 
99,000

 

 
4.17
%
 
Fixed
 
July 2026
 
Less: deferred financing costs, net
 
 
 
(4,328
)
 
(2,824
)
 
 
 
 
 
 
 
Mortgage note payable, net of deferred financing costs
 
2
 
$
190,672

 
$
93,176

 
3.58
%
 
 
 
 
 
_____________________
(1)
The Company may borrow up to $110.0 million subject to compliance with certain provisions as described in the terms of the mortgage agreement.
(2)
Interest rate is one month LIBOR, which was 0.524% at September 30, 2016, plus a margin of 2.25%, based on a 360 day year.
(3)
The Company has a one-time option to extend the maturity date by one year.
Real estate assets of $445.1 million, at cost (net of below-market lease liabilities), at September 30, 2016 have been pledged as collateral to the Company's mortgage note payable and are not available to satisfy the Company's other obligations unless first satisfying the mortgage note payable on the property. The Company makes payments of interest on its mortgage note payable on a monthly basis.
The following table summarizes the scheduled aggregate principal payments subsequent to September 30, 2016:
(In thousands)
 
Future Minimum Principal Payments
October 1, 2016 - December 31, 2016
 
$

2017
 
96,000

2018
 

2019
 

2020
 

Thereafter
 
99,000

Total
 
$
195,000

The Company's mortgage note payable requires compliance with certain property-level debt covenants. As of September 30, 2016, the Company was in compliance with the debt covenants under its mortgage note agreement.

14

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 6 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the instrument. This alternative approach also reflects the contractual terms of the instrument, as applicable, including the period to maturity, and may use observable market-based inputs, including interest rate curves and implied volatilities, and unobservable inputs, such as expected volatility. The guidance defines three levels of inputs that may be used to measure fair value.
 
Level 1
Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 
 
 
 
Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
 
 
 
 
 
Level 3
Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company has an investment in a real estate income fund that is traded in active markets and therefore, due to the availability of quoted market prices in active markets, classifies this investment as Level 1 in the fair value hierarchy.
The following table presents information about the Company's asset measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which that instrument falls.
 
 
Quoted Prices in Active Markets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
Investment Securities
 
$
508

 
$

 
$

 
$
508

December 31, 2015
 
 
 
 
 
 
 
 
Investment Securities
 
$
472

 
$

 
$

 
$
472

There were no transfers between levels of the fair value hierarchy during the three months ended September 30, 2016 or 2015.
Financial instruments not carried at fair value
The Company is required to disclose at least annually the fair value of financial instruments for which it is practicable to estimate the value. The fair value of short-term financial instruments such as cash and cash equivalents, prepaid expenses and other assets, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's financial instruments that are not reported at fair value on the consolidated balance sheet are reported below:
 
 
 
 
September 30, 2016
(In thousands)
 
Level
 
Gross Principal Balance
 
Fair Value
Mortgage note payable — 1140 Avenue of the Americas
 
3
 
$
99,000

 
$
105,123


15

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

As of December 31, 2015, the Company did not have any financial instruments not carried at fair value or an amount that approximates fair value. The fair value of the mortgage note payable on 123 William Street is deemed to be equivalent to its carrying value because it bears interest at a variable rate that fluctuates with market rates and there has been no material change in the credit risk or credit markets since origination.
Note 7 — Common Stock
As of September 30, 2016, the Company had 30.6 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from public offerings of $759.8 million, inclusive of $41.0 million from the DRIP and net of repurchases. As of December 31, 2015, the Company had 30.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds of $754.6 million, inclusive of $24.9 million from the DRIP.
In May 2014, the board of directors of the Company authorized, and the Company declared, a distribution payable to stockholders of record each day during the applicable period equal to $0.0041438356 per day, which is equivalent to $1.5125 per annum, per share of common stock. In March 2016, the board of directors of the Company ratified the existing distribution amount equivalent to $1.5125 per annum, per share of common stock, and, for calendar year 2016, affirmed a change to the daily distribution payable to stockholders of record each day during the applicable period to $0.004132513665 per day per share of common stock to accurately reflect that 2016 is a leap year. The distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
The Company has a Share Repurchase Program ("SRP") that enables stockholders, subject to certain conditions and limitations, to sell their shares to the Company. Under the SRP stockholders may request that the Company repurchase all or any portion of their shares of common stock, if such repurchase does not impair the Company's capital or operations.
On January 25, 2016, the Company's board of directors approved an amendment of the SRP to supersede and replace the existing SRP effective beginning on February 28, 2016. Under the SRP, as amended, repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the Company's board of directors and generally will be made semiannually (each six-month period ending June 30 or December 31, a "fiscal semester").
On October 24, 2016, the Company's board of directors approved an Estimated Per-Share NAV as of June 30, 2016.
Prior to the establishment of Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP depends on the length of time investors have held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
after one year from the purchase date - the lower of $23.13 and 92.5% of the amount they actually paid for each share; and,
after two years from the purchase date - the lower of $23.75 and 95.0% of the amount they actually paid for each share.
Prior to the establishment of Estimated Per-Share NAV, in the case of requests for death or disability, the repurchase price per share is equal to the price paid to acquire the shares from the Company.
Following the establishment of Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP now depends on the length of time investors have held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
after one year from the purchase date - 92.5% of the Estimated Per-Share NAV;
after two years from the purchase date - 95.0% of the Estimated Per-Share NAV;
after three years from the purchase date - 97.5% of the Estimated Per-Share NAV; and,
after four years from the purchase date - 100.0% of the Estimated Per-Share NAV.
Subsequent to the establishment of Estimated Per-Share NAV, in the case of requests for death or disability, the repurchase price per share is equal to the Estimated Per-Share NAV at the time of the repurchase.
Repurchases for any fiscal semester will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average

