S-11/A 1 v475128_s11a.htm S-11/A

 

As filed with the Securities and Exchange Commission on October 12, 2017

 

Registration No. 333-217924

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 1 TO

FORM S-11

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

 

 

 

Phillips Edison Grocery Center REIT III, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

11501 Northlake Drive

Cincinnati, Ohio 45249

(513) 554-1110

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

 

 

 

Jeffrey S. Edison

Chief Executive Officer

Phillips Edison Grocery Center REIT III, Inc.

11501 Northlake Drive

Cincinnati, Ohio 45249

(513) 554-1110

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

 Tanya Brady, Esq.

Kevin O’Neil, Esq.

Phillips Edison & Company

222 S. Main Street, Suite 1730

Salt Lake City, Utah 84101

(801) 521-6970

Robert H. Bergdolt, Esq.

Andrew M. Davisson, Esq.

DLA Piper LLP (US)

4141 Parklake Avenue, Suite 300

Raleigh, North Carolina 27612

(919) 786-2000

 Howard S. Hirsch

Griffin Capital Company, LLC

Griffin Capital Plaza

1520 E. Grand Avenue

El Segundo, California 90245

(310) 469-6100

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after the effectiveness of the registration statement.

 

If any of the securities on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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  ¨ Accelerated filer  ¨  
Non-accelerated filer ¨ Smaller Reporting Company x  
(Do not check if smaller reporting company) Emerging Growth Company x  

 

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 7(a)(2)(B) of the Securities Act. x

 

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission and various states is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED October 12, 2017

 

 

CO-SPONSORED BY GRIFFIN CAPITAL COMPANY

 

Maximum Offering – $1,700,000,000 of Shares of Common Stock

 

 

 

Phillips Edison Grocery Center REIT III, Inc. is a recently formed Maryland corporation that intends to invest primarily in well-occupied grocery-anchored neighborhood and community shopping centers primarily leased to national and regional creditworthy tenants selling necessity-based goods and services in strong demographic markets throughout the United States. In addition, we may invest in other retail properties including power and lifestyle shopping centers, multi-tenant shopping centers, free-standing single-tenant retail properties and other real estate and real estate-related loans and securities depending on real estate market conditions and investment opportunities. We are an “emerging growth company” under federal securities laws.

 

We are offering up to an aggregate of $1,500,000,000 of shares of our Class T and Class I common stock in our primary offering. Class T shares are offered at $10.94 per share and Class I shares are offered at $10.00 per share. We are also offering up to an aggregate of $200,000,000 of shares of Class T, Class I and Class A common stock pursuant to our distribution reinvestment plan at a purchase price of $10.29 per share. This offering will terminate on or before __________, 2019 (unless extended by our board of directors for an additional year or as otherwise permitted by applicable securities law).

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 28 to read about risks you should consider before buying shares of our common stock. These risks include the following:

 

No public market currently exists for our shares of common stock, and our charter does not require our board of directors to provide our stockholders a liquidity event by a specified date or at all.
We set the offering prices of our shares arbitrarily. The offering prices are unrelated to the book or net value of our assets or to our expected operating income.
We commenced investment operations on December 19, 2016 in connection with the acquisition of our first property, and we have a limited operating history. Except as disclosed in a supplement to this prospectus, we have not identified any additional investments to make with proceeds from this offering, and we are therefore a “blind pool.”
Investors in this offering will experience immediate dilution in their investment primarily because, among other reasons, (i) we pay upfront fees in connection with the sale of our shares that reduce the proceeds to us, (ii) through October 11, 2017 we had sold approximately 2.6 million shares of our Class A common stock at an average purchase price of approximately $9.85 per share and received average net proceeds of approximately $9.00 per share in private transactions, and (iii) we paid certain organization and other offering expenses in connection with our private offering.
We are dependent on our advisor and its affiliates to select investments and conduct our operations and this offering.
We pay substantial fees and expenses to our advisor, its affiliates and broker-dealers, which payments increase the risk that you will not earn a profit on your investment.
Our executive officers and some of our directors face conflicts of interest.
If we are unable to raise substantial funds during our offering stage, we may not be able to acquire a diverse portfolio of real estate investments and the value of our stockholders’ investment may vary more widely with the performance of specific assets.
There are restrictions on the ownership and transferability of our shares of common stock.
Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our advisor. Distributions that exceed our net income or net capital gain will likely represent a return of capital as opposed to current income or gain, as applicable. During the early stages of our operations, we will likely fund distributions from sources that will be categorized as return of capital.
We may change our targeted investments without stockholder consent.
Some of the other programs sponsored by our sponsor have experienced adverse business developments or conditions.

