10-Q 1 rxr0630201810-q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

Commission File Number: 000-55929

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
46-5183321
(State or Other Jurisdiction of
(IRS Employer
Incorporation or Organization)
Identification No.)
590 Madison Avenue, 34th Floor, New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)

(212) 547-2600
(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 ý   No o

Indicate by check mark whether the registrant has 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company ý

Emerging growth company ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:  
The Company had 2,075,591 shares of Class A common stock, $0.01 par value per share, 2,284,363 shares of Class T common stock, $0.01 par value per share, and 172,887 shares of Class I common stock, $0.01 par value per share, outstanding as of August 9, 2018.
 



NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC.
FORM 10-Q
TABLE OF CONTENTS

Index
 
Page
 
 
 
 
 
 
 
 
 



2


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to pay distributions to our stockholders, our reliance on our advisor entities and our sponsors, the operating performance of our investments, our financing needs, the effects of our current strategies and investment activities and our ability to effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:
adverse economic conditions and the impact on the commercial real estate industry;
our ability to achieve a diversified portfolio consistent with our target asset classes;
our dependence on the resources and personnel of our advisor entities, our co-sponsors and their affiliates, including our advisor entities’ ability to source and close on attractive investment opportunities on our behalf;
the performance of our advisor entities, our co-sponsors and their affiliates;
our liquidity and access to capital;
our use of leverage;
our ability to make distributions to our stockholders;
the lack of a public trading market for our shares;
the effect of economic conditions on the valuation of our investments;
the effect of paying distributions to our stockholders from sources other than cash flow provided by operations;
the impact of our co-sponsor’s disposition of our dealer manager;
our advisor entities and their affiliates’ ability to attract and retain qualified personnel to support our operations and potential changes to key personnel providing management services to us;
our reliance on our advisor entities and their affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial fees to our advisor entities, the allocation of investments by our advisor entities and their affiliates among us and the other sponsored or managed companies and strategic vehicles of our co-sponsors and its affiliates, and various potential conflicts of interest in our relationship with our co-sponsors;
the impact of market and other conditions influencing the availability of equity versus debt investments and performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments;
changes in our business or investment strategy;
changes in the value of our portfolio;
the impact of fluctuations in interest rates;
the impact of economic conditions on the tenants of the real property that we own as well as on borrowers of the debt we originate and acquire and the mortgage loans underlying the mortgage-backed securities in which we may invest;
our ability to realize current and expected returns over the life of our investments;
any failure in our advisor entities and their affiliates’ due diligence to identify relevant facts during our underwriting process or otherwise;


3


illiquidity of debt investments, equity investments or properties in our portfolio;
our ability to finance our assets on terms that are acceptable to us, if at all;
environmental compliance costs and liabilities;
risks associated with our joint ventures and unconsolidated entities, including our lack of sole decision making authority and the financial condition of our joint venture partners;
increased rates of loss or default and decreased recovery on our investments;
the degree and nature of our competition;
the effectiveness of our advisor and sub-advisor’s risk and portfolio management strategies;
the potential failure to maintain effective internal controls and disclosure controls and procedures;
regulatory requirements with respect to our business generally, as well as the related cost of compliance;
legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs, and changes to laws affecting non-traded REITs and alternative investments generally;
our ability to maintain our qualification as a REIT for federal income tax purposes and limitations imposed on our business by our status as a REIT;
the loss of our exemption from registration under the Investment Company Act of 1940, as amended;
general volatility in capital markets and economies and the New York metropolitan economy specifically;
the adequacy of our cash reserves and working capital;
our ability to raise capital in light of certain regulatory changes, including amended Rules 2340 and 2310 of the Financial Industry Regulatory Authority, Inc. (“FINRA”); and
other risks associated with investing in our targeted investments, including changes in our industry, interest rates, the securities markets, the general economy or the capital markets and real estate markets specifically.
The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the U.S. Securities and Exchange Commission, or the SEC, included in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.” The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.








4


PART I. Financial Information
Item 1.    Financial Statements
NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Assets
 
 
 
Cash and cash equivalents
$
6,134,901

 
$
10,883,296

Investment in unconsolidated venture, at fair value
5,388,650

 
5,388,487

Real estate debt investments, net
34,861,111

 
34,827,778

Interest receivable
244,177

 
240,630

Receivables, net

 
31,674

Total assets(1)
$
46,628,839

 
$
51,371,865

 
 
 
 
Liabilities
 
 
 
Due to related party
$
168,013

 
$
386,792

Distribution payable
103,241

 
84,795

Total liabilities(1)
271,254

 
471,587


 
 
 
Equity
 
 
 
NorthStar/RXR New York Metro Real Estate, Inc. Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2018 and December 31, 2017

 

Class A common stock, $0.01 par value, 120,000,000 shares authorized, 2,092,698 and 2,046,869 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
20,927

 
20,469

Class T common stock, $0.01 par value, 240,000,000 shares authorized, 2,295,384 and 2,213,824 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
22,953

 
22,138

Class I common stock, $0.01 par value, 40,000,000 shares authorized, 179,560 and 139,651 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
1,796

 
1,397

Additional paid-in capital
37,976,159

 
36,297,515

Retained earnings
1,586,726

 
1,028,440

Total NorthStar/RXR New York Metro Real Estate, Inc. stockholders’ equity
39,608,561

 
37,369,959

Non-controlling interests
6,749,024

 
13,530,319

Total equity
46,357,585

 
50,900,278

Total liabilities and equity
$
46,628,839

 
$
51,371,865

_______________________________________
(1)
Represents the consolidated assets and liabilities of NorthStar/RXR Operating Partnership, LP (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which the Company is the sole general partner and owns approximately 99.99%. As of June 30, 2018, the Operating Partnership includes $34.9 million of assets of certain VIEs that are consolidated by the Operating Partnership. Refer to Note 2, “Summary of Significant Accounting Policies.”













Refer to accompanying notes to consolidated financial statements.


5


NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Interest income
$
999,825

 
$
239,496

 
$
1,975,405

 
$
239,496

Other income
14,531

 
23,435

 
35,761

 
27,735

Total revenues
1,014,356

 
262,931

 
2,011,166

 
267,231

Expenses
 
 
 
 
 
 
 
General and administrative expenses
126,221

 
76,996

 
332,200

 
155,422

Asset management and other fees - related party
98,827

 
42,389

 
187,238

 
72,757

Transaction costs

 
105,620

 
10,696

 
105,620

Total expenses
225,048

 
225,005

 
530,134

 
333,799

Income (loss) before equity in earnings (losses) of unconsolidated venture
789,308

 
37,926

 
1,481,032

 
(66,568
)
Equity in earnings (losses) of unconsolidated venture
44,755

 
44,666

 
89,911

 
449,827

Net income (loss)
834,063

 
82,592

 
1,570,943

 
383,259

Net (income) loss attributable to non-controlling interests
(183,780
)
 
(82,437
)
 
(443,342
)
 
(82,437
)
Net income (loss) attributable to NorthStar/RXR New York Metro Real Estate, Inc. common stockholders
$
650,283

 
$
155

 
$
1,127,601

 
$
300,822

Net income (loss) per share, basic/diluted
$
0.14

 
$
0.00

 
$
0.25

 
$
0.15

Weighted average number of shares outstanding, basic/diluted
4,571,454

 
2,614,699

 
4,541,254

 
2,013,549

Dividends declared per share of common stock
$
0.07

 
$
0.02

 
$
0.14

 
$
0.04

























Refer to accompanying notes to consolidated financial statements.


6


NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY

Common Stock

Additional
Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Total Company’s
Stockholders’ Equity
 
Non-controlling
Interests
 
Total
Equity
 
Class A
 
Class T
 
Class I
 
 
 
 
 

Shares

Amount
 
Shares
 
Amount
 
Shares
 
Amount

 
 
 
 
Balance as of December 31, 2016
765,723

 
$
7,657

 
296,314

 
$
2,963

 
73,524

 
$
735

 
$
9,937,027

 
$
462,308

 
$
10,410,690

 
$
946

 
$
10,411,636

Net proceeds from issuance of common stock
665,033

 
6,650

 
1,127,708

 
11,278

 
14,944

 
149

 
16,270,126

 

 
16,288,203

 

 
16,288,203

Issuance and amortization of equity-based compensation
7,500

 
75

 

 

 

 

 
57,170

 

 
57,245

 

 
57,245

Stock distributions declared and issued
171,634

 
1,716

 
145,568

 
1,456

 
12,348

 
124

 
(568
)
 
(2,728
)
 

 

 

Non-controlling interests - contributions

 

 

 

 

 

 

 

 

 
5,513,107

 
5,513,107

Non-controlling interests - distributions

 

 

 

 

 

 

 

 

 
(48,377
)
 
(48,377
)
Distributions declared

 

 

 

 

 

 

 
(63,434
)
 
(63,434
)
 

 
(63,434
)
Proceeds from distribution reinvestment plan
1,862

 
19

 
163

 
2

 
86

 
1

 
20,534

 

 
20,556

 

 
20,556

Net income (loss)

 

 

 

 

 

 

 
300,822

 
300,822

 
82,437

 
383,259

Balance as of June 30, 2017 (Unaudited)
1,611,752

 
$
16,117

 
1,569,753

 
$
15,699

 
100,902

 
$
1,009

 
$
26,284,289

 
$
696,968

 
$
27,014,082

 
$
5,548,113

 
$
32,562,195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Total Company’s
Stockholders’ Equity
 
Non-controlling
Interests
 
Total
Equity
 
Class A
 
Class T
 
Class I
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance as of December 31, 2017
2,046,869

 
$
20,469

 
2,213,824

 
$
22,138

 
139,651

 
$
1,397

 
$
36,297,515

 
$
1,028,440

 
$
37,369,959

 
$
13,530,319

 
$
50,900,278

Net proceeds from issuance of common stock
40,492

 
405

 
75,736

 
757

 
39,285

 
393

 
1,497,039

 

 
1,498,594

 

 
1,498,594

Amortization of equity-based compensation

 

 

 

 

 

 
66,354

 

 
66,354

 

 
66,354

Non-controlling interests - contributions

 

 

 

 

 

 

 

 

 
250,000

 
250,000

Non-controlling interests - distributions

 

 

 

 

 

 

 

 

 
(503,050
)
 
(503,050
)
Acquisition of non-controlling interests

 

 

 

 

 

 

 

 

 
(6,971,587
)
 
(6,971,587
)
Shares redeemed for cash
(2,253
)
 
(23
)
 
(5,818
)
 
(58
)
 

 

 
(72,594
)
 

 
(72,675
)
 

 
(72,675
)
Distributions declared

 

 

 

 

 

 

 
(569,315
)
 
(569,315
)
 

 
(569,315
)
Proceeds from distribution reinvestment plan
7,590

 
76

 
11,642

 
116

 
624

 
6

 
187,845

 

 
188,043

 

 
188,043

Net income (loss)

 

 

 

 

 

 

 
1,127,601

 
1,127,601

 
443,342

 
1,570,943

Balance as of June 30, 2018 (Unaudited)
2,092,698

 
$
20,927

 
2,295,384

 
$
22,953

 
179,560

 
$
1,796

 
$
37,976,159

 
$
1,586,726

 
$
39,608,561

 
$
6,749,024

 
$
46,357,585










Refer to accompanying notes to consolidated financial statements.