16

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, the Company is only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from the DRIP in that same fiscal semester, as well as any reservation of funds the Company's board of directors, may, in its sole discretion, make available for this purpose. If the establishment of an Estimated Per-Share NAV occurs during any fiscal semester, any repurchase requests received during such fiscal semester will be paid at the Estimated Per-Share NAV applicable on the last day of the fiscal semester.
As permitted under the SRP, the Company’s board of directors authorized, with respect to redemption requests received during the first fiscal semester, the repurchase of shares validly submitted for repurchase in an amount equal to the amount of proceeds received from the DRIP in that same fiscal semester, representing less than all the shares validly submitted for repurchase during the first fiscal semester. Pursuant to this authorization 461,555 shares were repurchased for $10.9 million at an average repurchase price per share of $23.62 (including all shares submitted for death or disability) during the nine months ended September 30, 2016. The Company will complete a second repurchase in the first quarter of 2017 after completion of the second fiscal semester in accordance with the SRP.
Note 8 — Commitments and Contingencies
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of September 30, 2016, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 9 — Related Party Transactions and Arrangements
As of September 30, 2016, an entity wholly owned by the Sponsor owned 8,888 shares of the Company’s outstanding common stock.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO, which was ongoing from September 2010 to December 2013, and, together with its affiliates, continued to provide the Company with various services through December 31, 2015. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Global, the parent of the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc.
As of September 30, 2016 and 2015, the Company had $0.5 million invested in a mutual fund managed by an affiliate of the Sponsor. See Note 4 — Investment Securities. There is no obligation to purchase any additional shares and the shares can be sold at any time. The Company recognized income from investment securities of approximately $3,000 and approximately $6,000, respectively, during the three and nine months ended September 30, 2016. The Company recognized income from investment securities of approximately $8,000 and approximately $15,000, respectively, during the three and nine months ended September 30, 2015.
Fees Paid in Connection with the IPO
The Former Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock in the IPO. The Former Dealer Manager was paid a selling commission of up to 7.0% of the per share purchase price of offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Former Dealer Manager was paid up to 3.0% of the gross proceeds from the sale of shares as a dealer manager fee. The Former Dealer Manager was able to reallow its dealer manager fee to participating broker-dealers. A participating broker-dealer had the option to elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares (not including selling commissions and dealer manager fees) by such participating broker-dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option was elected, the dealer manager fee would have been reduced to 2.5% of gross proceeds (not including selling commissions and dealer manager fees).

17

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table details total selling commissions and dealer manager fees incurred from and due to the Former Dealer Manager as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Payable as of
(In thousands)
 
2016
 
2015
 
2016
 
2015
 
September 30, 2016
 
December 31, 2015
Total commissions and fees incurred from the Former Dealer Manager
 
$

 
$
2,056

 
$

 
$
22,374

 
$

 
$

The Advisor and its affiliates were paid compensation and reimbursement for services relating to the IPO, including transfer agent services and other professional services provided by an affiliate of the Former Dealer Manager. All offering costs incurred by the Company, the Advisor and affiliated entities of the Advisor on behalf of the Company were charged to additional paid-in capital on the accompanying consolidated balance sheets through the end of the IPO. Subsequent to the closing of the IPO, transfer agent and other professional fees are recognized as a component of general and administrative expenses on the accompanying consolidated statements of operations and comprehensive loss. The following table details offering costs and reimbursements incurred from and due to the Advisor and affiliated parties of the Former Dealer Manager as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Receivable as of
(In thousands)
 
2016
 
2015
 
2016
 
2015
 
September 30, 2016
 
December 31, 2015
Fees and expense reimbursements from the Advisor and affiliates of the Former Dealer Manager
 
$

 
$
240

 
$

 
$
5,277

 
$

 
$
758

As of September 30, 2016 and December 31, 2015, cumulative offering costs, including selling commissions and dealer manager fees, were $84.0 million. The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding commissions and dealer manager fees, in excess of the 2.0% cap as of the end of the IPO are the Advisor’s responsibility. As of December 31, 2015, the Company had a receivable from the Advisor totaling $0.8 million related to excess offering and related costs. This amount was paid in full during the three months ended September 30, 2016 and therefore no receivable remains as of September 30, 2016.
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee of 1.5% of (A) the contract purchase price of each acquired property and (B) the amount advanced for a loan or other investment. The Advisor is also reimbursed for expenses actually incurred related to selecting, evaluating and acquiring assets on the Company's behalf, regardless of whether the Company actually acquires the related assets. Specifically, the Company pays the Advisor or its affiliates for any services provided for which they incur investment-related expenses, or insourced expenses. Such insourced expenses are fixed initially at and may not exceed 0.50% of the contract purchase price of each property and 0.50% of the amount advanced for each loan or other investment, which is paid at the closing of each such investment. The Advisor is also reimbursed for legal expenses incurred in the process of acquiring properties, in an amount not to exceed 0.10% of the contract purchase price. In addition, the Company also pays third parties, or reimburses the Advisor for any investment-related expenses due to third parties. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect to the Company's portfolio of investments exceed 4.5% of (A) the contract purchase price or (B) the amount advanced for all loans or other investments. Once the proceeds from the primary offering have been fully invested, the aggregate amount of acquisition fees and any financing coordination fees may not exceed 1.5% of (A) the contract purchase price and (B) the amount advanced for a loan or other investment, as applicable, for all the assets acquired.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company pays the Advisor a financing coordination fee equal to 0.75% of the amount made available or outstanding under such financing, subject to certain limitations.

18

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Until September 30, 2015, for its asset management services, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based, restricted, forfeitable partnership units in the OP designated as “Class B Units” on a quarterly basis in an amount equal to: (i) the product of (y) 0.1875% multiplied by (z) the cost of the Company's assets divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the primary offering price minus selling commissions and dealer manager fees). The Class B Units are intended to be profits interests and will vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP's assets plus all distributions made by the Company to its stockholders equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pretax, non-compounded annual return thereon, or the "economic hurdle;" (b) any one of the following events occurs concurrently with or subsequently to the achievement of the economic hurdle described above: (i) a listing of the Company's common stock on a national securities exchange; (ii) a transaction to which the Company or the OP is a party, as a result of which OP Units or the Company's common stock are or will be exchanged for or converted into the right, or the holders of such securities will otherwise be entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause by an affirmative vote of a majority of the Company's independent directors after the economic hurdle has been met; and (c) the Advisor pursuant to the advisory agreement is providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above, unless the failure to provide such services is attributable to the termination without cause of the advisory agreement by an affirmative vote of the majority of the Company's independent directors after the economic hurdle has been met (the "performance condition"). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. As of September 30, 2016, the Company cannot determine the probability of achieving the performance condition. The Advisor receives distributions on its vested and unvested Class B Units at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B Units are expensed in the consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. As of September 30, 2016, the Company's board of directors has approved the issuance of 159,159 Class B Units in connection with the arrangement. Beginning on October 1, 2015, and in lieu of the asset management subordinated participation, the Company pays an asset management fee to the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets. The asset management fee is payable on the first business day of each month in the amount of 0.0625% multiplied by (i) the cost of the Company's assets for the preceding monthly period or (ii) during the period of time after the Company publishes Estimated Per-Share NAV, the lower of the cost of assets and the estimated fair market value of the Company’s assets as reported in the applicable periodic or current report filed with the SEC disclosing the fair market value. The Company paid $1.3 million and $3.3 million in cash asset management fees during the three and nine months ended September 30, 2016, respectively. The Company did not pay any cash asset management fees during the three or nine months ended September 30, 2015.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee equal to: (i) for non-hotel properties, 4.0% of gross revenues from the properties managed, plus market-based leasing commissions; and (ii) for hotel properties, a market-based fee based on a percentage of gross revenues. The Company also reimburses the Property Manager for property-level expenses. The Property Manager may subcontract the performance of its property management and leasing services duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. The Company paid $0.2 million and $0.3 million in property management fees during the three and nine months ended September 30, 2016, respectively. The Company paid $0.1 million in property management fees during the three and nine months ended September 30, 2015.