 

None of the Securities and Exchange Commission, the Attorney General of the State of New York or any other state securities regulator has approved or disapproved of our common stock, determined if this prospectus is truthful or complete or passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense.

 

This investment involves a high degree of risk. You should purchase these securities only if you can afford a complete loss of your investment. The use of projections or forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from an investment in this offering is not permitted.

 

    Price
to Public(1)
    Selling
Commissions(2)
    Dealer
Manager Fee(2)
    Net Proceeds
(Before Expenses) (3)
 
Primary Offering                                
Per T Share   $ 10.94     $ 0.3283     $ 0.3283 (4)   $ 10.50  
Per I Share   $ 10.00     $ 0.00     $ 0.15 (4)   $ 10.00  
Total Maximum   $ 1,500,000,000     $ 40,500,000     $ 42,750,000 (4)   $ 1,446,000,000  
Distribution Reinvestment Plan                                
Per A Share   $ 10.29     $ 0.00     $ 0.00     $ 10.29  
Per T Share   $ 10.29     $ 0.00     $ 0.00     $ 10.29  
Per I Share   $ 10.29     $ 0.00     $ 0.00     $ 10.29  
Total Maximum   $ 200,000,000     $ 0.00     $ 0.00     $ 200,000,000  

 

(1) Volume and other discounts are available for some categories of investors. Reductions in commissions and fees will result in corresponding reductions in the purchase price.

(2) The maximum selling commissions and dealer manager fee assumes that 90% and 10% of the amount of common stock sold in the primary offering is Class T common stock and Class I common stock, respectively.

(3) In addition to selling commissions and the dealer manager fee, we will pay additional underwriting compensation to our dealer manager in the form of a quarterly stockholder servicing fee on the shares of Class T common stock sold in the primary offering. This fee is subject to certain limits and will accrue daily in an annual amount equal to 1.0% of the most recent purchase price per share of Class T common stock sold in the primary offering. See “Plan of Distribution.”

(4) Our dealer manager will receive dealer manager fees in the amounts of (i) 3.0% of the gross offering proceeds for sales of Class T shares and (ii) 1.5% of the gross offering proceeds for sales of Class I shares. For sales of Class T shares, 2/3 of the dealer manager fee will be funded by our advisor, and the remainder will be funded by us. For sales of Class I shares, all of the dealer manager fee will be funded by our advisor.

 

The dealer manager, Griffin Capital Securities, LLC, our affiliate, is not required to sell any specific number or dollar amount of shares but will use its best efforts to sell the shares offered. The minimum permitted purchase is $2,500. We have not established a minimum offering amount for this offering because, through October 11, 2017, we had raised approximately $25.6 million in gross offering proceeds from the sale of shares of our Class A common stock in private transactions.

 

The date of this prospectus is [__________].

 

 

 

 

Suitability Standards

 

The shares we are offering through this prospectus are suitable only as a long-term investment for persons of adequate financial means and who have no need for liquidity in this investment. Because there is no public market for our shares, you will have difficulty selling your shares.

 

In consideration of these factors, we have established suitability standards for investors in this offering and subsequent purchasers of our shares. These suitability standards require that a purchaser of shares have either:

 

·a net worth of at least $250,000; or

 

·gross annual income of at least $70,000 and a net worth of at least $70,000.