7


NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
1,570,943

 
$
383,259

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Amortization of origination fee on real estate debt investment
 
(33,333
)
 

Amortization of equity-based compensation
 
66,354

 
57,245

Equity in earnings of unconsolidated venture
 
(89,911
)
 
(449,827
)
Dividends from unconsolidated venture
 
89,748

 
96,767

Changes in assets and liabilities:
 
 
 
 
Interest Receivable
 
(3,547
)
 
(128,638
)
Receivables, net
 

 
(35,579
)
Other assets
 

 
(34,932
)
Due to related party
 
1,349

 
10,023

Net cash provided by (used in) operating activities
 
1,601,603

 
(101,682
)
Cash flows from investing activities:
 
 
 
 
Investments in real estate debt
 

 
(10,000,000
)
Net cash provided by (used in) investing activities
 

 
(10,000,000
)
Cash flows from financing activities:
 
 
 
 
Net proceeds from issuance of common stock
 
1,310,140

 
17,224,375

Shares redeemed for cash
 
(72,675
)
 

Distributions paid on common stock
 
(550,869
)
 
(53,052
)
Proceeds from distribution reinvestment plan
 
188,043

 
20,556

Contributions from non-controlling interests
 
250,000

 
513,107

Distributions to non-controlling interests
 
(503,050
)
 
(48,377
)
Acquisition of non-controlling interests
 
(6,971,587
)
 

Net cash provided by (used in) financing activities
 
(6,349,998
)
 
17,656,609

Net increase (decrease) in cash and cash equivalents
 
(4,748,395
)
 
7,554,927

Cash and cash equivalents - beginning of period
 
10,883,296

 
4,595,392

Cash and cash equivalents - end of period
 
$
6,134,901

 
$
12,150,319

 
 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
Accrued cost of capital (refer to Note 5)
 
$
220,128

 
$
31,035

Subscriptions receivable, gross
 

 
45,000

Distributions payable
 
103,241

 
15,059

Contributions from non-controlling interests
 

 
5,000,000













Refer to accompanying notes to consolidated financial statements.


8


NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Organization
NorthStar/RXR New York Metro Real Estate, Inc. (the “Company”) was formed to acquire a high-quality commercial real estate (“CRE”) portfolio concentrated in the New York metropolitan area, and in particular New York City, with a focus on office, mixed-use properties and a lesser emphasis on multifamily properties. The Company was formed on March 21, 2014 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016.
The Company is externally managed and has no employees. Prior to January 11, 2017, the Company was managed by an affiliate of NorthStar Asset Management Group Inc. (“NSAM”). Effective January 10, 2017, NSAM completed its merger with Colony Capital, Inc., NorthStar Realty Finance Corp. (“NorthStar Realty”), and Colony NorthStar, Inc. (“Colony NorthStar”), a wholly-owned subsidiary of NSAM, which the Company refers to as the mergers, with Colony NorthStar surviving the mergers and succeeding NSAM as one of the Company’s co-sponsors. As a result of the mergers, Colony NorthStar became an internally-managed equity REIT, with a diversified real estate and investment management platform and publicly-traded on the New York Stock Exchange (“NYSE”). Effective June 25, 2018, Colony NorthStar changed its name to Colony Capital, Inc. (“Colony Capital”) and its ticker symbol on the NYSE from “CLNS” to “CLNY.” CNI NS/RXR Advisors, LLC (the “Advisor”), is a subsidiary of Colony Capital. The Advisor manages the Company’s day-to-day operations pursuant to an advisory agreement.
Colony Capital manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies.
The Company is sub-advised by RXR NTR Sub-Advisor LLC (“Sub-advisor”), a Delaware limited liability company and a subsidiary of the Company’s other co-sponsor, RXR Realty LLC (“RXR”). The Company’s Advisor and Sub-advisor are collectively referred to as the Advisor Entities. The Company, its Advisor and its Sub-advisor entered into a sub-advisory agreement delegating certain investment responsibilities of the Advisor to the Sub-advisor. Colony Capital and RXR are each referred to as a Co-sponsor and collectively as the Co-sponsors.
Substantially all business of the Company is conducted through NorthStar/RXR Operating Partnership, LP (the “Operating Partnership”). The Company is the sole general partner and a limited partner of the Operating Partnership. NorthStar/RXR NTR OP Holdings LLC (the “Special Unit Holder”) (a joint venture between Colony Capital and RXR) has invested $1,000 in the Operating Partnership and has been issued a separate class of limited partnership units (the “Special Units”), which is recorded as non-controlling interest on the consolidated balance sheets. As the Company accepts subscriptions for shares, it transfers substantially all of the net proceeds from the continuous, public offering to the Operating Partnership as a capital contribution.
The Company’s charter authorizes the issuance of up to 400,000,000 shares of common stock with a par value of $0.01 per share and up to 50,000,000 shares of preferred stock with a par value of $0.01 per share. Of the total shares of common stock authorized, 120,000,000 are classified as Class A shares (“Class A Shares”), 240,000,000 are classified as Class T shares (“Class T Shares”), and 40,000,000 are classified as Class I shares (“Class I Shares”). The board of directors of the Company is authorized to amend its charter, without the approval of the stockholders, to increase or decrease the aggregate number of shares of capital stock or the number of shares of any class or series that the Company has authority to issue or to classify and reclassify any unissued shares of common stock into one or more classes or series.
On March 28, 2014, as part of its formation, the Company issued 16,667 shares of common stock to a subsidiary of Colony Capital, and 5,556 shares of common stock to a subsidiary of RXR for $0.2 million, all of which were subsequently renamed Class A Shares. On February 9, 2015, the Company’s registration statement on Form S-11 with the U.S. Securities and Exchange Commission (the “SEC”) was declared effective to offer a minimum of $2.0 million and a maximum of $2.0 billion in shares of common stock in a continuous, public offering, of which up to $1.8 billion was offered pursuant to its primary offering (the “Primary Offering”) at a purchase price of $10.1111 per Class A Share and $9.5538 per Class T Share and up to $200.0 million pursuant to its distribution reinvestment plan (the “DRP”) at a purchase price of $9.81 per Class A Share and $9.27 per Class T Share.
On December 23, 2015, the Company commenced operations by satisfying the minimum offering requirement in the Primary Offering as a result of a subsidiary of Colony Capital and RXR purchasing $1.5 million and $0.5 million in Class A Shares, respectively.
On August 22, 2016, the Company filed a post-effective amendment to its registration statement that reclassified its common stock offered pursuant to its registration statement into Class A Shares, Class T Shares and Class I Shares. The SEC declared the post-effective amendment effective on October 26, 2016. Pursuant to the registration statement, as amended, the Company offered for


9

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

sale up to $1.8 billion in shares of common stock at a price of $10.1111 per Class A Share, $9.5538 per Class T Share and $9.10 per Class I Share in the Primary Offering, and up to $200.0 million in shares under the DRP at a price of $9.81 per Class A Share, $9.27 per Class T Share and $9.10 per Class I Share. The Primary Offering and the DRP are herein collectively referred to as the Offering. The Company retained NorthStar Securities, LLC (“NorthStar Securities”), an affiliate of its Advisor and one of its co-sponsors, to serve as the dealer manager (the “Dealer Manager”) and to market the shares offered pursuant to the Primary Offering.
In November 2016, the Company’s board of directors approved an extension of the Offering by one year to February 9, 2018. On February 2, 2018, the Company filed a registration statement on Form S-11 with the SEC for a follow-on public offering of up to $200.0 million in shares of the Company’s common stock, of which $150.0 million are to be offered pursuant to a primary offering and $50.0 million are to be offered pursuant to a distribution reinvestment plan. The follow-on offering has not yet been declared effective by the SEC and there can be no assurance that the Company will commence the follow-on offering.
On March 15, 2018, the Company’s board of directors determined to terminate the Primary Offering effective March 31, 2018 and the DRP effective April 2, 2018, after the issuance of shares with respect to the distributions declared for the month of March 2018.
From inception through the termination of the Offering, the Company raised total gross proceeds of $40.7 million pursuant to the Offering, including gross proceeds of $327,073 pursuant to the DRP.
2.
Summary of Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the SEC on March 20, 2018.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIEs”), if any, where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb losses of the VIE or the right to receive benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
The Company evaluates its investments, including investments in unconsolidated ventures, to determine whether each investment is a VIE. The Company analyzes new investments, as well as reconsideration events for existing investments, which vary depending on type of investment.
The most significant consolidated VIE is the Operating Partnership, which is a VIE because the non-controlling interests do not have substantive kick-out or participating rights. The Company consolidates this entity because it controls all significant business activities. The Operating Partnership consolidates certain VIEs that have non-controlling interests. Included in real estate debt investment on the Company’s consolidated balance sheets as of June 30, 2018 is $34.9 million related to such consolidated VIEs. The Company consolidates these entities because it determined it is the primary beneficiary.
As of June 30, 2018, the Company identified unconsolidated VIEs related to its investment in an unconsolidated venture. Based on management’s analysis, the Company determined that it is not the primary beneficiary. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of June 30, 2018. The Company did not provide financial support to the unconsolidated VIEs during the six months ended June 30, 2018. As of June 30, 2018, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to its unconsolidated VIEs.
The Company’s maximum exposure to loss as of June 30, 2018 would not exceed its investment in the VIEs. Creditors of each of the VIEs have no recourse to the general credit of the Company.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or a simple majority vote.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Investments in Unconsolidated Ventures
A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method, fair value option or net asset value ("NAV") practical expedient, if elected, or for equity investments without readily determinable fair values, the measurement alternative to measure at cost adjusted for any impairment and observable price changes, as applicable.

The Company will account for an investment under the equity method of accounting if it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of preferred returns and allocation formulas, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model in which the investment is recognized based on the cost to the investor, which includes acquisition fees. The Company records as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.

The Company elected the fair value option for its investment in an unconsolidated venture and records the corresponding results from operations, which includes dividends received and its share of the change in fair value of the underlying investment, as equity in earnings (losses) of unconsolidated venture on the consolidated statements of operations. The Company measures fair value using the NAV of the underlying investment as a practical expedient as permitted by the guidance on fair value measurement.


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NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Dividends received in excess of cumulative equity in earnings from the unconsolidated venture will be deemed as a return of capital.
Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) attributable to controlling and non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
Fair Value Option
The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings. The Company has elected the fair value option for its investment in an unconsolidated venture.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity date of three months or less to be cash equivalents. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. The Company mitigates credit risk by placing cash and cash equivalents with major financial institutions. To date, the Company has not experienced any losses on cash and cash equivalents. Interest income earned on cash deposits is reflected as other income in the consolidated statements of operations.
Real Estate Debt Investments
CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium and discount. CRE debt investments that are deemed to be impaired are carried at amortized cost less a reserve, if deemed appropriate, which would approximate fair value. CRE debt investments where the Company does not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated fair value.
Acquisition Expenses
The total of all acquisition expenses for an investment cannot exceed, in the aggregate, 6.0% of the contract purchase price of such investment unless such excess is approved by a majority of the directors, including independent directors. From inception through June 30, 2018, total acquisition expenses did not exceed the allowed limit for any investment. The Company records as an expense certain acquisition costs associated with transactions deemed to be business combinations in which it consolidates the asset and capitalizes these costs for transactions deemed to be acquisitions of an asset, including an equity investment.
Revenue Recognition
Real Estate Debt Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such investment is reclassified to held for sale.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Credit Losses and Impairment on Investments
Real Estate Debt Investments
CRE debt investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of reserves on a quarterly basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the investment as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the investment, a reserve is recorded with a corresponding charge to a credit provision. The reserve is maintained at a level that is determined to be adequate by management to absorb probable losses. Income recognition is suspended for an investment at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the investment becomes contractually current and performance is demonstrated to be resumed. Interest accrued and not collected will be reversed against interest income. An investment is written off when it is no longer realizable and/or legally discharged. As of June 30, 2018, the Company did not have any impaired CRE debt investments.
Investments in Unconsolidated Ventures
The Company will review its investments in unconsolidated ventures for which the Company did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, the Company will consider U.S. and global macroeconomic factors, including real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying value of the investment over the estimated fair value and recorded in equity in earnings (losses) of unconsolidated ventures in the consolidated statements of operations. As of June 30, 2018, the Company did not have any investments in unconsolidated ventures for which the Company did not elect the fair value option.
Organization and Offering Costs
The Advisor Entities, or their affiliates, were entitled to receive reimbursement for organization and offering costs paid on behalf of the Company in connection with the Offering. The Company was obligated to reimburse the Advisor Entities, as applicable, for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees, distribution fees and other organization and offering costs did not exceed 15% of gross proceeds from the Offering. Based on gross proceeds of $40.7 million from the Offering, the Company incurred reimbursable organizational and offering costs, excluding selling commissions and dealer manager fees, of 1.0%. The Company recorded organization and offering costs each period based on an allocation of expected total organization and offering costs to be reimbursed. Organization costs were recorded in general and administrative expenses in the consolidated statements of operations and offering costs were recorded as a reduction to equity.
Equity-Based Compensation
The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant. All fixed equity-based awards to the Company’s independent directors, which have no vesting conditions other than time of service, are amortized to compensation expense over the awards’ vesting period on a straight-line basis. Equity-based compensation is classified within general and administrative expense in the consolidated statements of operations.
Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code and to operate as such, commencing with its taxable year ended December 31, 2016. The Company had little or no taxable income prior to electing REIT status. To maintain its qualification as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to