19

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company reimburses the Advisor’s costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt, impairments or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services; however, the Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. The Company’s executive officers, who are employees of affiliates of the Advisor and Property Manager, do not receive any compensation directly from the Company for serving as executive officers. The Company does not reimburse the Advisor and its affiliates that are involved in managing the Company’s operations, including the Property Manager, for salaries, bonuses or benefits incurred by these entities and paid to the Company’s executive officers. Total reimbursement of costs and expenses for the three and nine months ended September 30, 2016 was $0.5 million and $1.3 million, respectively. Total reimbursement of costs and expenses for the three and nine months ended September 30, 2015 was $0.2 million and $0.5 million, respectively.
The predecessor to the parent of the Sponsor was party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager ("RCS Advisory"), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by the Sponsor with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to the parent of the Sponsor instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with American National Stock Transfer, LLC, ("ANST") a subsidiary of the parent company of the Former Dealer Manager, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end Internal Revenue Service ("IRS") reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc. ("DST"), a third-party transfer agent. The Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. DST continued to provide the Company with transfer agency services and, on March 10, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services). For the three and nine months ended September 30, 2016, the fees for services from DST are included in general and administrative expenses on the consolidated statements of operations and comprehensive loss during the period in which the service was provided.

20

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table details amounts incurred, waived and payable in connection with the Company's operations-related services described above as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
Payable (receivable) as of
(In thousands)
 
Incurred
 
Waived(1)
 
Incurred
 
Waived(1)
 
Incurred
 
Waived(1)
 
Incurred
 
Waived(1)
 
September 30, 2016
 
December 31, 2015
Acquisition fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements
 
$

 
$

 
$

 
$

 
$
3,600

 
$

 
$
5,060

 
$

 
$

 
$

Financing coordination fees
 

 

 

 

 
743

 

 
825

 

 

 

Ongoing fees:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating fees incurred from related parties
 
1,525

 

 
128

 

 
3,676

 

 
332

 
204

 
(95
)
 
(44
)
Professional fees and other reimbursements
 
460

 

 
203

 

 
1,286

 

 
520

 

 
2

 
167

Distributions on Class B Units
 
60

 

 
37

 

 
180

 

 
68

 

 

 

Total related party operation fees and reimbursements
 
$
2,045

 
$

 
$
368

 
$

 
$
9,485

 
$

 
$
6,805

 
$
204

 
$
(93
)
 
$
123

______________________
(1)
Beginning in the third quarter 2015, fees related to property management and leasing were charged to the Company.
Fees and Participations Paid in Connection with Liquidation or Listing
The Company will pay to the Advisor an annual subordinated performance fee calculated on the basis of the Company’s return to stockholders, payable annually in arrears, such that for any year in which investors receive payment of 6.0% per annum, the Advisor will be entitled to 15.0% of the excess return, provided that the amount paid to the Advisor does not exceed 10.0% of the aggregate return for such year, and that the amount paid to the Advisor will not be paid unless investors receive a return of capital contributions. This fee will be paid only upon the sale of assets, distributions or other event which results in the return on stockholders’ capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three and nine months ended September 30, 2016 and 2015.
The Company will pay a brokerage commission to the Advisor or its affiliates on the sale of properties, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three and nine months ended September 30, 2016 and 2015.
Upon a sale of all or substantially all assets, the Special Limited Partner will receive a subordinated distribution from the OP equal to 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of an annual 6.0% cumulative, pre-tax non-compounded return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company’s investors have received a return of their capital plus a 6.0% cumulative non-compounded annual return on their capital contributions. No such participation in net sales proceeds became due and payable during the three and nine months ended September 30, 2016 and 2015.

21

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

If the Company’s shares of common stock are listed on a national exchange, the Special Limited Partner will receive a subordinated incentive listing distribution from the OP equal to 15.0% of the amount by which the Company’s market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors. The Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such distributions were incurred during the three and nine months ended September 30, 2016 and 2015. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in net sales proceeds and the subordinated incentive listing distribution.
Upon termination or non-renewal of the advisory agreement with or without cause, the Special Limited Partner will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Note 10 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services, transaction management and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that the Advisor and its affiliates are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 11 — Share-Based Compensation
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the “RSP”), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further approval by the Company’s board of directors or the stockholders, after initial election to the board of directors and after each annual stockholder meeting, with such shares vesting annually beginning with the one year anniversary of initial election to the board of directors and the date of the next annual meeting, respectively. Restricted stock issued to independent directors will vest over a five-year period in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of common shares granted under the RSP shall not exceed 5.0% of the Company’s outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 1.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to July 1, 2015, such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. For restricted share awards granted on or after July 1, 2015, such awards provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.

22

AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table displays restricted share award activity during the nine months ended September 30, 2016:
 
 
Number of
Restricted Shares
 
Weighted-Average Issue Price
Unvested, December 31, 2015
 
4,799

 
$
22.50

Granted
 
5,332

 
22.50

Unvested, September 30, 2016
 
10,131

 
$
22.50

As of September 30, 2016, the Company had $0.2 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. That cost is expected to be recognized over a weighted-average period of 4.1 years. Restricted share awards are expensed in accordance with the service period required. Compensation expense related to restricted stock was approximately $29,000 and $49,000 for the three and nine months ended September 30, 2016, respectively, and approximately $18,000 and $19,000 for the three and nine months ended September 30, 2015, respectively. Compensation expense related to restricted stock is recorded as general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at the respective director's election. There are no restrictions on the shares issued. There were no shares of common stock issued in lieu of cash during the three and nine months ended September 30, 2016 or 2015.
Note 12 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net loss (in thousands)
 
$
(4,369
)
 
$
(2,305
)
 
$
(14,175
)
 
$
(11,726
)
Basic and diluted weighted average shares outstanding
 
30,556,494

 
29,867,646

 
30,634,400

 
26,657,732

Basic and diluted net loss per share
 
$
(0.14
)
 
$
(0.08
)
 
$
(0.46
)
 
$
(0.44
)
The Company had the following potentially dilutive securities as of September 30, 2016 and 2015, which were excluded from the calculation of diluted net loss per share attributable to stockholders as the effect would have been antidilutive:
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Unvested restricted stock
 
10,131

 
4,799

OP Units
 
90

 
90

Class B Units
 
159,159

 
115,798

Total potentially dilutive securities
 
169,380

 
120,687

Note 13 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements.