 

In addition, the states listed below have established suitability requirements that are more stringent than ours and investors in these states are directed to the following special suitability standards:

 

·Alabama – Investors residing in Alabama may not invest more than 10% of their liquid net worth in us and our affiliates.

 

·Idaho – Investors residing in Idaho must have either (a) a liquid net worth of $85,000 and annual gross income of $85,000 or (b) a liquid net worth of $300,000. Additionally, the total investment in us shall not exceed 10% of an investor’s liquid net worth.

 

· Iowa – Investors residing in Iowa must have either (a) an annual gross income of at least $100,000 and a net worth of at least $100,000, or (b) a net worth of at least $350,000 (net worth should be determined exclusive of home, auto and home furnishings); and (ii) Iowa investors must limit their aggregate investment in this offering and in the securities of other non-traded real estate investment trusts (REITs) to 10% of such investor's liquid net worth (liquid net worth should be determined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities). Investors who are accredited investors as defined in 17 C.F.R. § 230.501 of Regulation D under the Securities Act of 1933, as amended, are not subject to the foregoing 10% investment concentration limit.

 

· Kentucky – Investors residing in Kentucky may not invest more than 10% of their liquid net worth in the shares of our common stock or in any shares of common stock of affiliated non-publicly traded REITs.

 

· Maine – The Maine Office of Securities recommends that an investor's aggregate investment in this offering and similar direct participation investments not exceed 10% of the investor's liquid net worth.

 

· Massachusetts – Investors residing in Massachusetts may not invest more than 10% of their liquid net worth in us and in other illiquid direct participation programs.

 

· Missouri – Investors residing in Missouri may not invest more than 10% of their liquid net worth in our securities.

 

·Nebraska – Investors residing in Nebraska who do not meet the definition of “accredited investor” as defined in as defined in 17 C.F.R. § 230.501 of Regulation D under the Securities Act of 1933, as amended, must limit their aggregate investment in this offering and in the securities of other non-publicly traded REITs to 10% of their net worth.

 

· New Jersey - Investors residing in New Jersey must have either (a) a minimum liquid net worth of at least $100,000 and a minimum annual gross income of not less than $85,000, or (b) a minimum liquid net worth of $350,000. In addition, a New Jersey investor's investment in us, our affiliates, and other non-publicly traded direct investment programs (including real estate investment trusts, business development companies, oil and gas programs, equipment leasing programs and commodity pools, but excluding unregistered, federally and state exempt private offerings) may not exceed ten percent (10%) of his or her liquid net worth.

 

·New Mexico – Investors residing in New Mexico may not invest more than 10% of their liquid net worth in our shares, shares of our affiliates and other non-traded real estate investment trusts.

 

·Oregon – Investors residing in Oregon may not invest more than 10% of their liquid net worth, which consists of cash, cash equivalents, and readily marketable securities, in us.

 

·Tennessee – Investors residing in Tennessee may not invest more than 10% of their net worth (exclusive of home, home furnishings and automobiles) in our common stock.

 

· Pennsylvania – Because we do not have a minimum offering amount, Pennsylvania investors are cautioned to carefully evaluate our ability to fully accomplish our stated objectives and to inquire as to the current dollar volume of subscriptions. Please refer to the “Plan of Distribution—Special Notice to Pennsylvania Investors” section on page 215 of this prospectus.  Additionally, investors residing in Pennsylvania may not invest more than 10% of their net worth (exclusive of home, home furnishings and automobiles) in our common stock.

 

·Vermont – In addition to meeting the applicable suitability standards set forth above, each Vermont investor who is not an “accredited investor” as defined in 17 C.F.R. § 230.501 of Regulation D under the Securities Act of 1933, as amended, may not purchase an amount of shares in this offering that exceeds 10% of the investor’s liquid net worth. Vermont residents who are “accredited investors” as defined in 17 C.F.R. § 230.501 are not subject to the limitation described in this paragraph. For these purposes, "liquid net worth" is defined as an investor’s total assets (not including home, home furnishings, or automobiles) minus total liabilities.