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NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

distribute at least 90% of the Company’s annual REIT taxable income to its stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with U.S. GAAP). As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company intends to operate in such a manner as to qualify for treatment as a REIT.
Recent Accounting Pronouncements
Equity Method Accounting—In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting, which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The Company adopted the new guidance prospectively on January 1, 2017, and the adoption of this standard did not have a material impact on its consolidated financial statements and related disclosures.
Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company is currently assessing the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Cash Flow Classifications—In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in certain classifications on the statement of cash flows. This guidance addresses eight types of cash flows, which includes clarifying how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows, as well as requiring an accounting policy election for classification of distributions received from equity method investees using either the cumulative earnings or nature of distributions approach, among others. Transition will generally be on a retrospective basis. The Company adopted this standard on January 1, 2018, and it did not have a material impact on its consolidated financial statements and related disclosures.
Business Combinations—In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which amends the guidance for determining whether a transaction involves the purchase or disposal of a business or an asset. The amendments clarify that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of transferred assets and activities is not a business. The guidance is effective for fiscal years, and interim periods within those years, beginning December 15, 2017. The amendments in this update will be applied on a prospective basis. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings and related intangible assets). A significant difference between the accounting for an asset acquisition and a business combination is that transaction costs are capitalized for an asset acquisition, rather than expensed for a business combination. The Company adopted the standard on its required effective date of January 1, 2018, and it did not have a material impact on its consolidated financial statements and related disclosures.
Derecognition of Partial Sales of Nonfinancial Assets—In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of recently established guidance on recognition of gains and losses from derecognition of non-financial assets, and defines in-substance non-financial assets.  In addition, the guidance clarifies the accounting for partial sales of non-financial assets to be more consistent with the accounting for sale of a business. Specifically, in a partial sale to a non-customer, when a non-controlling interest is received or retained, the latter is considered a non-cash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. The effective date for this guidance is January 1, 2018, with early adoption permitted beginning January 1, 2017.  The Company adopted this standard on January 1, 2018 using the modified retrospective approach.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Under the new standard, if the Company sells a partial interest in its real estate assets to noncustomers or contributes real estate assets to unconsolidated ventures, and the Company retains a noncontrolling interest in the asset, such transactions could result in a larger gain on sale.  The adoption of this standard could have a material impact to the Company's results of operations in a period if the Company sells a significant partial interest in a real estate asset. There were no such sales for the six months ended June 30, 2018.
3.
Investment in Unconsolidated Venture
The following is a description of the Company’s investment in an unconsolidated venture, which the Company has elected to account for under the fair value option.
1285 Avenue of the Americas Venture
As of June 30, 2018, the Company held a non-controlling interest of approximately 1.0% in 1285 Avenue of the Americas (“1285 AoA”), a 1.8 million square foot Class-A office building located in midtown Manhattan. The remainder of the building is owned by institutional investors and funds affiliated with the Company’s Sub-advisor. The acquisition was part of an approximately $1.65 billion transaction in May 2016 that was sourced by RXR, the Company’s Co-sponsor and affiliate of its Sub-advisor. The purchase was approved by the Company’s board of directors, including all of its independent directors.
The Company’s investment is accounted for using the fair value option. As of June 30, 2018, the carrying value of the Company’s investment in an unconsolidated venture was $5.4 million. For the three months ended June 30, 2018, the Company recognized equity in earnings of the unconsolidated venture of $44,755, comprising dividends received of $48,438 and a decrease in fair value of the investment of $3,683. For the six months ended June 30, 2018, the Company recognized equity in earnings of the unconsolidated venture of $89,911, comprising dividends received of $89,748 and an increase in fair value of the investment of $163.
4.
Real Estate Debt Investments
The following table presents the Company’s real estate debt investments as of June 30, 2018:
Asset type:
 
Count
 
Principal
Amount
 
Carrying Value
 
Spread over LIBOR(1)
 
Floating Rate as % of Principal Amount
Mezzanine loans(2)(3)
 
2
 
$
35,000,000

 
$
34,861,111

 
9.39
%
 
100.0
%
_______________________________________
(1)
Represents weighted average spread over LIBOR, based on principal amount.
(2)
Includes a $15.0 million mezzanine loan interest acquired through joint ventures with affiliates of RXR and an unaffiliated third party. The Company’s proportionate interest of the loan is 63.3%, representing $9.5 million of the principal amount. The Company consolidates the loan and records a non-controlling interest for the ownership of RXR and an unaffiliated third party. Refer to Note 2, “Summary of Significant Accounting Policies—Principles of Consolidation,” for further information.
(3)
Includes a $20.0 million mezzanine loan interest, net of unamortized origination fee, originated through a joint venture with an affiliate of RXR. The Company’s proportionate interest of the loan is 95.0%, representing $19.0 million of the principal amount. The Company consolidates the loan and records a non-controlling interest for the ownership of RXR. Refer to Note 2, “Summary of Significant Accounting Policies—Principles of Consolidation,” for further information.
The following table presents the Company’s real estate debt investments as of December 31, 2017:
Asset type:
 
Count
 
Principal
Amount
 
Carrying Value
 
Spread over LIBOR(1)
 
Floating Rate as % of Principal Amount
Mezzanine loans(2)(3)
 
2
 
$
35,000,000

 
$
34,827,778

 
9.39
%
 
100.0
%
_______________________________________
(1)
Represents weighted average spread over LIBOR, based on principal amount.
(2)
Includes a $15.0 million mezzanine loan interest acquired through joint ventures with affiliates of RXR and an unaffiliated third party. The Company’s proportionate interest of the loan is 63.3%, representing $9.5 million of the principal amount. The Company consolidates the loan and records a non-controlling interest for the ownership of RXR and an unaffiliated third party. Refer to Note 2, “Summary of Significant Accounting Policies—Principles of Consolidation,” for further information.
(3)
Includes a $20.0 million mezzanine loan interest, net of unamortized origination fee, originated through a joint venture with an affiliate of RXR. As of December 31, 2017, the Company’s proportionate interest of the loan was 60.0%, representing $12.0 million of the principal amount. The Company consolidates the loan and records a non-controlling interest for the ownership of RXR. Refer to Note 2, “Summary of Significant Accounting Policies—Principles of Consolidation,” for further information.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following is a description of the Company’s real estate debt investments:
In May 2017, the Company, through a subsidiary of the Operating Partnership, completed the acquisition of a $9.5 million interest in a $15.0 million mezzanine loan through a joint venture with RXR Real Estate Value Added Fund - Fund III LP (together with its parallel funds, “VAF III”), an affiliate of RXR who acquired a $0.5 million interest in the loan, and an unaffiliated third party, who originated the loan and retained the remaining $5.0 million interest in the loan. The loan is secured by a pledge of an ownership interest in a retail development project located in Times Square, New York. The loan bears interest at a floating rate of 9.25% over the one-month London Interbank Offered Rate (“LIBOR”), and had an initial maturity in November 2017, with two one-year extension options available to the borrower. In September 2017, the borrower exercised its right to extend the term of the loan until November 2018. In August 2018, the borrower repaid the loan in full. Refer to Note 11, “Subsequent Events” for further discussion.
In August 2017, the Company, through a subsidiary of the Operating Partnership, completed the origination of a $12.0 million pari passu interest in a $20.0 million mezzanine loan, secured by a pledge of an ownership interest in a luxury condominium development project located in the West Village of New York City. The Company completed the investment through a partnership with VAF III, which contributed the remaining $8.0 million of the loan origination. In February 2018, the Company, through a subsidiary of its operating partnership, completed the acquisition of an additional $7.0 million interest from VAF III, and now holds a $19.0 million interest in the loan. VAF III now holds the remaining $1.0 million interest in the loan. The loan bears interest at a floating rate of 9.5% over the one-month LIBOR, with a LIBOR ceiling of 1.5%. The loan had a 1.0% origination fee and has an initial term of three years, with two one-year extension options available to the borrower.
5.
Related Party Arrangements
Advisor Entities
Subject to certain restrictions and limitations, the Advisor Entities are responsible for managing the Company’s affairs on a day-to-day basis and for identifying, acquiring, originating and asset managing investments on behalf of the Company. The Advisor Entities may delegate certain of their obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions. References to the Advisor Entities include the Advisor Entities and any such affiliated entities. For such services, to the extent permitted by law and regulations, the Advisor Entities receive fees and reimbursements from the Company, of which the Sub-advisor generally receives 50% of all fees and up to 25% of all reimbursements. Pursuant to the advisory agreement, the Advisor may defer or waive fees in its discretion.
The Company entered into advisory and sub-advisory agreements with the Advisor Entities, which each have a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Advisor Entities and the Company’s board of directors, including a majority of its independent directors. In February 2017, the Company amended and restated its advisory agreement (the “Amended Advisory Agreement”) with the Advisor for a term ending June 30, 2017, which eliminated the acquisition fees and disposition fees payable to the Advisor Entities, and reduced the monthly asset management fee payable to the Advisor Entities from one-twelfth of 1.25% to one-twelfth of 1.0% (as discussed further below). On March 17, 2017, the Company entered into a second amended and restated sub-advisory agreement with its Sub-advisor for a term ending June 30, 2017, which reflected the amendments to the fees in the Amended Advisory Agreement. In June 2018, the Amended Advisory Agreement and the sub-advisory agreement were renewed for additional one-year terms commencing on June 30, 2018, with terms identical to those in effect through June 30, 2018.
The Company pays the Sub-advisor, or its affiliates, development, leasing, property management and construction related service fees that are usual and customary for owners and operators in the geographic area of the property. Below is a description of the fees and reimbursements in effect commencing on February 7, 2017 incurred to the Advisor Entities.
Fees to Advisor Entities
Asset Management Fee
In February 2017, the Amended Advisory Agreement reduced the monthly asset management fee payable to one-twelfth of 1.0% of the cost of investments or sum of the amount funded or allocated for CRE investments, including expenses and any financing attributable to such investments, less any principal received on debt and securities investments (or the proportionate share thereof in the case of an investment made through a joint venture). Prior to that date, the Advisor Entities received a monthly asset management fee equal to one-twelfth of 1.25% of the cost of investments.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Incentive Fee
The Advisor Entities, or their affiliates, are entitled to receive distributions equal to 15.0% of net cash flows of the Company, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 6.0% cumulative, non-compounded annual pre-tax return on such invested capital.
Acquisition Fee
In February 2017, the Amended Advisory Agreement eliminated the acquisition fees payable to the Advisor Entities. Prior to that date, the Advisor Entities were entitled to receive fees for providing structuring, diligence, underwriting advice and related services in connection with real estate acquisitions equal to 2.25% of each real estate property acquired by the Company, including acquisition costs and any financing attributable to an equity investment (or the proportionate share thereof in the case of an indirect equity investment made through a joint venture or other investment vehicle) and 1.0% of the amount funded or allocated by the Company to acquire or originate CRE debt investments, including acquisition costs and any financing attributable to such investments (or the proportionate share thereof in the case of an indirect investment made through a joint venture or other investment vehicle). From inception through February 2017, the Advisor Entities waived $0.1 million of acquisition fees.
Disposition Fee
In February 2017, the Amended Advisory Agreement eliminated the disposition fees payable to the Advisor Entities. Prior to that date, the Advisor Entities were entitled to receive a disposition fee equal to 2.0% of the contract sales price of each property sold and 1.0% of the contract sales price of each CRE debt investment sold or syndicated for substantial assistance in connection with the sale of investments and based on the services provided, as determined by the Company’s independent directors. From inception through February 2017, no disposition fees were incurred or paid.
Reimbursements to Advisor Entities
Operating Costs
The Advisor Entities are entitled to receive reimbursement for direct and indirect operating costs incurred by the Advisor Entities in connection with administrative services provided to the Company. The Advisor Entities allocate, in good faith, indirect costs to the Company related to the Advisor Entities and their affiliates’ employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with the Advisor Entities. The indirect costs include the Company’s allocable share of the Advisor Entities compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The indirect costs also include rental and occupancy, technology, office supplies, travel and entertainment and other general and administrative costs and expenses also allocated based on the percentage of time devoted by personnel to the Company’s affairs. However, there is no reimbursement for personnel costs related to executive officers (although there may be reimbursement for certain executive officers of the Advisor) and other personnel involved in activities for which the Advisor Entities receive an acquisition fee or a disposition fee. The Advisor Entities allocate these costs to the Company relative to their and their affiliates’ other managed companies in good faith and have reviewed the allocation with the Company’s board of directors, including its independent directors. The Advisor Entities update the board of directors on a quarterly basis of any material changes to the expense allocation and provide a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. The Company reimburses the Advisor Entities quarterly for operating costs (including the asset management fee) based on a calculation for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of its average invested assets; or (ii) 25.0% of its net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of assets for that period (the “2%/25% Guidelines”). Notwithstanding the above, the Company may reimburse the Advisor Entities for expenses in excess of this limitation if a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. The Company calculates the expense reimbursement quarterly based upon the trailing twelve-month period.
Organization and Offering Costs
The Advisor Entities were entitled to receive reimbursement for organization and offering costs paid on behalf of the Company in connection with the Offering. The Company was obligated to reimburse the Advisor Entities, as applicable, for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees, distribution fees and other organization and offering costs did not exceed 15% of gross proceeds from the Offering. Based on gross proceeds of $40.7 million from the