23


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital New York City REIT, Inc. (including, as required by context, New York City Operating Partnership, L.P. and its subsidiaries, the "Company," "we," "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We have a limited operating history which makes our future performance difficult to predict;
All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in our advisor, New York City Advisors, LLC (our "Advisor") and other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"); as a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investor entities advised by AR Global affiliates and conflicts in allocating time among these entities and us, which could negatively impact our operating results;
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants;
We may not be able to achieve our rental rate objectives on new and renewal leases and our expenses could be greater, which may impact operations;
Our properties may be adversely affected by economic cycles and risks inherent to the New York metropolitan statistical area, especially New York City;
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates;
We may fail to continue to qualify to be treated as a real estate investment trust for United States federal income tax purposes ("REIT");
Because investment opportunities that are suitable for us may also be suitable for other AR Global-advised programs or investors, our Advisor and its affiliates may face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders;
We are party to an investment opportunity allocation agreement with another program that is sponsored by American Realty Capital III, LLC (our "Sponsor"), pursuant to which we may not have the first opportunity to acquire all properties identified by our Advisor and its affiliates;
No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid;
Our stockholders are limited in their ability to sell their shares pursuant to our share repurchase program (the “SRP”) and may have to hold their shares for an indefinite period of time;
If we and our Advisor are unable to find suitable investments, then we may not be able to achieve our investment objectives, or pay distributions with cash flows from operations;
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions;
We do not expect to generate sufficient cash flow from operations in 2016 to fund distributions at our current level, and there can be no assurance we will be able to continue paying cash distributions at our current level or at all;
We cannot assure our stockholders that we will be able to continue to pay distributions or that distributions will increase over time;

24


We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act; and
As of September 30, 2016, we owned only six properties and therefore have limited diversification.
Overview
We were incorporated on December 19, 2013 as a Maryland corporation and elected and qualified to be taxed as a REIT beginning with our taxable year ended December 31, 2014. On April 24, 2014, we commenced our initial public offering ("IPO") on a "reasonable best efforts" basis of up to 30.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, for total gross proceeds of up to $750.0 million, pursuant to our registration statement on Form S-11, as amended (File No. 333-194135) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 10.5 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders may elect to have their distributions reinvested in additional shares of our common stock at a price of $23.75 per share, which is equal to 95% of the offering price in the IPO.
On May 29, 2014, we received and accepted subscriptions in excess of the minimum offering amount for the IPO of $2.0 million in shares, broke general escrow and issued shares of common stock to initial investors who were admitted as stockholders. In February 2015, as permitted, we reallocated the remaining 10.0 million DRIP shares available under the Registration Statement to the primary offering. On May 22, 2015, we registered an additional 25.0 million shares to be issued pursuant to the DRIP pursuant to a registration statement on Form S-3 (File No. 333-204433). We closed our IPO on May 31, 2015, and continued to accept subscriptions in process as of that date. As of September 30, 2016, we had 30.6 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and the DRIP of $759.8 million, inclusive of $41.0 million from the DRIP. The per share purchase price in the IPO was up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP is equal to $23.75 per share, which is equal to 95% of the offering price in the primary offering.
On October 24, 2016, our board of directors approved an estimated net asset value per share of the Company's common stock ("Estimated Per-Share NAV) as of June 30, 2016, which was published on October 26, 2016 ("NAV Pricing Date"). We intend to publish subsequent valuations of Estimated Per-Share NAV periodically at the discretion of our board of directors, provided that such valuations will be made at least once annually. Until the NAV Pricing Date, we offered shares pursuant to the DRIP at $23.75 per share and have repurchased shares pursuant to the Share Repurchase Program ("SRP"). Beginning with the NAV Pricing Date, we began to offer shares pursuant to the DRIP and repurchase shares pursuant to our SRP at a price based on Estimated Per-Share NAV.
We were formed to invest our assets in properties in the five boroughs of New York City, with a focus on Manhattan. We may also purchase certain real estate assets that accompany office properties, including retail spaces and amenities, as well as hospitality assets, residential assets and other property types exclusively in New York City. All such properties may be acquired and owned by us alone or jointly with another party. As of September 30, 2016, we owned six properties consisting of 1,091,571 rentable square feet, which were 89.8% leased, with a weighted average remaining lease term of 6.6 years. Our six properties include one commercial property, one property consisting of three condominium units (one retail unit, a parking garage and one office unit), one parking garage and three institutional-quality office buildings.
Substantially all of our business is conducted through New York City Operating Partnership, L.P. a Delaware limited partnership (the “OP”). We are the sole general partner and hold substantially all of the units of limited partner interests in the OP, entitled "OP Units" (“OP Units”). The Advisor contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP Units has the right to convert OP Units for the cash value of a corresponding number of shares of our common stock or, at the option of the OP, a corresponding number of shares of our common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP Units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
We have no employees. Our Advisor manages our affairs on a day-to-day basis. New York City Properties, LLC (our "Property Manager") manages our properties, unless services are performed by a third party for specific properties. The Advisor and Property Manager are under common control with AR Global, the parent of our Sponsor, as a result of which they are related parties and have received or will continue to receive compensation, fees and expense reimbursements for services related to the investment and management of our assets.

25


Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Offering and Related Costs
All offering costs incurred by us, our Advisor and its affiliates on our behalf are charged to additional paid-in capital on the consolidated balance sheets. Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) include costs that may be paid by the Advisor, the Former Dealer Manager or their affiliates on our behalf. These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Former Dealer Manager for amounts it may pay to reimburse itemized and detailed due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our IPO exceed 2.0% of gross offering proceeds in the IPO. As a result, these costs are our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs are less than 12.0% of the gross proceeds determined at the end of the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of our leases provide for rental increases at specified intervals, accounting principles generally accepted in the United States ("GAAP") require us to record a receivable, and include in revenues on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates. When we acquire a property, the acquisition date is considered to be the commencement date for the purposes of this calculation.
Rental revenue recognition commences when the tenant takes possession of or controls the physical use of the leased space. For the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, we evaluate whether we own or if the tenant owns the tenant improvements. When we are the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such improvements are substantially complete. When we conclude that the tenant is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space.
When we conclude that we are the owner of tenant improvements, we capitalize the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants. When we conclude that the tenant is the owner of tenant improvements for accounting purposes, we record our contribution towards those improvements as a lease incentive, which is included in deferred leasing costs, net on the consolidated balance sheets and amortized as a reduction to rental income on a straight-line basis over the term of the lease.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we will record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
We may own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. If we own certain properties with leases that include these provisions, contingent rental income will be included in rental income on the consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.