 

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For purposes of determining the suitability of an investor, net worth in all cases should be calculated excluding the value of an investor’s home, home furnishings and automobiles. Except as otherwise stated above, liquid net worth is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities. In the case of sales to fiduciary accounts, these suitability standards must be met by the fiduciary account, by the person who directly or indirectly supplied the funds for the purchase of the shares if such person is the fiduciary or by the beneficiary of the account.

 

Our sponsors, those selling shares on our behalf and participating broker-dealers and registered investment advisors recommending the purchase of shares in this offering must make every reasonable effort to determine that the purchase of shares in this offering is a suitable and appropriate investment for each stockholder based on information provided by the stockholder regarding the stockholder’s financial situation and investment objectives. See “Plan of Distribution—Determination of Suitability” for a detailed discussion of the determinations regarding suitability that we require.

 

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TABLE OF CONTENTS

 

SUITABILITY STANDARDS i
Prospectus Summary 1
Risk Factors 28
Risks Related to an Investment in Us 28
Risks Related to Conflicts of Interest 31
Risks Related to This Offering and Our Corporate Structure 34
Risks Related to Investments in Real Estate 41
Risks Related to Real Estate-Related Investments 47
Risks Associated with Debt Financing 50
Federal Income Tax Risks 52
Retirement Plan Risks 56
Special Note Regarding Forward-Looking Statements 59
Estimated Use of Proceeds 60
Potential Market Opportunity 64
Management 69
Board of Directors 69
Executive Officers and Directors 70
Board Committees 72
Compensation of Directors 73
Board Participant 73
Limited Liability and Indemnification of Directors, Officers, Employees and Other Agents 73
Our Advisor 74
Investment Committee 75
The Advisory Agreement 75
Initial Investment by Our Advisor 79
Other Affiliates 79
Management Compensation 88
Stock Ownership 97
Conflicts of Interest 98
Our Affiliates’ Interests in Other Real Estate Programs 98
Receipt of Fees and Other Compensation by Our Advisor and its Affiliates 101
Fiduciary Duties Owed by Some of Our Affiliates to Our Advisor and Our Advisor’s Affiliates 102
Certain Conflict Resolution Measures 102
Investment Objectives and POLICIES 107
General 107
Grocery-Anchored Retail Properties Focus 108
Other Real Estate and Real Estate-Related Loans and Securities 108
Acquisition Policies 109
Borrowing Policies 112
Certain Risk Management Policies 113
Equity Capital Policies 113
Disposition Policies 113
Liquidity Strategy 114
Charter-Imposed Investment Limitations 114
Disclosure Policies with Respect to Future Probable Acquisitions 116
Investment Limitations Under the Investment Company Act of 1940 116
Changes in Investment Objectives and Policies 117
Plan of Operation 118
Prior Performance Summary 126
Prior Investment Programs Sponsored by Our Phillips Edison Sponsor 126
Prior Investment Programs Sponsored by Our Griffin Sponsor 130
Federal Income Tax Considerations 148
Taxation of Phillips Edison Grocery Center REIT III, Inc. 149

 

 iii 

 

 