17

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Offering, the Company incurred reimbursable organizational and offering costs, excluding selling commissions and dealer manager fees, of 1.0%. The Advisor Entities have incurred unreimbursed organization and offering costs on behalf of the Company of $5.9 million that are no longer eligible to be allocated to the Company. The Company recorded organization and offering costs each period based on an allocation of expected total organization and offering costs to be reimbursed. The Company’s independent directors determined that all of the organization and offering costs were fair and commercially reasonable. Organization costs were recorded in general and administrative expenses in the consolidated statements of operations and offering costs were recorded as a reduction to equity.
Dealer Manager
Selling Commissions, Dealer Manager Fees and Distribution Fees
Pursuant to a dealer manager agreement, the Company paid the Dealer Manager selling commissions of up to 7.0% of gross proceeds from the sale of Class A Shares and up to 2.0% of the gross proceeds from the sale of Class T Shares issued in the Primary Offering, all of which were reallowed to participating broker-dealers. The Company paid the Dealer Manager a dealer manager fee of up to 3.0% of gross proceeds from the sale of Class A Shares and up to 2.75% of the gross proceeds from the sale of Class T Shares issued in the Primary Offering, a portion of which was typically reallowed to participating broker-dealers and paid to certain employees of the Dealer Manager. No selling commissions or dealer manager fees were paid for the sale of Class I Shares. The Dealer Manager was also able to enter into participating dealer agreements that provide for the Dealer Manager to pay a distribution fee of up to 2.0% over a maximum eight-year period in connection with the sale of Class I Shares in the Primary Offering. The Company will not reimburse the Dealer Manager for its payment of these fees and such fees will be subject to the limitations on underwriting compensation under applicable Financial Industry Regulatory Authority, Inc. (“FINRA”) rules.
In addition, the Company paid the Dealer Manager a distribution fee of up to 1.0% annually of gross proceeds from the sale of Class T Shares issued in the Primary Offering, all of which were reallowed to participating broker-dealers. The Dealer Manager would cease receiving distribution fees with respect to each Class T Share upon the earliest of the following to occur: (i) a listing of the Company’s shares of common stock on a national securities exchange; (ii) such Class T Share is no longer outstanding; (iii) the Dealer Manager’s determination that total underwriting compensation with respect to all Class A Shares, Class T Shares and Class I Shares would be in excess of 10% of the gross proceeds of the Primary Offering; or (iv) the end of the month in which total underwriting compensation, with respect to Class T Shares issued in connection with the Primary Offering held by a stockholder within his or her particular account would be in excess of 10% of the stockholder’s total gross investment amount at the time of purchase of the primary Class T Shares held in such account.
In March 2018, although the Company had not paid underwriting compensation in excess of 10% of the gross proceeds of the Primary Offering, the Company determined that total underwriting compensation with respect to all Class A Shares, Class T Shares and Class I Shares was in excess of 10% of the gross proceeds of the Primary Offering. As a result, the Dealer Manager ceased receiving distribution fees with respect to each Class T Share.
No selling commissions or dealer manager fees were paid for sales pursuant to the DRP or the Company’s distribution support agreement (“Distribution Support Agreement”).


18

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Summary of Fees and Reimbursements
The following tables present the fees and reimbursements incurred to the Advisor Entities and the Dealer Manager for the six months ended June 30, 2018 and the amount due to related party as of June 30, 2018 and December 31, 2017:
Type of Fee or Reimbursement
 
 
 
Due to Related Party as of December 31, 2017
 
Six Months Ended 
 June 30, 2018
 
Due to Related Party as of June 30, 2018 (Unaudited)
 
Financial Statement Location
 
 
Incurred
 
Paid
 
Fees to Advisor Entities
 
 
 
 
 
 
 
 
 
 
   Asset management
 
Asset management and other fees-related party
 
$
27,109

 
$
187,238

 
$
181,404

 
$
32,943

Reimbursements to Advisor Entities
 
 
 
 
 
 
 
 
   Operating costs(1)
 
General and administrative expenses
 
136,265

 
207,580

 
209,060

 
134,785

   Organization
 
General and administrative expenses
 
3,025

 
745

 
3,750

 
20

   Offering
 
Cost of capital(2)
 
57,357

 
14,150

 
71,242

 
265

Selling commissions
 
Cost of capital(2)
 

 
46,381

 
46,381

 

Dealer Manager Fees
 
Cost of capital(2)
 

 
27,984

 
27,984

 

Distribution Fees(3)
 
Cost of capital(2)
 
163,036

 
(97,614
)
 
65,422

 

Total
 
 
 
$
386,792

 
$
386,464

 
$
605,243

 
$
168,013

_______________________________________
(1)
As of June 30, 2018, the Advisor Entities have incurred unreimbursed operating costs on behalf of the Company of $14.0 million that remain eligible to be allocated to the Company.
(2)
Cost of capital is included in net proceeds from issuance of common stock in the Company’s consolidated statements of equity.
(3)
In March 2018, although the Company had not paid underwriting compensation in excess of 10% of the gross proceeds of the Primary Offering, the Company determined that total underwriting compensation with respect to all Class A Shares, Class T Shares and Class I Shares was in excess of 10% of the gross proceeds of the Primary Offering. As a result, the Dealer Manager ceased receiving distribution fees with respect to each Class T Share. Amounts incurred for the six months ended June 30, 2018 includes a reversal of the previously recorded liability.
Distribution Support Agreement
Pursuant to the Distribution Support Agreement, NorthStar Realty, a subsidiary of Colony Capital, and RXR committed to purchase 75% and 25%, respectively, of up to an aggregate of $10.0 million in shares of the Company’s common stock at a current offering price for Class A Shares, net of selling commissions and dealer manager fees, if cash distributions exceed modified funds from operations (as computed in accordance with the definition established by the Institute for Portfolio Alternatives and adjusted for certain items) to provide additional funds to support distributions to stockholders. On December 23, 2015, NorthStar Realty and RXR purchased 164,835 and 54,945 shares of the Company’s Class A Shares for $1.5 million and $0.5 million, respectively, under the Distribution Support Agreement to satisfy the minimum offering requirement, which reduced the total commitment.
In November 2016, the Company’s board of directors amended and restated the Distribution Support Agreement to extend the term of the Distribution Support Agreement for the period ending upon the termination of the primary portion of the Offering. Accordingly, the Distribution Support Agreement terminated on March 31, 2018. From inception through March 31, 2018, pursuant to the Distribution Support Agreement, NorthStar Realty and RXR agreed to purchase an additional 2,399 and 800 shares of the Company’s Class A Shares, respectively, for an aggregate amount of approximately $29,000.
Investments
As of June 30, 2018, all of the Company’s investments were structured through joint venture arrangements with VAF III, an institutional real estate investment fund affiliated with RXR. The Chief Executive Officer of RXR is a member of the Company’s board.
Colony Capital and Investment in RXR Equity
In December 2013, NorthStar Realty, a subsidiary of Colony Capital, entered into a strategic transaction with RXR. The investment in RXR includes an approximate 27% equity interest. As a result of Colony Capital’s equity interest in RXR, Colony Capital may be entitled to certain fees in connection with RXR’s investment management business.
In March 2017, Colony Capital, through an affiliate, committed $25.0 million to VAF III for the purposes of investing in CRE located in New York City. As of June 30, 2018, Colony Capital had funded $10.5 million to VAF III, and had a remaining unfunded commitment of $14.5 million.


19

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Sub-advisor Fees
Affiliates of the Company’s Sub-advisor provide leasing and management services for the property underlying the Company’s unconsolidated venture investment in 1285 AoA. For the six months ended June 30, 2018, the Company’s indirect share of management fees incurred by the unconsolidated venture was approximately $81,000. Refer to Note 3, “Investment in Unconsolidated Venture” to the Consolidated Financial Statements for further discussion of the Company’s investment in an unconsolidated venture.
6.
Equity-Based Compensation
The Company adopted a long-term incentive plan (the “Plan”), which it may use to attract and retain qualified officers, directors, employees and consultants, as well as an independent directors compensation plan, which is a component of the Plan. All stock issued under the Plan will consist of Class A Shares unless the board of directors of the Company determines otherwise. The Company currently intends to issue awards only to its independent directors under the Plan. The Company accounts for its equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant. All fixed equity-based awards to directors, which have no vesting conditions other than time of service, are amortized to compensation expense over the vesting period on a straight-line basis. Equity-based compensation is recorded in general and administrative expenses in the consolidated statements of operations.
Pursuant to the Plan, the Company granted Class A Shares of restricted common stock to its three independent directors concurrent with when the Company made its first investment in May 2016. As of June 30, 2018, the Company’s independent directors have been granted a cumulative total of 30,000 Class A Shares of restricted common stock for an aggregate value of $0.3 million, based on the share price on the date of each grant. The restricted common stock granted vests quarterly over two years. However, the stock will become fully vested on the earlier occurrence of: (i) the termination of the independent director’s service as a director due to his or her death or disability; or (ii) a change in control of the Company.
The Company recognized equity-based compensation expense of $28,437 and $28,806 for the three months ended June 30, 2018 and 2017, respectively, and $66,354 and $57,245 for the six months ended June 30, 2018 and 2017, respectively, related to the issuance of restricted stock to the independent directors, which was recorded in general and administrative expenses in the consolidated statements of operations. As of June 30, 2018, unvested shares totaled 3,750.
7.
Stockholders’ Equity
Common Stock from Primary Offering
The following table presents Class A Shares, Class T Shares and Class I Shares the Company issued, and the corresponding gross proceeds generated, in connection with its Primary Offering for the six months ended June 30, 2018, year ended December 31, 2017 and the period from inception through June 30, 2018 (in thousands):
 
 
Class A Shares
 
Class T Shares
 
Class I Shares
Six months ended June 30, 2018
 
 
 
 
 
 
Shares issued
 
40

 
76

 
39

Gross proceeds
 
$
408

 
$
724

 
$
358

Year ended December 31, 2017
 
 
 
 
 
 
Shares issued
 
1,094

 
1,766

 
53

Gross proceeds
 
$
10,973

 
$
16,873

 
$
486

Inception through June 30, 2018
 
 
 
 
 
 
Shares issued
 
1,855

 
2,138

 
167

Gross proceeds
 
$
18,389

 
$
20,427

 
$
1,513

In November 2016, the Company’s board of directors approved an extension of the Offering by one year to February 9, 2018. In February 2018, the Company filed a registration statement on Form S-11 with the SEC for a follow-on public offering of up to $200.0 million in shares of the Company’s common stock, of which $150.0 million are to be offered pursuant to a primary offering and $50.0 million are to be offered pursuant to a distribution reinvestment plan. The follow-on offering has not yet been declared effective by the SEC and there can be no assurance that the Company will commence the follow-on offering. On March 15, 2018, the Company’s board of directors determined to terminate the Primary Offering effective March 31, 2018 and the DRP effective April 2, 2018, after the issuance of shares with respect to the distributions declared for the month of March 2018.