26


Investments in Real Estate
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statement of operations. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities and non-controlling interests based on their respective estimated fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the comparable fair market lease rate, measured over the remaining term of the lease. The fair value of other intangible assets, such as real estate tax abatements and signage rights, are recorded based on the present value of the expected benefit and amortized over the expected useful life including any below-market fixed rate renewal options for below-market leases.
Fair values of assumed mortgages, if applicable, are recorded as debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above- or below-market interest rates.
Non-controlling interests in property owning entities are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
We utilize a number of sources in making our estimates of fair values for purposes of allocating purchase price, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry in which the tenant operates, characteristics of the real estate such as location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
Disposals of real estate investments that represent a strategic shift in operations that will have a major effect on our operations and financial results are presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all periods presented; otherwise, we continue to report these properties' operations within continuing operations. Properties that are intended to be sold will be designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs for all periods presented when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale.
Restricted Cash
Restricted cash consists of mortgage lender required reserves for maintenance, real estate tax, structural, and debt service reserves.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five to seven years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Acquired above-market leases are amortized as a reduction of rental income over the remaining terms of the respective leases. Acquired below-market leases are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above and below-market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts, if applicable, are amortized as a reduction or increase to interest expense over the remaining term of the respective mortgages.

27


Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If such estimated cash flows are less than the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is based on the adjustment to estimated fair value less estimated cost to dispose of the asset. Generally, we determine estimated fair value for properties held for sale based on the agreed-upon selling price of an asset. These assessments may result in the immediate recognition of an impairment loss resulting in a reduction to net income (loss).
Recent Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and are currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. We are currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.

28


Recently Adopted Accounting Pronouncements
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIE") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for our fiscal year ended December 31, 2016. In determining whether we have a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a VIE for which we are the primary beneficiary. We have evaluated the impact of the adoption of the new guidance on our consolidated financial statements and determined that the OP, which holds substantially all of our assets and liabilities, is considered to be a VIE. We meet the disclosure exemption criteria of the new guidance as we are the primary beneficiary of the OP and our partnership interest is considered a majority voting interest in a business, and the OP's assets can be used for purposes other than settling its obligations, such as paying distributions. Further, we have consolidated the OP even prior to the adoption of the new guidance. As such, the adoption of the new guidance did not have a material impact on our consolidated financial statements.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability and that the entity apply the new guidance on a retrospective basis. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for the fiscal year ending December 31, 2016. As a result of adoption of the new guidance, we reclassified deferred financing costs, net related to mortgage notes payable as a reduction of the carrying amount of mortgage notes payable.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We have adopted the provisions of this guidance beginning January 1, 2016 and determined that there is no impact to our consolidated financial position, results of operations and cash flows. Our policy is to account for forfeitures as they occur.
Properties
The following table presents certain information about the investment properties we owned as of September 30, 2016:
Portfolio
 
Acquisition Date
 
Rentable Square Feet
 
Occupancy
 
Remaining Lease Term (1)
421 W. 54th Street - Hit Factory
 
Jun. 2014
 
12,327

 
100.0
%
 
4.0
400 E. 67th Street - Laurel Condominium
 
Sept. 2014
 
58,750

 
100.0
%
 
7.5
200 Riverside Boulevard - ICON Garage
 
Sept. 2014
 
61,475

 
100.0
%
 
21.0
9 Times Square
 
Nov. 2014
 
166,640

 
56.0
%
 
4.7
123 William Street
 
Mar. 2015
 
542,676

 
97.7
%
 
7.4
1140 Avenue of the Americas
 
June 2016
 
249,703

 
89.7
%
 
5.5
 
 
 
 
1,091,571

 
89.8
%
 
6.6
_______________________________
(1) Remaining lease term in years as of September 30, 2016, calculated on a weighted-average basis, as applicable.

29


Results of Operations
Comparison of Three Months Ended September 30, 2016 to Three Months Ended September 30, 2015
As of July 1, 2015, we owned five properties (our "Three-Month Same Store"). From July 1, 2015 through September 30, 2016, we acquired one property located at 1140 Avenue of the Americas in Manhattan, New York (our "Three-Month Acquisition"), and therefore as of September 30, 2016 we owned six properties. Due to our Three-Month Acquisition our results of operations for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, reflect significant increases in most categories.
As of September 30, 2016, 9 Times Square was 56.0% occupied, which increased from 49.7% occupied as of September 30, 2015. Subsequent to the acquisition of 9 Times Square in November 2014, we allowed leases to expire and terminate as part of the implementation of our repositioning, redeveloping and remarketing plan with respect to the property. Leasing activity for the remodeled retail space at the building has been slower than expected, however, largely due to construction timing delays and excess retail space capacity in the Times Square sub-market. Continued delays or market weakness could suppress our financial results at this property; however, we have seen positive leasing with respect to the vacant office space in the current quarter and expect this trend to continue.
Rental Income
Rental income increased $6.1 million to $13.4 million for the three months ended September 30, 2016, from $7.3 million for the three months ended September 30, 2015, primarily due to our Three-Month Acquisition which contributed $4.9 million to the increase. Our Three-Month Same Store provided $1.2 million of the increase primarily due to lease commencements at 123 William Street and an acquisition that closed in March 2015. Additionally, 9 Times Square contributed $0.1 million to the increase in Three-Month Same Store, primarily due to lease commencements.
Operating Expense Reimbursements
Operating expense reimbursements increased $0.4 million to $1.0 million for the three months ended September 30, 2016, compared to $0.6 million for the three months ended September 30, 2015, due to our Three-Month Acquisition and Three-Month Same Store which each contributed $0.2 million to the increase.
Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for most operating costs of the respective properties. Therefore, operating expense reimbursements are directly affected by changes in property operating expenses, although not all increases in property operating expenses may be reimbursed by our tenants.
Property Operating Expenses
Property operating expenses increased $2.8 million to $6.4 million for the three months ended September 30, 2016 from $3.5 million for the three months ended September 30, 2015 primarily due to our Three-Month Acquisition, which contributed $2.5 million to the increase. Our Three-Month Same Store provided $0.3 million of the increase mainly due to increases at 9 Times Square due to higher occupancy. The increase in property operating expenses primarily related to lease commencements and the increased costs of maintaining our six properties including real estate taxes, condominium fees, utilities, repairs and maintenance and property insurance.
Operating Fees incurred from Related Parties
We incurred $1.5 million in fees for asset and property management services from our Advisor and Property Manager for the three months ended September 30, 2016. Until September 30, 2015, for its asset management services, we issued to the Advisor performance-based, restricted, forfeitable partnership units in the OP designated as "Class B Units." Beginning on October 1, 2015, we began paying monthly asset management fees in cash, in shares of common stock, or a combination of both, the form of payment to be determined at the sole discretion of the Advisor. We paid $1.3 million in cash for asset management fees for the three months ended September 30, 2016.
Property management fees increase in direct correlation with gross revenue and amounted to $0.2 million for the three months ended September 30, 2016 and 2015.
Acquisition and Transaction Related Expenses
We incurred approximately $24,000 of acquisition and transaction related expenses for the three months ended September 30, 2016. For the three months ended September 30, 2015, we incurred no acquisition and transaction related expenses.