Taxation of Domestic Stockholders 165
Taxation of Foreign Stockholders 166
Taxation of Tax-Exempt Stockholders 170
Backup Withholding and Information Reporting 171
Other Tax Considerations 172
ERISA Considerations 173
Prohibited Transactions 173
Plan Asset Considerations 174
Other Prohibited Transactions 176
Annual Valuation 176
New Fiduciary Rule 178
Description of Shares 179
General 179
Common Stock 179
Preferred Stock 181
Distributions 181
Restriction on Ownership of Shares 183
Transfer Agent and Registrar 185
Meetings and Special Voting Requirements 185
Advance Notice for Stockholder Nominations for Directors and Proposals of New Business 186
Inspection of Books and Records 186
Control Share Acquisitions 186
Business Combinations 187
Subtitle 8 188
Tender Offer by Stockholders 188
Distribution Reinvestment Plan 189
Share Repurchase Program 191
Restrictions on Roll-Up Transactions 194
The Operating Partnership Agreement 196
General 196
Description of Partnership Units 196
Management of the Operating Partnership 197
Indemnification 198
Extraordinary Transactions 198
Issuance of Additional Units 199
Capital Contributions 199
Distributions 199
Liquidation 200
Allocations 200
Operations 200
Limited Partner Exchange Rights 201
Special Limited Partner 201
Tax Matters 201
Term 202
Plan of Distribution 203
General 203
Compensation of Dealer Manager and Participating Broker-Dealers 203
Underwriting Compensation and Organization and Offering Expenses 204
Volume Discounts 208
Subscription Procedures 211
Determination of Suitability 211
Minimum Purchase Requirements 212
Special Notice to Pennsylvania Investors 212
How to Subscribe 213
Electronic delivery of documents 214

 

 iv 

 

 

Supplemental Sales Material 214
Legal Matters 214
Experts 214
Where You Can Find More Information 214
Index to Financial Statements F-1
Appendix A – Prior Performance Tables A-1
Appendix B – Form of Subscription Agreement B-1
Appendix C – Amended and Restated Distribution Reinvestment Plan C-1

 

 v 

 

 

Prospectus Summary

 

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including the information set forth in “Risk Factors,” for a more complete understanding of this offering. Except where the context suggests otherwise, the terms “we,” “us” and “our” refer to Phillips Edison Grocery Center REIT III, Inc. and its subsidiaries; “Operating Partnership” refers to our operating partnership, Phillips Edison Grocery Center Operating Partnership III, L.P.; “advisor” refers to PECO-Griffin REIT Advisor, LLC; “property manager” refers to Phillips Edison & Company Ltd.; “dealer manager” refers to Griffin Capital Securities, LLC; “Phillips Edison sponsor” refers to Phillips Edison Limited Partnership prior to October 4, 2017, and Phillips Edison Grocery Center REIT I, Inc. on and after October 4, 2017; “Griffin sponsor” refers to Griffin Capital Company, LLC; and “sponsor” or “sponsors” refer to one or both of our Phillips Edison sponsor and our Griffin sponsor.

 

 

 

What is Phillips Edison Grocery Center REIT III, Inc.?

 

We are a Maryland corporation incorporated on April 15, 2016. We were formed to leverage the expertise of our sponsors, and capitalize on the market opportunity to acquire and manage grocery-anchored neighborhood and community shopping centers located in strong demographic markets throughout the United States. We seek to acquire and manage grocery-anchored neighborhood and community shopping centers that are typically over 80% occupied, have a mix of national, regional and local tenants selling necessity-based goods and services, and are anchored by a leading grocery provider in the region, with the specific grocery store demonstrating solid sales performance. We intend to build a high-quality portfolio utilizing the following acquisition strategy:

 

·Grocery-Anchored Retail — We are focused on primarily acquiring well-occupied grocery-anchored neighborhood and community shopping centers serving the day-to-day shopping needs of the community in the surrounding trade area.

 

·National and Regional Tenants — We intend to acquire shopping centers primarily leased to national and regional retail tenants selling necessity-based goods and services to customers living in the local trade area.

 

·Diversification — We intend to own and operate a diversified grocery-anchored portfolio based on geography, industry, tenant mix and lease expirations, thereby mitigating risk.

 

·Infill Locations/Solid Markets — We intend to target properties in established or growing markets based on trends in population density, population growth, employment, household income, employment diversification, and other key demographic factors having higher barriers to entry, which we believe limit additional competition.