20

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Distribution Reinvestment Plan
The Company adopted the DRP through which common stockholders could elect to reinvest an amount equal to the distributions declared on their shares in additional shares of the same class, in lieu of receiving cash distributions, at a price equal to $9.81 per Class A Share, $9.27 per Class T Share and $9.10 per Class I Share. No selling commissions, dealer manager fees or distribution fees were paid on shares issued pursuant to the DRP. The amount available for distributions on all Class T Shares was reduced by the amount of distribution fees payable with respect to the Class T Shares issued in the Primary Offering. The board of directors of the Company could amend, suspend or terminate the DRP for any reason upon ten-days’ notice to participants, except that the Company could not amend the DRP to eliminate a participant’s ability to withdraw from the DRP. On March 15, 2018, the Company’s board of directors determined to terminate the DRP effective April 2, 2018, after the issuance of shares with respect to the distributions declared for the month of March 2018.
From inception through April 2, 2018, the Company raised gross proceeds of $327,073 pursuant to the DRP.
Distributions
Distributions to stockholders are declared quarterly by the board of directors of the Company and, for the nine months ended September 30, 2017, were paid monthly based on a daily amount of $0.000273973 per Class A Share and Class I Share, and $0.000273973 per Class T Share less the distribution fees that are payable with respect to such Class T Shares, which was equivalent to an annualized distribution amount of $0.10 per share of the Company’s common stock, less the distribution fee on Class T Shares. Cash distribution rates per share are not adjusted for the retroactive impact of the stock distributions issued in January and May 2017.
From October 1, 2017 through June 30, 2018, distributions were paid monthly based on a daily amount of $0.000753425 per share of common stock, less the distribution fees that are payable with respect to Class T Shares, which was equivalent to an annualized distribution amount of $0.275 per share of the Company’s common stock, less the distribution fee on Class T Shares.
On May 10, 2018, the board of directors of the Company approved a daily cash distribution of $0.000753425 per share of common stock for each of the three months ended September 30, 2018.
Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution has accrued.
The following table presents distributions declared for the six months ended June 30, 2018:
 
Distributions(1)
Period
Cash
 
DRP
 
Total
2018
 
 
 
 
 
January
$
38,786

 
$
48,249

 
$
87,035

February
35,592

 
44,174

 
79,766

March
40,576

 
48,594

 
89,170

April
103,420

 

 
103,420

May
106,683

 

 
106,683

June
103,241

 

 
103,241

Total
$
428,298

 
$
141,017

 
$
569,315

_______________________________________
(1)
Represents distributions declared for such period, even though such distributions are actually paid to stockholders the month following such period.
Share Repurchase Program
The Company adopted a share repurchase program that may enable stockholders to sell their shares to the Company in limited circumstances (the “Share Repurchase Program”). The Company may not repurchase shares unless a stockholder has held shares for one year. However, the Company may repurchase shares held less than one year in connection with a stockholder’s death or disability (as disability is defined in the Internal Revenue Code) and after receiving written notice from the stockholder or the stockholder’s estate. The Company is not obligated to repurchase shares pursuant to the Share Repurchase Program. The Company may amend, suspend or terminate the Share Repurchase Program at its discretion at any time, subject to certain notice requirements.
Stock Distributions
In April 2016, the board of directors of the Company approved a special stock distribution to all common stockholders of record on the close of business on the earlier of: (a) the date by which the Company raises $100 million pursuant to the Offering and (b)


21

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

December 31, 2016. On January 4, 2017, the Company issued the stock distribution to stockholders of record as of December 31, 2016 in the amount of 38,293, 14,816 and 3,676 Class A Shares, Class T Shares and Class I Shares, respectively, based on 5.0% of the outstanding shares of each share class. On December 31, 2016, the Company reduced its retained earnings by the par value of the Class A Shares, Class T Shares and Class I Shares declared to be issued or $383, $148 and $37, respectively.
In November 2016, the board of directors of the Company authorized an additional special stock distribution to all stockholders of record of Class A Shares, Class T Shares and Class I Shares on the close of business on the earlier of: (a) the date on which the Company raises $25 million from the sale of shares pursuant to the Offering or (b) a date determined in the Company’s management’s discretion, but in any event no earlier than January 1, 2017 and no later than December 31, 2017, in an amount equal in value to 10.0% of the current gross offering price of each issued and outstanding Class A Share, Class T Share and Class I Share on the applicable date. The Company received and accepted subscriptions in the Offering in an aggregate amount in excess of $25 million on May 16, 2017, which became the record date. On May 22, 2017, the Company issued the stock distribution to stockholders of record as of May 16, 2017 in the amount of 133,341, 130,752 and 8,672 Class A Shares, Class T Shares and Class I Shares, respectively. In May 2017, the Company reduced its retained earnings by the par value of the Class A Shares, Class T Shares and Class I Shares declared to be issued or $1,333, $1,308 and $87, respectively.
No selling commissions or dealer manager fees were paid in connection with the shares issued from the special stock distributions.
8.
Non-controlling Interest
Operating Partnership
Non-controlling interest includes the special limited partnership interest in the Operating Partnership held by the Special Unit Holder and is recorded as its non-controlling interest on the consolidated balance sheets as of June 30, 2018 and December 31, 2017. Income (loss) attributable to the non-controlling interest is based on the Special Unit Holder’s share of the Operating Partnership’s income (loss) and was a de minimis amount for the three and six months ended June 30, 2018 and 2017.
Other
Other non-controlling interest represents third party equity interest in ventures that are consolidated within the Company’s financial statements. Net income attributable to the other non-controlling interest holders was $183,780 and $443,342 for the three and six months ended June 30, 2018, respectively. Net income attributable to the other non-controlling interest holders was $82,437 for the three and six months ended June 30, 2017.
9.
Fair Value
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1.
Quoted prices for identical assets or liabilities in an active market.
Level 2.
Financial assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets.
b)
Quoted prices for identical or similar assets or liabilities in non-active markets.
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.


22

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Level 3.
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Investments for which fair value is measured using the NAV as a practical expedient are not categorized within the fair value hierarchy.
Assets Measured at Fair Value on a Recurring Basis
The following is a description of the valuation technique used to measure fair value of assets accounted for at fair value on a recurring basis and the general classification of the investment pursuant to the fair value hierarchy.
Investment in Unconsolidated Venture
The Company accounts for its equity investment in 1285 AoA through an unconsolidated venture at fair value based upon its share of the NAV of the underlying investment companies (the “1285 Investment Companies”). The Company continuously reviews the NAV provided by the 1285 Investment Companies, which were created solely for the purpose of pooling investor capital to invest in the 1285 AoA property. There is no active market for the Company’s ownership interest in the 1285 Investment Companies and any sale of the Company’s ownership interests is generally restricted and subject to approval by the general partner of the 1285 Investment Companies. Distributions from 1285 AoA will generally be received on a monthly basis.
As of June 30, 2018, the fair value of the Company’s investment in an unconsolidated venture was $5.4 million. As the Company utilizes NAV to determine fair value as a practical expedient, the Company will not present its investment in 1285 AoA within the fair value hierarchy.
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets as of June 30, 2018 and December 31, 2017:
 
June 30, 2018 (Unaudited)
 
December 31, 2017
 
Principal Amount
 
Carrying Value
 
Fair Value
 
Principal Amount
 
Carrying Value
 
Fair Value
Financial assets:(1)
 
 
 
 
 
 
 
 
 
 
 
Real estate debt investments(2)(3)
$
35,000,000

 
$
34,861,111

 
$
35,000,000

 
$
35,000,000

 
$
34,827,778

 
$
35,000,000

_______________________________________
(1)
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
(2)
Includes a $15.0 million mezzanine loan interest acquired through joint ventures with affiliates of RXR and an unaffiliated third party. The Company’s proportionate interest of the loan is 63.3%, representing $9.5 million of the principal amount. The Company consolidates the investment and records a non-controlling interest for the ownership of RXR and the unaffiliated third party.
(3)
Includes a $20.0 million mezzanine loan interest, net of unamortized origination fee, originated through a joint venture with an affiliate of RXR. The Company’s proportionate interest of the loan is 95.0%, representing $19.0 million of the principal amount. The Company consolidates the investment and records a non-controlling interest for the ownership of RXR.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Real Estate Debt Investments
For the CRE debt investments, fair values were determined: (i) by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment; or (ii) based on discounted cash flow projections of principal and interest expected to be collected, which includes consideration of the financial standing of the borrower or sponsor as well as operating results of the underlying collateral. As of the reporting date,


23

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

the Company believes the principal amount approximates fair value. These fair value measurements of CRE debt are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.
10.
Segment Reporting
The Company currently conducts its business through the following three segments, which are based on how management reviews and manages its business:
Commercial Real Estate Debt - CRE debt investments may include subordinate loans and participations in such loans and preferred equity interest.
Commercial Real Estate Equity - CRE equity investments will primarily be high-quality commercial real estate concentrated in the New York metropolitan area with a focus on office and mixed-use properties and a lesser emphasis on multifamily properties. These investments may include direct and indirect ownership in real estate and real estate assets that may or may not be structurally senior to a third party partner’s equity.
Corporate - The corporate segment includes corporate level asset management and other fees - related party and general and administrative expenses.
The presentation of the Company’s segment reporting includes investments held directly or indirectly through joint ventures.
The following tables present selected results of operations of the Company’s segments for the three and six months ended June 30, 2018 and 2017:
Three Months Ended June 30, 2018
 
Real Estate Debt
 
Real Estate Equity
 
Corporate
 
Total
Interest income
 
$
999,825

 
$

 
$

 
$
999,825

Other income
 

 

 
14,531

 
14,531

General and administrative expenses
 

 

 
(126,221
)
 
(126,221
)
Asset management and other fees - related party
 

 

 
(98,827
)
 
(98,827
)
Income (loss) before equity in earnings (losses) of unconsolidated venture
 
999,825

 

 
(210,517
)
 
789,308

Equity in earnings (losses) of unconsolidated venture
 

 
44,755

 

 
44,755

Net income (loss)
 
$
999,825

 
$
44,755

 
$
(210,517
)
 
$
834,063

Three Months Ended June 30, 2017
 
Real Estate Debt
 
Real Estate Equity
 
Corporate
 
Total
Interest income
 
$
239,496

 
$

 
$

 
$
239,496

Other income
 

 