30


General and Administrative Expenses
General and administrative expenses increased $0.6 million to $1.3 million for the three months ended September 30, 2016 from $0.6 million for the three months ended September 30, 2015, primarily due to general and administrative expense reimbursements incurred from our Advisor of $0.5 million. During the year ended December 31, 2015, our Advisor began requesting reimbursement of general and administrative expenses, which had not previously been requested, but no such reimbursement requests were made during the three months ended September 30, 2015. Increased professional fees related to our 2016 annual meeting and to maintaining our larger real estate portfolio also contributed to the increase in general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expenses increased $2.5 million to $7.3 million for the three months ended September 30, 2016, compared to $4.8 million for the three months ended September 30, 2015, due to our Three-Month Acquisition. Our Three-Month Same Store contributed $0.1 million to the increase.
Interest Expense
Interest expense increased $1.2 million to $2.4 million for the three months ended September 30, 2016, from $1.2 million for the three months ended September 30, 2015 primarily due to the closing of the loan on our Three-Month Acquisition in June 2016. As of September 30, 2016, we had two loans outstanding with a combined balance of $195.0 million and a weighted average effective interest rate of 3.58%.
Income from Investment Securities and Interest
Income from investment securities and interest remained at $0.1 million for the three months ended September 30, 2016 and 2015. The income related to interest earned on our cash balance for the three months ended September 30, 2016 and 2015 and dividends earned on our investment in equity securities purchased in August 2014.
Comparison of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2015
As of January 1, 2015, we owned four properties (our "Nine-Month Same Store"). From January 1, 2015 through September 30, 2016, we acquired two properties (our "Nine-Month Acquisitions"), and therefore as of September 30, 2016 we owned six properties. Accordingly, due to our Nine-Month Acquisitions, our results of operations for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 reflect significant increases in most categories.
Rental Income
Rental income increased $13.8 million to $30.8 million for the nine months ended September 30, 2016, from $16.9 million for the nine months ended September 30, 2015, primarily due to our Nine-Month Acquisitions, which contributed $13.3 million to the increase. Our Nine-Month Same Store contributed $0.5 million to the increase in rental income, driven primarily by lease commencements at 9 Times Square.
Operating Expense Reimbursements
Operating expense reimbursements increased $1.0 million to $2.2 million for the nine months ended September 30, 2016, compared to $1.2 million for the nine months ended September 30, 2015, primarily due to our Nine-Month Acquisitions.
Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for most operating costs of the respective properties. Therefore, operating expense reimbursements are directly affected by changes in property operating expenses, although not all increases in property operating expenses may be reimbursed by our tenants.
Property Operating Expenses
Property operating expenses increased $6.3 million to $13.9 million for the nine months ended September 30, 2016 from $7.6 million for the nine months ended September 30, 2015, primarily due to our Nine-Month Acquisitions. Our Nine-Month Same Store also contributed $0.5 million to the increase. Property operating expenses related to lease commencements and the costs of maintaining our six properties including real estate taxes, condominium fees, utilities, repairs and maintenance and property insurance.

31


Operating Fees incurred from Related Parties
We incurred $3.7 million in fees for asset and property management services from our Advisor and Property Manager for the nine months ended September 30, 2016. Until September 30, 2015, for its asset management services, we issued to the Advisor performance-based, restricted, forfeitable partnership units in the OP designated as "Class B Units." Beginning on October 1, 2015, we began paying monthly asset management fees in cash, in shares of common stock, or a combination of both, the form of payment to be determined at the sole discretion of the Advisor. We paid $3.3 million in cash for asset management fees for the nine months ended September 30, 2016.
Property management fees increase in direct correlation with gross revenue and amounted to $0.3 million and $0.1 million for the nine months ended September 30, 2016 and 2015, respectively. The Property Manager elected to waive a portion of property management fees for the nine months ended September 30, 2015. For the nine months ended September 30, 2015, we would have incurred and additional $0.2 million of property management fees had these fees not been waived.
Acquisition and Transaction Related Expenses
We incurred $4.3 million of acquisition and transaction related expenses for the nine months ended September 30, 2016 which related to our purchase of 1140 Avenue of the Americas, which closed in June 2016. For the nine months ended September 30, 2015, acquisition and transaction related expenses of $6.0 million related to our purchase of 123 William Street, which closed in March 2015.
General and Administrative Expenses
General and administrative expenses increased $1.5 million to $3.8 million for the nine months ended September 30, 2016 from $2.3 million for the nine months ended September 30, 2015, primarily due to general and administrative expense reimbursements incurred from our Advisor of $1.3 million. During the year ended December 31, 2015, our Advisor began requesting reimbursement of general and administrative expenses, which had not previously been requested, but no such reimbursement requests were made during the nine months ended September 30, 2015.
Depreciation and Amortization
Depreciation and amortization expenses increased $5.2 million to $16.8 million for the nine months ended September 30, 2016, compared to $11.6 million for the nine months ended September 30, 2015, due to our Nine-Month Acquisitions.
Interest Expense
Interest expense of $5.0 million for the nine months ended September 30, 2016 related to our two mortgage notes payable, the proceeds of which funded portions of our Nine-Month Acquisitions. As of September 30, 2016, the loans had a combined balance of $195.0 million and a weighted average effective interest rate of 3.58%. For the nine months ended September 30, 2015, interest expense was $2.4 million.
Income from Investment Securities and Interest
Income from investment securities and interest increased to $0.3 million for the nine months ended September 30, 2016 from approximately $0.1 million for the nine months ended September 30, 2015. The income related to interest earned on our cash balance for the nine months ended September 30, 2016 and dividends earned on our investment in equity securities purchased in August 2014.
Cash Flows for the Nine Months Ended September 30, 2016
During the nine months ended September 30, 2016, net cash used in operating activities was $0.6 million, compared to $8.2 million of net cash used in operating activities during nine months ended September 30, 2015. Net cash used in operating activities contained acquisition and transaction related expenses of approximately $4.3 million and $6.0 million, respectively, for the nine months ended September 30, 2016 and 2015.
The level of cash flows used in operating activities is affected by the volume of acquisition activity, the timing of interest payments, the receipt of scheduled rent payments and the level of property operating expenses. Notwithstanding a net loss of $14.2 million, net cash used in operating activities included adjustments for depreciation and amortization of tangible and intangible assets and other non-cash expenses of $16.8 million, which resulted in cash outflows of $2.6 million. Net cash used in operating activities also included net cash inflows of $1.7 million for an increase in deferred rent related to payments received from tenants in advance of their due dates and other liabilities. As occupancy increases at 9 Times Square, cash flows from operations is expected to increase.
Net operating cash outflows primarily related to an increase in prepaid expenses and other assets of $6.3 million primarily related to an increase in unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis as well as a $1.4 million decrease related to accounts payable and accrued expenses associated with operating activities.