 

·Triple-Net Leases — We intend to negotiate leases we enter into to provide for, or acquire properties with leases that provide for, tenant reimbursements of operating expenses, real estate taxes and insurance, providing a level of protection against rising expenses.

 

Our strategy is to acquire, own and manage a high-quality, diverse, grocery-anchored shopping center portfolio, while maintaining a property-focused approach to maximize total returns to stockholders. We believe these goals will be supported by the following attributes of our company:

 

·Stable Income to Provide Consistent Distributions — We intend to acquire a portfolio with sustainable income, and expect that approximately 70% to 80% of such income will come from national and regional tenants. We expect that such sustainable income will fund monthly distributions to our stockholders at a rate consistent with our operating performance.

 

·Upside Potential — We seek to create value from a combination of the strategic leasing of portfolio vacancies, rental growth, creation of new revenue streams and strategic expense reduction, all leading to increased cash flow.

 

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·Low Leverage — We intend to utilize a prudent leverage strategy with an approximate 45% to 50% targeted loan-to-value ratio on our portfolio once we have invested substantially all of the net proceeds of this offering.

 

·Tenured Management with a National Platform — Our Phillips Edison sponsor’s seasoned team of professional managers has extensive retail industry expertise and established tenant relationships. Accordingly, we expect that team to provide reliable execution of our acquisition and operating strategies through its national operating and leasing platform.

 

·Property Focus — We intend to utilize a property-specific operational focus that combines intensive leasing and merchandising plans with cost containment measures to deliver a more solid and stable income stream from each property.

 

·Liquidity Strategy — We anticipate listing our shares on a national securities exchange, merging, reorganizing or otherwise transferring our company or its assets to another entity that has listed securities, commencing the sale our properties and liquidation of our company, conducting an “NAV” offering and providing increased capacity to repurchase shares through our share repurchase program or otherwise creating a liquidity event for our stockholders subject to then-existing market conditions and the sole discretion of our board of directors after the completion of our primary offering.

 

We commenced investment operations on December 19, 2016 in connection with the acquisition of our first property. As of the date of this prospectus, we own one grocery-anchored shopping center located in St. Cloud, Florida. However, except as disclosed in a supplement to this prospectus, we have not yet identified any additional assets to acquire with the proceeds from this offering. Therefore, we are considered a “blind pool.” We are also considered an “emerging growth company” under federal securities laws.

 

Our external advisor, PECO-Griffin REIT Advisor, LLC, conducts our operations and manages our portfolio of real estate investments, all subject to the supervision of our board of directors. We have no paid employees.

 

Our offices are located at 11501 Northlake Drive, Cincinnati, Ohio 45249. Our telephone number is (513) 554-1110, and our web site address is www.grocerycenterREIT3.com.

 

 

 

What is a REIT?

 

We intend to qualify as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2017. In general, a REIT is an entity that:

 

·combines the capital of many investors to acquire or provide financing for real estate investments;

 

·allows individual investors to invest in a professionally managed, large-scale, diversified real estate portfolio through the purchase of interests, typically shares, in the REIT;

 

·is required to pay to investors distributions of at least 90% of its annual REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain); and

 

·avoids the “double taxation” treatment of income that normally results from investments in a corporation because a REIT is not generally subject to federal corporate income taxes on that portion of its income distributed to its stockholders, provided certain income tax requirements are satisfied.

 

However, under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), REITs are subject to numerous organizational and operational requirements. If we fail to qualify for taxation as a REIT in any year after electing REIT status, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.

 

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What are your investment objectives?

 

Our principal investment objectives are to:

 

·preserve and protect your capital contribution;

 

·provide you with stable cash distributions;

 

·realize growth in the value of our assets upon the sale of such assets; and

 

·provide you with the potential for future liquidity through the sale of our assets, a sale or merger of our company, a listing of our common stock on a national securities exchange, increasing our capacity to repurchase shares in connection with an “NAV” offering or other similar transactions. See “—What are your potential liquidity strategies?”