 
23,435

 
23,435

General and administrative expenses
 
(1,935
)
 

 
(75,061
)
 
(76,996
)
Asset management and other fees - related party
 

 

 
(42,389
)
 
(42,389
)
Transaction costs
 
(105,620
)
 

 

 
(105,620
)
Income (loss) before equity in earnings (losses) of unconsolidated venture
 
131,941

 

 
(94,015
)
 
37,926

Equity in earnings (losses) of unconsolidated venture
 

 
44,666

 

 
44,666

Net income (loss)
 
$
131,941

 
$
44,666

 
$
(94,015
)
 
$
82,592



24

NORTHSTAR/RXR NEW YORK METRO REAL ESTATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Six Months Ended June 30, 2018
 
Real Estate Debt
 
Real Estate Equity
 
Corporate
 
Total
Interest income
 
$
1,975,405

 
$

 
$

 
$
1,975,405

Other income
 

 

 
35,761

 
35,761

General and administrative expenses
 

 

 
(332,200
)
 
(332,200
)
Asset management and other fees - related party
 

 

 
(187,238
)
 
(187,238
)
Transaction costs
 
(10,696
)
 

 

 
(10,696
)
Income (loss) before equity in earnings (losses) of unconsolidated venture
 
1,964,709

 

 
(483,677
)
 
1,481,032

Equity in earnings (losses) of unconsolidated venture
 

 
89,911

 

 
89,911

Net income (loss)
 
$
1,964,709

 
$
89,911

 
$
(483,677
)
 
$
1,570,943

Six Months Ended June 30, 2017
 
Real Estate Debt
 
Real Estate Equity
 
Corporate
 
Total
Interest income
 
$
239,496

 
$

 
$

 
$
239,496

Other income
 

 

 
27,735

 
27,735

General and administrative expenses
 
(1,935
)
 

 
(153,487
)
 
(155,422
)
Asset management and other fees - related party
 

 

 
(72,757
)
 
(72,757
)
Transaction costs
 
(105,620
)
 

 

 
(105,620
)
Income (loss) before equity in earnings (losses) of unconsolidated venture
 
131,941

 

 
(198,509
)
 
(66,568
)
Equity in earnings (losses) of unconsolidated venture
 

 
449,827

 

 
449,827

Net income (loss)
 
$
131,941

 
$
449,827

 
$
(198,509
)
 
$
383,259

The following table presents total assets by segment as of June 30, 2018 and December 31, 2017:
Total Assets
 
Real Estate Debt
 
Real Estate Equity
 
Corporate(1)
 
Total
June 30, 2018 (Unaudited)
 
$
35,317,126

 
$
5,388,650

 
$
5,923,063

 
$
46,628,839

December 31, 2017
 
35,089,312

 
5,388,487

 
10,894,066

 
51,371,865

_______________________________________
(1)
Includes cash and cash equivalents, unallocated receivables, and other assets, net.
11.
Subsequent Events
Distributions
On August 9, 2018, the board of directors of the Company approved a daily cash distribution of $0.000753425 per share of common stock for each of the three months ended December 31, 2018. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.
Share Repurchases
From July 1, 2018 through August 9, 2018, the Company repurchased 34,801 shares for a total of $295,861 or a weighted average price of $8.49 per share under the Share Repurchase Program that enables stockholders to sell their shares to the Company in certain circumstances, including death or a qualifying disability. The Company generally funds repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from its DRP, but may fund additional repurchase requests with any available capital sources.
Repayments
In August 2018, the Company received $9.4 million related to the repayment of a CRE debt investment. Refer to Note 4, “Real Estate Debt Investments” for additional information.



25


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Item 1. “Financial Statements” and risk factors in Part II, Item 1A. “Risk Factors” of this report. References to “we,” “us” or “our” refer to NorthStar/RXR New York Metro Real Estate, Inc. and its subsidiaries unless the context specifically requires otherwise.
Introduction
We were formed to acquire a high-quality commercial real estate, or CRE, portfolio concentrated in the New York metropolitan area, and in particular New York City, with a focus on office, mixed-use properties and a lesser emphasis on multifamily properties. We were formed on March 21, 2014 as a Maryland corporation and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with our taxable year ended December 31, 2016.
We are externally managed and have no employees. Prior to January 11, 2017, we were managed by an affiliate of NorthStar Asset Management Group Inc., or NSAM. Effective January 10, 2017, NSAM completed its merger with Colony Capital, Inc., NorthStar Realty Finance Corp., or NorthStar Realty, and Colony NorthStar, Inc., or Colony NorthStar, a wholly-owned subsidiary of NSAM, which we refer to as the mergers, with Colony NorthStar surviving the mergers and succeeding NSAM as one of our co-sponsors. As a result of the mergers, Colony NorthStar became an internally-managed equity REIT, with a diversified real estate and investment management platform and publicly-traded on the New York Stock Exchange, or NYSE. Effective June 25, 2018, Colony NorthStar changed its name to Colony Capital, Inc., or Colony Capital, and its ticker symbol on the NYSE from “CLNS” to “CLNY.” CNI NS/RXR Advisors, LLC, or our Advisor, is a subsidiary of Colony Capital. Our Advisor manages our day-to-day operations pursuant to an advisory agreement.
Colony Capital manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies. As of June 30, 2018, Colony Capital had approximately $43.0 billion of assets under management, including Colony Capital’s balance sheet investments and third party managed investments.
We are sub-advised by RXR NTR Sub-Advisor LLC, or our Sub-advisor, a Delaware limited liability company and a subsidiary of our other co-sponsor, RXR Realty LLC, or RXR. RXR is a New York-based, approximately 500-person vertically integrated real estate operating and development company with expertise in a wide array of value creation activities, including distressed investments, uncovering value in complex transactions, structured finance investments and real estate development. RXR’s core growth strategy is focused on New York City and the surrounding region. As of June 30, 2018, the RXR platform manages 75 commercial real estate properties and investments with an aggregate gross asset value of approximately $18.1 billion, comprising approximately 25.5 million square feet of commercial properties, inclusive of a multifamily residential portfolio of approximately 2,600 units under operation or development, and control of development rights for an additional approximately 3,600 multifamily and for sale units in the New York metropolitan area. Gross asset value is compiled by RXR in accordance with its fair value measurement policy and is comprised of capital invested by RXR and its partners, as well as leverage.
We, our Advisor and our Sub-advisor entered into a sub-advisory agreement delegating certain investment responsibilities of our Advisor to our Sub-advisor. Our Advisor and Sub-advisor are collectively referred to as the Advisor Entities. Colony Capital and RXR are each referred to as a Co-sponsor and collectively as our Co-sponsors.
On March 28, 2014, as part of our formation, we issued 16,667 shares of common stock to a subsidiary of Colony Capital, and 5,556 shares of common stock to a subsidiary of RXR for $0.2 million, all of which were subsequently renamed Class A common stock, or the Class A Shares. On February 9, 2015, our registration statement on Form S-11 with the U.S. Securities and Exchange Commission, or SEC, was declared effective to offer a minimum of $2.0 million and a maximum of $2.0 billion in shares of common stock in a continuous, public offering, of which up to $1.8 billion was offered pursuant to our primary offering, or Primary Offering, at a purchase price of $10.1111 per Class A Share and $9.5538 per share of Class T common stock, or the Class T Shares, and up to $200.0 million pursuant to our distribution reinvestment plan, or our DRP, at a purchase price of $9.81 per Class A Share and $9.27 per Class T Share.
On December 23, 2015, we commenced operations by satisfying our minimum offering requirement in our Primary Offering as a result of a subsidiary of Colony Capital and RXR purchasing $1.5 million and $0.5 million in Class A Shares, respectively.
On August 22, 2016, we filed a post-effective amendment to our registration statement that reclassified our common stock offered pursuant to the registration statement into Class A Shares, Class T Shares and shares of Class I common stock, or the Class I Shares. The SEC declared the post-effective amendment effective on October 26, 2016. Pursuant to the registration statement, as amended, we offered for sale up to $1.8 billion in shares of common stock at a price of $10.1111 per Class A Share, $9.5538 per Class T Share and $9.10 per Class I Share in the Primary Offering, and up to $200.0 million in shares under the DRP at a price


26


of $9.81 per Class A Share, $9.27 per Class T Share and $9.10 per Class I Share. The Primary Offering and the DRP are herein collectively referred to as the Offering. We retained NorthStar Securities, LLC, or NorthStar Securities, an affiliate of our Advisor and one of our Co-sponsors, to serve as the dealer manager, or our Dealer Manager, for our Primary Offering, and to market our shares offered pursuant to our Primary Offering.
In November 2016, our board of directors approved an extension of the Offering by one year to February 9, 2018. On February 2, 2018, we filed a registration statement on Form S-11 with the SEC for a follow-on public offering of up to $200.0 million in shares of our common stock, of which $150.0 million are to be offered pursuant to a primary offering and $50.0 million are to be offered pursuant to a distribution reinvestment plan. The follow-on offering has not yet been declared effective by the SEC and there can be no assurance that we will commence the follow-on offering.
On March 15, 2018, our board of directors determined to terminate our Primary Offering effective March 31, 2018 and our DRP effective April 2, 2018, after the issuance of shares with respect to the distributions declared for the month of March 2018. Following the termination of our Offering, we will continue to actively manage our portfolio. In addition, our board of directors has formed a special committee comprised of our three independent directors to explore strategic alternatives, including, among others, a capital raise, restructuring, merger, joint venture, disposition of some or all of our assets and other liquidity options. The special committee has engaged Venable LLP as its legal advisor in connection with the strategic review process. The formation of the special committee and its review of strategic alternatives reflects our board of directors’ continued commitment to act in our best interests and maximize stockholder value.
From inception through the termination of the Offering, we raised total gross proceeds of $40.7 million pursuant to our Offering, including gross proceeds of $327,073 pursuant to our DRP.
Our Investments
The following table presents our investments as of June 30, 2018, adjusted for repayments through August 9, 2018 (refer to the below and “Recent Developments”):
Investment Type
 
Count(1)
 
Principal Amount/ Gross Cost
 
% of Total Investments
Real estate equity
 

 
 
 
 
Operating real estate
 
 
 
 
 
 
Class-A office building
 
1
 
$
11,030,895

(2) 
36.7
%
 
 
 
 
 
 
 
CRE debt
 

 
 
 
 
Mezzanine loans
 
1
 
19,000,000

(3) 
63.3
%
Total
 
2
 
$
30,030,895

 
100.0
%
_______________________________________
(1)
For real estate equity, the count represents the number of properties. For CRE debt, the count represents the number of respective financial instruments.
(2)
Represents our proportionate share of the gross purchase price (including financing), deferred costs and other assets underlying our investment in an unconsolidated venture.
(3)
Represents our proportionate share of the principal balance of our mezzanine loans. In August 2018, one of our mezzanine loans was repaid in full. Refer to “Recent Developments” for further discussion.
Commercial Real Estate Equity
Our Portfolio
As of June 30, 2018, our CRE equity investment portfolio consisted of an approximately 1.0% unconsolidated non-controlling interest in a 1.8 million square foot Class-A office building located at 1285 Avenue of the Americas, or 1285 AoA, in midtown Manhattan. The remainder of the building is owned by institutional investors and funds affiliated with our Co-sponsor, RXR. As of June 30, 2018, 1285 AoA was 100% occupied with a weighted average lease term of 10.1 years.
The following table presents our real estate property investment through an unconsolidated venture as of June 30, 2018:
Property Type
 
Number of Properties
 
Gross Cost(1)
 
Invested Equity
 
Carrying Value(2)
 
Capacity
 
Primary Locations
Class-A office building
 
1
 
$
11,030,895

 
$
4,297,842

 
$
5,388,650

 
1,790,570

square feet
 
New York, NY
_______________________________________
(1)
Represents our proportionate share of the gross purchase price (including financing), deferred costs and other assets underlying our investment in an unconsolidated venture.
(2)
Represents the fair value of our equity investment in the unconsolidated venture.