32


Net cash used in investing activities during the nine months ended September 30, 2016 was $91.6 million, primarily related to the acquisition of 1140 Avenue of the Americas for $79.2 million, consisting of a purchase price of $178.5 million, net of purchase price adjustments, partially funded with a mortgage note payable of $99.0 million. Net cash used in investing activities also related to payment of capital expenditures of $12.4 million relating to building and tenant improvements at 9 Times Square and 123 William Street.
Net cash used in financing activities of $37.4 million during the nine months ended September 30, 2016 consisted primarily of distributions to stockholders of $18.7 million, payments of $3.3 million relating to financing costs, repurchases of common stock of $12.5 million and an increase in restricted cash of $2.9 million.
Cash Flows for the Nine Months Ended September 30, 2015
During the nine months ended September 30, 2015, net cash used in operating activities was $8.2 million. The level of cash flows used in or provided by operating activities is affected by recent acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows used in operating activities during the nine months ended September 30, 2015 included $6.0 million of acquisition and transaction costs. Cash flows used in operating activities included a net loss adjusted for non-cash items of $0.5 million (net loss of $11.7 million adjusted for non-cash items consisting of depreciation and amortization of tangible and intangible real estate assets, share based compensation, and deferred financing costs of $11.3 million) and an increase in prepaid expenses, other assets and deferred costs of $10.3 million related to tenant and other accounts receivable, unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis and leasing costs. These cash outflows were partially offset by an increase in accounts payable and accrued expenses of $1.9 million, primarily related to accrued property operating costs and professional fees and an increase in deferred rent and other liabilities of $0.6 million.
Net cash used in investing activities during the nine months ended September 30, 2015 was $162.9 million primarily related to our acquisition of one property for $157.0 million, with an aggregate purchase price of $253.0 million, partially funded with a mortgage note payable of $96.0 million, as well as capital expenditures of $7.9 million relating to building and tenant improvements at 9 Times Square and 123 William Street. These cash outflows were partially offset by funds released from escrow of $2.1 million related to a prior period acquisition.
Net cash provided by financing activities of $179.7 million during the nine months ended September 30, 2015 consisted of proceeds from the issuance of common stock of $230.6 million, partially offset by payments of offering costs of $30.4 million, distributions to stockholders of $14.3 million, payments of financing costs of $4.6 million relating to our mortgage note and payments for repurchases of common stock of $1.6 million.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including funds from operations ("FFO") and modified funds from operations ("MFFO"). A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income (loss), is provided below.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

33


Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses, amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

34


The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods presented.
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
September 30, 2016
Net loss (in accordance with GAAP)
 
$
(3,405
)
 
$
(6,401
)
 
$
(4,369
)
 
$
(14,175
)
Depreciation and amortization
 
4,769

 
4,735

 
7,272

 
16,776

FFO
 
1,364

 
(1,666
)
 
2,903

 
2,601

Acquisition and transaction-related fees and expenses
 
40

 
4,263

 
24

 
4,327

Accretion of below- and amortization of above-market lease liabilities and assets, net
 
(635
)
 
(616
)
 
(617
)
 
(1,868
)
Straight-line rent
 
(1,126
)
 
(1,277
)
 
(1,110
)
 
(3,513
)
Straight-line ground rent
 

 

 
1,127

 
1,127

MFFO
 
$
(357
)
 
$
704

 
$
2,327

 
$
2,674

Liquidity and Capital Resources
As of September 30, 2016, we had cash and cash equivalents of $53.2 million. The decrease in cash and cash equivalents from the second quarter 2016 is primarily due to the repurchase of shares which were requested and accrued for repurchase under our SRP as of June 30, 2016. Our principal demands for cash will be for acquisition costs, including the purchase price of any properties, loans and securities we acquire, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations, distributions to our stockholders and repurchases under our SRP. If we acquire additional assets, we intend to pay for them with cash proceeds from our IPO and mortgage or other debt, but we also may acquire assets free and clear of mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in OP Units.
We expect to fund our future short-term operating liquidity requirements, including distributions, through a combination of net cash provided by our current property operations and the operations of properties to be acquired in the future, the remaining proceeds from the sale of common stock and proceeds from secured mortgage financings. Management expects that, as our portfolio of investments stabilizes, specifically 9 Times Square, cash flow from our properties will be sufficient to fund operating expenses and a larger portion of the payment of our monthly distributions. Other potential future sources of capital include proceeds from secured and unsecured financings from banks or other lenders, proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations.
We have used mortgage financing to acquire two of our properties and expect to use debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined in our charter) as of the date of any borrowing, which is generally equal to 75% of the cost of our investments. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 40% to 50% of the aggregate fair market value of our assets unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation will be calculated once we have invested substantially all the proceeds of our IPO and will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
Once the total of our Estimated Per-Share NAV multiplied by the number of shares of common stock outstanding exceeds $1.0 billion, we intend to maintain 5% of the total of our Estimated Per-Share NAV multiplied by the number of shares of common stock outstanding in liquid assets that can be liquidated more readily than properties. However, our stockholders should not expect that we will maintain liquid assets at or above this level. To the extent that we maintain borrowing capacity under a line of credit, such available amount will be included in calculating our liquid assets. Our Advisor will consider various factors in determining the amount of liquid assets we should maintain, including, but not limited to, our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under a line of credit, if any, our receipt of proceeds from any asset sale, and the use of cash to fund repurchases. Our board of directors will review the amount and sources of liquid assets on a quarterly basis.