27


Commercial Real Estate Debt
Our Portfolio
Times Square Loan—In May 2017, we, through a subsidiary of NorthStar/RXR Operating Partnership, LP, or our Operating Partnership, completed the acquisition of a $9.5 million interest in a $15.0 million mezzanine loan through a joint venture with RXR Real Estate Value Added Fund - Fund III LP, or together with its parallel funds, VAF III, an affiliate of RXR who acquired a $0.5 million interest in the loan, and an unaffiliated third party, who originated the loan and retained the remaining $5.0 million interest in the loan. The loan is secured by a pledge of an ownership interest in a retail development project located in Times Square, New York. The loan bears interest at a floating rate of 9.25% over the one-month London Interbank Offered Rate, or LIBOR, and had an initial maturity in November 2017, with two one-year extension options available to the borrower. In September 2017, the borrower exercised its right to extend the term of the loan until November 2018. In August 2018, the borrower repaid the loan in full. Refer to “Recent Developments” for further discussion.
Jane Street Loan—In August 2017, we, through a subsidiary of our Operating Partnership, completed the origination of a $12.0 million pari passu interest in a $20.0 million mezzanine loan, secured by a pledge of an ownership interest in a luxury condominium development project located in the West Village of New York City. We completed the investment through a partnership with VAF III, which contributed the remaining $8.0 million of the loan origination. In February 2018, we, through a subsidiary of our Operating Partnership, completed the acquisition of an additional $7.0 million interest from VAF III, and now hold a $19.0 million interest in the loan. VAF III now holds the remaining $1.0 million interest in the loan. The loan bears interest at a floating rate of 9.5% over the one-month LIBOR, with a LIBOR ceiling of 1.5%. The loan had a 1.0% origination fee and has an initial term of three years, with two one-year extension options available to the borrower.
The following table presents a summary of our CRE debt investments as of June 30, 2018, adjusted for repayments through August 9, 2018 (refer to “Recent Developments”):
Investment Type:
 
Count
 
Principal
Amount(1)
 
Carrying
Value(2)
 
Spread
over
LIBOR(3)
Mezzanine loans
 
1
 
$
19,000,000

 
$
18,868,055

 
9.50
%
_______________________________________
(1)
Represents our proportionate share of the principal balance of our mezzanine loans.
(2)
Represents our proportionate share of the carrying value of our real estate debt investments, net of unamortized origination fee.
(3)
Represents weighted average spread over LIBOR, based on principal amount.
Sources of Operating Revenues and Cash Flows
We expect to primarily generate revenue from rental income and interest income. Rental and escalation income will be generated from our operating real estate for the leasing of space to various tenants. The leases will be for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases will be recognized on a straight-line basis over the term of the respective leases. Interest income will be generated from our CRE debt and securities investments. Additionally, we record equity in earnings for CRE investments which we may own through unconsolidated ventures.
Profitability and Performance Metrics
We calculate Funds from Operations, or FFO, as defined by the National Association of Real Estate Investment Trusts, or NAREIT, and Modified Funds from Operations, or MFFO, as defined by the Institute for Portfolio Alternatives, or IPA, to evaluate the profitability and performance of our business.


28


Outlook and Recent Trends
The U.S. economy continues to demonstrate positive underlying fundamentals, with moderate gross domestic product, or GDP, growth and improving employment conditions. The Federal Reserve’s June 2018 decision to raise the federal funds rate to a target 1.75%-2.00%, the highest in nearly a decade, reflects a consensus that the economic foundation driving the current expansion remains sound. Additionally, the labor market is effectively at full employment, fueling wage growth and consumer confidence. The Bureau of Economic Analysis released a third estimate of U.S. real gross domestic product indicating a 2.0% increase in the first quarter of 2018 and reaffirmed a 2.9% increase in the fourth quarter of 2017, driven by strong consumer spending, nonresidential fixed investment and exports. The 10-year Treasury note rate increased 0.11% in the second quarter of 2018 to 2.85% (source: Yahoo Finance), reflecting the market’s confidence that the stability of economic growth is outpacing fears about the longevity of the post crisis expansion.
The Tax Cuts and Jobs Act of 2017, reduced corporate and individual tax rates effective 2018 and reformed the tax code in a way not seen since former President Ronald Reagan’s tax cuts in 1981 and tax reform in 1986. Economists and market participants appear to believe these tax cuts will bolster continued economic growth. With major stock indexes near all-time highs and corporate earnings generally exceeding estimates, investor sentiment reflects increased confidence in the global economy. While some market participants believe that higher interest rates may potentially reduce investor demand in the broader commercial real estate market, we expect real estate prices and returns to remain attractive.
New York
We believe the New York real estate market remains poised for growth, due to a rising population and improving labor market. The U.S. Census Bureau’s most recent estimate indicates New York City’s population was approximately 8.5 million as of July 2016, which represents an increase of approximately 4.4% over the April 2010 decennial census, equaling a pace of growth not witnessed since the 1920’s. In 2017, New York City’s total employment reached an all-time high of 4.5 million non-farm jobs and continued to retain these jobs through the second quarter of 2018 (i.e., positions excluding agricultural, private household, non-profit organization and government jobs), having recovered all of the jobs lost in the last recession (source: New York State Department of Labor). New York City’s unemployment rate remained unchanged at 4.2% in the second quarter of 2018 (source: New York State Department of Labor).
We believe there is a renewed focus on infrastructure spending from all levels of government (federal, state and local), which may reinforce New York City’s competitive advantages and support continued private sector growth. New York City is undergoing a large-scale transformation through significant public investments in its infrastructure, including the opening of the first subway expansion funded by the City of New York in 60 years, the connection of the Long Island Railroad with Grand Central Terminal and major improvements to local bridges, tunnels, harbors and airports. New York City also has a number of “shovel ready” projects poised to attract investment, including the redevelopment of LaGuardia Airport and the proposed redevelopment of John F. Kennedy Airport. These activities are anticipated to support a growing opportunity for private sector players to participate in public private partnerships to advance both public infrastructure projects and social infrastructure projects (i.e., projects relating to the infrastructure of universities, hospitals and others with similar, publicly-focused missions). We believe that real estate investors with regional investment expertise and long-standing local relationships, including with local governments and institutions, as well as access to capital and an ability to execute complex projects, will have a competitive advantage in sourcing and executing a variety of real estate transactions. We believe the combination of population growth, the expanding labor market and public infrastructure spending may reinforce New York City’s competitive advantages and support continued private sector growth.
Office & Residential Markets
We believe the New York City office market is in a state of equilibrium and the New York metropolitan area will remain a strong market for commercial real estate investing in the United States. Manhattan experienced strong new office leasing activity in the second quarter of 2018, but recorded an overall vacancy rate of 9.2%, a 0.5% increase from the first quarter of 2018 due to the completion of Three World Trade Center, the first major office delivery of 2018 in Manhattan (brought approximately 1.6 million square feet of office space to the market). Manhattan’s new leasing activity reached 9.3 million square feet, marking only the third time quarterly leasing exceeded 9.0 million square feet, and net absorption was 4.2 million square feet due to above-average leasing across all major sub-markets (source: Cushman & Wakefield Manhattan Marketbeat Q2 2018 Report). It is anticipated a total of 5.7 million square feet of new construction will be delivered to the market in 2018. However, we expect that this new supply will be absorbed by strong leasing activity, continued private sector job growth, the creation of new office-using jobs, as well as the conversion of obsolete buildings to alternate uses.
New York City’s multifamily market fundamentals include limited rental and sales inventory and low vacancies. Combined with a growing population and employment base, these factors have increased upward pressure on rental rates and property values. According to Marcus & Millichap, high prices for single-family homes are driving the vast majority of new households to opt for


29


rental housing; the overall vacancy rate in the New York City area decreased slightly to 2.2% in the second quarter of 2018. We believe tight vacancy will continue to persist given the peak in new supply in 2017, however individual sub-markets may experience temporary upticks in vacancy as newly built projects lease up. As the pace of construction and newly built projects subside, we believe high demand neighborhoods along commuter routes have the greatest potential for reacceleration of rent growth. These continued sound leasing fundamentals highlight the strength of New York City’s real estate market, which we expect will continue to outperform other major cities. We believe that these dynamics continue to create compelling investment and redevelopment opportunities for experienced and well-connected local owners and operators.
Following a historically weak investment sales market in 2017, Manhattan experienced a strong increase in investment sales totaling approximately $14.3 billion in the first half of 2018, a 42.4% increase from the first half of 2017 (source: Cushman & Wakefield), as sellers became increasingly willing to negotiate with buyers to reign in some of the bid/ask spread.
Private Equity & Debt Markets
Despite access to funding, the real estate private equity market faces challenges finding attractive investment opportunities. We believe this could benefit Manhattan investment sales; despite high prices, real estate funds have a combined $244.0 billion in capital to invest according to Preqin, putting heavy weight on new equity. As a result, we are beginning to see pension fund executives begin to decrease their return expectations for this asset class. Nevertheless, pension funds, endowments and other institutions have not lost their appetite for commercial property—allocations are still strong and there remains a robust demand for hard assets. In fact, according to a recent global institutional investor survey published by the European Association for Investors in Non-listed Real Estate Vehicles (INREV), Asian Association for Investors in Non-listed Real Estate Vehicles (ANREV) and Pension Real Estate Association (PREA) suggests continued positive sentiment toward real estate in general, and non-listed real estate in particular. According to the survey (published in January 2018), 56% of global investors plan to increase their exposure to real estate over the next 24 months (source: Property Funds World). We believe these dynamics continue to support robust pricing in Manhattan and the surrounding markets, and are contributing to the increased investment sales activity witnessed in 2018.
The CMBS market expanded in the first half of the year, issuing an aggregate $40.5 billion of debt compared to $35.7 billion in the same period last year (source: Commercial Mortgage Alert). Initial worries concerning new retention rules subsided and market activity increased. Construction lending continues to be increasingly difficult in 2018 as banks struggle with post financial crisis-era regulatory requirements that generally have resulted in a more conservative lending posture, particularly with respect to condominium construction financing. The mentality of commercial banks has been to limit new construction loans to the best sponsors (who have a track record of successfully doing business), in the best locations, with a conservative loan structure. This has made it increasingly difficult for the run-of-the-mill borrower to obtain low interest rate financing at moderate leverage. The projects that are being financed by commercial banks are limited to those with proximity to a commuter train station providing easy access to New York City, high end finishes, luxury amenities and a walkable thriving downtown providing a diversified mix of restaurants, shops and bars.
Alternative lenders are moving to fill in the gap, providing financing options not offered by banks, albeit at a significant premium in pricing and generally with more recourse. Many alternative lenders now can lend on cash flowing assets, transitional assets and ground up construction. We have observed that most alternative lenders are targeting the value-add space but are still driven by credit metrics, and as a result, do not take abnormal credit risk. Given the market experience and depth of our Advisors Entities’ teams, we have the skill to evaluate credit differently by underwriting the real estate to mitigate the lending risk. Additionally, we believe the real estate development and operating expertise of our Sub-advisor, provides us with the capability to add value to a project that we lend on in ways that a typical lender cannot.
Our Strategy
In light of the challenges we have faced raising capital, it has proven difficult for us to implement our investment strategy and build a diverse portfolio of high-quality commercial real estate in the New York metropolitan area.  As a result, our board of directors has formed a special committee comprised of our three independent directors to explore strategic alternatives, including, among others, a capital raise, restructuring, merger, joint venture, disposition of some or all of our assets and other liquidity options. The special committee has engaged Venable LLP as its legal advisor in connection with the strategic review process. The formation of the special committee and its review of strategic alternatives reflects our board of directors’ continued commitment to act in our best interests and maximize stockholder value. In the interim, we will continue to actively manage our small, but high quality portfolio of investments in an effort to preserve, protect and return stockholders’ capital and to pay current income through cash distributions.


30


The following table presents our investment activity for the six months ended June 30, 2018 and from inception through August 9, 2018:
 
 
Six Months Ended
 
From Inception through
Investment Type:
 
June 30, 2018
 
August 9, 2018
Real estate equity(1)
 
$

 
$
11,030,895

CRE debt(2)
 
7,000,000

 
28,500,000

Total
 
$
7,000,000

 
$
39,530,895

_______________________________________
(1)
Represents our proportionate share of the gross purchase price (including financing), deferred costs and other assets underlying our investment in an unconsolidated venture.
(2)
Represents our proportionate share of the principal amount of our mezzanine loan investments.
Financing Strategy
Although we will have a limitation on the maximum leverage for our portfolio, which approximates 75% of the aggregate cost of our assets (including cash and cash equivalents and excluding indirect leverage held through our unconsolidated joint venture investments), other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation, we do not have a targeted debt-to-equity ratio on an asset-by-asset basis, as we believe the appropriate leverage for the particular assets we finance depends on the specific credit characteristics of each asset. We may use leverage for the sole purpose of financing our investments and diversifying our equity and we will not employ leverage to speculate on changes in interest rates. We also may seek assignable financing when available. As of June 30, 2018, we had fully invested the proceeds of our Offering and had not incurred any leverage.
Our financing strategy for our debt and securities investments will be dependent on our ability to obtain match-funded borrowings at rates that provide a positive net spread, generally using credit facilities and securitization financing transactions.
Portfolio Management
Our Advisor Entities maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management and servicing team, regular management meetings and an exhaustive quarterly credit review process. These processes are designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. For our joint venture investments, we rely on affiliates of our Sub-advisor to provide certain asset management, property management and/or other services in managing our joint investments. Nevertheless, we cannot be certain that our Advisor Entities’ review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these credit reviews. Our Advisor Entities, under the direction of the investment committee, use many methods to actively manage our asset base to preserve our income and capital. Credit risk management is the ability of our Advisor Entities to manage our assets in a manner that preserves principal/cost and income and minimizes credit losses that could decrease income and portfolio value. For real estate equity and CRE debt investments, frequent re-underwriting and dialogue with borrowers/partners and regular inspections of our collateral and owned properties have proven to be an effective process for identifying issues early. During the quarterly credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible loan loss reserves/asset impairment, as appropriate, based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. Our Advisor Entities use an experienced portfolio management and servicing team that monitors these factors on our behalf.
Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that its carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including real estate sector conditions, together with asset and market specific circumstances among other factors.
Each of our debt investments is secured by CRE collateral and requires customized portfolio management and servicing strategies for dealing with potential credit situations. The business plan may necessitate a lease reserve or interest or other reserves, whether through proceeds from our loans, borrowings, offering proceeds or otherwise, to support lease payments or debt service and capital expenditures during the implementation of the business plan. There may also be a requirement for the borrower, tenant/operator, guarantor or us, to refill these reserves should they become deficient during the applicable period for any reason.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect


31


the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There have been no material changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Recent Accounting Pronouncements
For recent accounting pronouncements, refer to Note 2, “Significant Accounting Policies” in our accompanying consolidated financial statements included in Part I Item 1. “Financial Statements.”
Results of Operations
Comparison of the Three Months Ended June 30, 2018 to June 30, 2017:
 
 
Three Months Ended June 30,
 
Increase (Decrease)
 
 
2018
 
2017
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
 
Interest income
 
$
999,825

 
$
239,496

 
$
760,329

 
317.5
 %
Other income
 
14,531

 
23,435

 
(8,904
)
 
(38.0
)%
Total revenues
 
1,014,356

 
262,931

 
751,425

 
285.8
 %
Expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
126,221

 
76,996

 
49,225

 
63.9
 %
Asset management and other fees - related party
 
98,827

 
42,389

 
56,438

 
133.1
 %
Transaction costs
 

 
105,620

 
(105,620
)
 
(100.0
)%
Total expenses
 
225,048

 
225,005

 
43

 
 %
Income (loss) before equity in earnings (losses) of unconsolidated venture
 
789,308

 
37,926

 
751,382

 
1,981.2
 %
Equity in earnings (losses) of unconsolidated venture
 
44,755

 
44,666

 
89

 
0.2
 %
Net income (loss)
 
$
834,063

 
$
82,592

 
$
751,471

 
909.9
 %
Revenues
Interest income
Interest income represents income earned on CRE debt investments acquired and originated during the second and third quarters of 2017, respectively.
Other income
Other income is earned from cash invested in highly-liquid investments with a maturity of three months or less.
Expenses
Transaction Costs
Transaction costs represent costs such as professional fees associated with new investments and transactions. Transaction costs of $0.1 million for the three months ended June 30, 2017 are a result of costs associated with our investment in the Times Square Loan.
General and Administrative Expenses
General and administrative expenses are incurred at the corporate level and include auditing and professional fees, director fees, and other costs associated with operating our business which are primarily paid by our Advisor Entities on our behalf in accordance with our advisory and sub-advisory agreements. The reimbursable operating expenses increased in 2018 as a result of higher average invested assets.
Asset Management and Other Fees - Related Party
Asset management and other fees - related party increased approximately $56,000 from the three months ended June 30, 2017 to June 30, 2018 as a result of a higher level of invested assets.


32


Equity in Earnings (Losses) of Unconsolidated Venture
Equity in earnings of unconsolidated venture for the three months ended June 30, 2018 represents dividends received of approximately $48,000 and a decrease in the fair value of our unconsolidated investment of approximately $4,000. Equity in earnings of unconsolidated venture for the three months ended June 30, 2017 includes dividends received of approximately $48,000 and a decrease in the fair value of our unconsolidated investment of approximately $3,000.
Comparison of the Six Months Ended June 30, 2018 to June 30, 2017:
 
 
Six Months Ended June 30,
 
Increase (Decrease)
 
 
2018
 
2017
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
 
Interest income
 
$
1,975,405

 
$
239,496

 
$
1,735,909

 
724.8
 %
Other income
 
35,761

 
27,735

 
8,026

 
28.9
 %
Total revenues
 
2,011,166

 
267,231

 
1,743,935

 
652.6
 %
Expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
332,200

 
155,422

 
176,778

 
113.7
 %
Asset management and other fees - related party
 
187,238

 
72,757

 
114,481

 
157.3
 %
Transaction costs
 
10,696

 
105,620

 
(94,924
)
 
(89.9
)%
Total expenses
 
530,134

 
333,799

 
196,335

 
58.8
 %
Income (loss) before equity in earnings (losses) of unconsolidated venture
 
1,481,032

 
(66,568
)
 
1,547,600

 
2,324.8
 %
Equity in earnings (losses) of unconsolidated venture
 
89,911

 
449,827

 
(359,916
)
 
(80.0
)%
Net income (loss)
 
$
1,570,943

 
$
383,259

 
$
1,187,684

 
309.9
 %
Revenues
Interest income
Interest income represents income earned on CRE debt investments acquired and originated during the second and third quarters of 2017, respectively.
Other income
Other income is earned from cash invested in highly-liquid investments with a maturity of three months or less.
Expenses
Transaction Costs
Transaction costs represent costs such as professional fees associated with new investments and transactions. Transaction costs of approximately $11,000 for the six months ended June 30, 2018 are a result of costs associated with our acquisition of a non-controlling interest in the Jane Street Loan. Transaction costs of $0.1 million for the six months ended June 30, 2017 are a result of costs associated with our investment in the Times Square Loan.
General and Administrative Expenses
General and administrative expenses are incurred at the corporate level and include auditing and professional fees, director fees, and other costs associated with operating our business which are primarily paid by our Advisor Entities on our behalf in accordance with our advisory and sub-advisory agreements. The reimbursable operating expenses increased in 2018 as a result of higher average invested assets.
Asset Management and Other Fees - Related Party
Asset management and other fees - related party increased approximately $114,000 from the six months ended June 30, 2017 to June 30, 2018 as a result of a higher level of invested assets.
Equity in Earnings (Losses) of Unconsolidated Venture
Equity in earnings of unconsolidated venture for the six months ended June 30, 2018 represents dividends received of approximately $90,000. Equity in earnings of unconsolidated venture for the six months ended June 30, 2017 includes dividends received of approximately $97,000 and an increase in the fair value of our unconsolidated investment of approximately $353,000.


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Liquidity and Capital Resources
We require capital to fund our investment activities, operating activities and to make distributions. Historically, we obtained the capital required to acquire and manage our CRE portfolio and conduct our operations from the proceeds of our Offering. We may access additional capital from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of August 9, 2018, we had $15.0 million of investable cash.
We raised substantially less than the maximum offering amount in our Offering. Because we raised substantially less than the maximum offering amount, we have made fewer investments resulting in less diversification in terms of the type, number and size of investments we have made and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we have certain fixed direct and indirect operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we were able to raise substantial funds in our Offering. Our inability to raise substantial funds increases our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions. As of June 30, 2018, we have only raised $40.7 million in the Offering and have only made three investments. The Primary Offering terminated on March 31, 2018 and the DRP terminated on April 2, 2018, after the issuance of shares with respect to distributions declared for March 2018. On February 2, 2018, we filed a registration statement on Form S-11 with the SEC for a follow-on offering of up to $200 million in shares. The follow-on offering has not yet been declared effective by the SEC and there can be no assurance that we will commence the follow-on offering or successfully sell the full number of shares registered.
We currently have no outstanding borrowings and no commitments from any lender to provide us with financing. Our charter limits us from incurring borrowings that would exceed 300% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by a majority of our independent directors. We would need to disclose any such approval to our stockholders in our next quarterly report along with the justification for such excess. An approximation of this leverage calculation, excluding indirect leverage held through our unconsolidated joint venture investments, is 75% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation.
In addition to making investments in accordance with our investment objectives, we use our capital resources to make certain payments to our Advisor Entities and our Dealer Manager. During our organization and offering stage, these payments included payments to our Dealer Manager for selling commissions, dealer manager fees and distribution fees and payments to our Dealer Manager and our Advisor Entities, or their affiliates, as applicable, for reimbursement of certain organization and offering costs. We expect to make payments to our Advisor Entities, or their affiliates, as applicable, in connection with the management of our assets and costs incurred by our Advisor Entities in providing services to us.
We elected to be taxed as a REIT and to operate as a REIT commencing with our taxable year ended December 31, 2016. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. Provided we have sufficient available cash flow, we intend to authorize and declare daily distributions and pay distributions on a monthly basis. We have not established a minimum distribution level.
Cash Flows
The following presents our consolidated statement of cash flows for the six months ended June 30, 2018 and 2017:
 
Six Months Ended June 30,
 
 
 
2018
 
2017
 
Change
Cash flow provided by (used in):
 
 
 
 
 
    Operating activities
$
1,601,603

 
$
(101,682
)
 
$
1,703,285

    Investing activities

 
(10,000,000
)
 
10,000,000

    Financing activities
(6,349,998
)
 
17,656,609

 
(24,006,607
)
Net increase (decrease) in cash and cash equivalents
$
(4,748,395
)
 
$
7,554,927

 
$
(12,303,322
)
Six Months Ended June 30, 2018 Compared to June 30, 2017
Operating Activities
Net cash provided by operating activities depends on numerous factors including the changes to interest income generated from our investments, distributions from our unconsolidated venture, fees paid to our Advisor Entities for the management of our investments, and general and administrative expenses. Net cash provided by operating activities increased by $1.7 million for


34


the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily as a result of increased invested assets generating higher interest income.
Investing Activities
Net cash used in investing activities of $10.0 million for the six months ended June 30, 2017, related to the acquisition of a CRE debt investment.