35


Share Repurchase Program
Our board of directors has adopted the SRP that enables stockholders, subject to certain conditions and limitations, to sell their shares to us. Due to these conditions and limitations, there can be no assurance that all, or any, shares submitted validly for repurchase will be repurchased under the SRP. On January 25, 2016, we announced that our board of directors had unanimously approved an amendment to the SRP. Under the SRP amendment, repurchases of shares of our common stock, when requested, are at the sole discretion of our board of directors and generally will be made semiannually (each six-month period ending June 30 or December 31, a "fiscal semester"). Repurchases for any fiscal semester will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, we are only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from the DRIP in that same fiscal semester, as well as any reservation of funds our board of directors may, in its sole discretion, make available for this purpose. Since we established an Estimated Per-Share NAV during the second fiscal semester of 2016, any repurchase requests received during the second fiscal semester of 2016 will be paid at the Estimated Per-Share NAV applicable on the last day of the fiscal semester. The SRP amendment became effective beginning on February 28, 2016.
As permitted under the SRP, the only repurchase requests completed during the three months ended September 30, 2016 were for death or disability. Our second fiscal semester will end on December 31, 2016 at which time we will evaluate repurchase requests. During our first fiscal semester of 2016, 461,555 shares were repurchased for $10.9 million at an average repurchase price per share of $23.62 (including all shares submitted for death or disability), while requests to repurchase 874,782 shares for $20.3 million at an average price per share of $23.21 were not fulfilled.
Capital Expenditures
We may invest in additional capital expenditures to further enhance the value of our investments. Additionally, many of our lease agreements with tenants include provisions for tenant improvement allowances.
As previously noted, subsequent to the acquisition of 9 Times Square in November 2014, we allowed leases to expire and terminate as part of the implementation of our repositioning, redeveloping and remarketing plan with respect to the property. As a result of these initiatives, we expect to incur $2.5 million to $3.0 million of additional capital expenditures during 2016 related to building improvements, tenant improvements and leasing commissions as we continue to execute on our repositioning, redeveloping and remarketing plan. For the nine months ended September 30, 2016, we incurred $4.6 million of capital expenditures related to building improvements, tenant improvements and leasing commissions for 9 Times Square. The remainder of our $8.1 million in capital expenditures for the nine months ended September 30, 2016 related to building and tenant improvements at 123 William Street and 1140 Avenue of the Americas.
Acquisitions
On June 15, 2016, we, through a wholly-owned subsidiary of the OP, completed our acquisition of the leasehold interest in an institutional-quality office building located at 1140 Avenue of the Americas in Manhattan, New York ("1140 Avenue of the Americas"). 1140 Avenue of the Americas comprises 249,703 square feet and is subject to a ground lease held by 1140 Sixth Avenue LLC. The seller of 1140 Avenue of the Americas was BPGL Holdings LLC. The purchase price of 1140 Avenue of the Americas was $178.5 million, exclusive of closing costs and net of any purchase price adjustments. We funded the purchase price with proceeds from our IPO and a mortgage loan from Ladder Capital Finance I LLC. We accounted for the purchase of 1140 Avenue of the Americas as a business combination and incurred acquisition related costs of $4.3 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Our Advisor evaluates potential acquisitions of real estate and real estate-related assets and engages in negotiations with sellers and borrowers on our behalf. Investors should be aware that after a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and fully negotiated binding agreements. During this period, we may decide to temporarily invest any unused proceeds from common stock offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Distributions
We are required to distribute annually at least 90% of our annual REIT taxable income, determined without regard for the deduction for distributions paid and excluding net capital gains. On March 9, 2016, our board of directors approved a change to the daily distribution amount to $0.0041325137 per day per share of common stock to accurately reflect that 2016 is a leap year and maintain equivalence to $1.5125 per annum, per share of common stock. Distributions to record holders are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.

36


Future distributions to our stockholders will be determined by our board of directors and are dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the nine months ended September 30, 2016, distributions paid to common stockholders totaled $34.8 million. Of that amount, $16.1 million was reinvested in shares of our common stock pursuant to the DRIP. During the nine months ended September 30, 2016, cash used to pay our distributions was generated from proceeds from our IPO and proceeds from the sale of our shares through the DRIP.
For the nine months ended September 30, 2016 our cash flows from operations was negative, and we do not expect to generate sufficient cash flow from operations in 2016 to fund distributions at our current level. We may not generate sufficient cash flows from operations to fund future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. With limited operating history, we cannot assure our stockholders that we will be able to continue to pay distributions or that distributions will increase over time. We cannot give any assurance that rents from the properties we have acquired will increase, or that future acquisitions of real properties will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
We do not expect to generate sufficient cash flows from our operations to pay distributions at the current level. In addition to cash flow from operations, we expect to use a portion of our cash on hand, which represents the remaining proceeds we received in our IPO, and the proceeds from our DRIP to pay distributions. A decrease in the level of stockholder participation in our DRIP or any decline in cash flow or need to use cash flow for other purposes could have an adverse impact on our ability to meet these expectations. If these sources are insufficient, we may use other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions. There can be no assurance we will be able to continue paying cash distributions at our current level or at all.
The following table shows the sources for the payment of distributions to common stockholders for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
September 30, 2016
(In thousands)
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
Distributions:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions to stockholders
 
$
11,485

 
 
 
$
11,678

 
 
 
$
11,648

 
 
 
$
34,811

 
 
Source of distribution coverage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in) operations
 
$
1,308

 
11.4
%
 
$
(1,308
)
 
(11.2
)%
 
$

 
 %
 
$

 
%
Net proceeds from the sale of shares through DRIP
 
4,019

 
35.0
%
 
5,294

 
45.3
 %
 
(5,705
)
 
(49.0
)%
 
3,608

 
10.4
%
Offering proceeds from issuance of common stock
 
6,158

 
53.6
%
 
7,692

 
65.9
 %
 
17,353

 
149.0
 %
 
31,203

 
89.6
%
Total sources of distributions
 
$
11,485

 
100.0
%
 
$
11,678

 
100.0
 %
 
$
11,648

 
100.0
 %
 
$
34,811

 
100.0
%
Cash flows provided by (used in) operations (GAAP basis)
 
$
1,308

 
 
 
$
(3,254
)
 
 
 
$
1,359

 
 
 
$
(587
)
 
 
Net loss (in accordance with GAAP)
 
$
(3,405
)
 
 
 
$
(6,401
)
 
 
 
$
(4,369
)
 
 
 
$
(14,175
)
 
 
__________________________________
(1)
Excludes distributions related to Class B Units, the expense for which is included in general and administrative expenses on the consolidated statements of operations and comprehensive loss.

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Contractual Obligations
Debt Obligations
The following is a summary of our contractual debt obligations as of September 30, 2016:
 
 
 
 
 
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
October 1, 2016 — December 31, 2016
 
2017 — 2018
 
2019 — 2020
 
Thereafter
Mortgage note payable:
 
 
 
 
 
 
 
 
 
 
Principal payments
 
$
195,000

 
$

 
$
96,000

 
$

 
$
99,000

Interest payments
 
41,898

 
1,709

 
8,900

 
8,260