 

See the “Investment Objectives and Policies” section of this prospectus for a more complete description of our investment policies and charter-imposed investment restrictions.

 

 

 

How do you expect your assets to be allocated?

 

As of the date of this prospectus, we own one grocery-anchored shopping center. We plan to diversify our real estate portfolio by geographic region, anchor tenants, tenant mix, investment size and investment risk with the goal of attaining an asset base of income-producing real estate properties and real estate-related assets that provide stable returns to our investors and the potential for growth in the value of our assets. We intend to allocate at least 90% of our asset base to investments in grocery-anchored neighborhood and community shopping centers throughout the United States with a focus on well-located shopping centers that are well occupied at the time of purchase. We also may allocate up to 10% of our asset base to other real estate properties, real estate-related loans and securities and the equity securities of other REITs and real estate companies, assuming we sell the maximum offering amount.

 

 

 

How do you select potential properties for acquisition?

 

To find properties that best meet our criteria for investment, our Phillips Edison sponsor has developed a disciplined investment approach that combines the experience of its team of real estate professionals with a structure that emphasizes thorough market research, stringent underwriting standards and an extensive down-side analysis of the risks of each investment.

 

 

 

What types of real estate-related debt investments do you expect to make?

 

To the extent that we make any real estate-related debt investments, we intend to primarily focus on investments in first mortgages. The other real estate-related debt investments in which we may invest include mortgages (other than first mortgages); mezzanine, bridge and other loans; debt and derivative securities related to real estate assets, including mortgage-backed securities; collateralized debt obligations; debt securities issued by real estate companies; and credit default swaps.

 

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What types of investments will you make in the equity securities of other companies?

 

We may make equity investments in REITs and other real estate companies. We may purchase the common or preferred stock of these entities or options to acquire their stock. We do not expect our non-controlling equity investments in other public companies to exceed 5% of the proceeds of this offering, assuming we sell the maximum offering amount, or to represent a substantial portion of our assets at any one time.

 

 

Are there any risks involved in an investment in your shares?

 

Investing in our common stock involves a high degree of risk. You should carefully review the “Risk Factors” section of this prospectus beginning on page 28, which contains a detailed discussion of the material risks that you should consider before you invest in our common stock. Some of the more significant risks relating to an investment in our shares include the following:

 

·No public market currently exists for our shares of common stock, and our charter does not require our directors to seek stockholder approval to liquidate our assets, list our shares on an exchange or create any other liquidity event for our stockholders by a specified date. In addition, our share repurchase program includes numerous restrictions that limit your ability to sell your shares to us. If you are able to sell your shares before a liquidity event or a listing, you would likely have to sell them at a substantial discount from their public offering price.

 

·We set the primary offering prices of our Class T and Class I shares arbitrarily. These prices may not be indicative of the prices at which our shares would trade if they were listed on an exchange or actively traded, and the prices bear no relationship to the book or net value of our assets or to our expected operating income.

 

·We commenced investment operations on December 19, 2016 in connection with the acquisition of our first property, and we have a limited operating history. Except as disclosed in a supplement to this prospectus, we have not identified any additional investments to make with proceeds from this offering, and we are therefore a “blind pool.”

 

· Investors in this offering will experience immediate dilution in their investment primarily because, among other reasons, (i) we pay upfront fees in connection with the sale of our shares that reduce the proceeds to us, (ii) through October 11, 2017 we had sold approximately 2.6 million shares of our Class A common stock at an average purchase price of approximately $9.85 per share and received average net proceeds of approximately $9.00 per share in private transactions, and (iii) we paid certain organization and other offering expenses in connection with our private offering.

 

·We are dependent on our advisor to select investments and conduct our operations. Loss of our advisor or the loss of key employees by our sponsors could cause a substantial disruption to our business.

 

·Our executive officers and some of our directors are also officers, directors, managers or key professionals of our sponsors. As a result, they will face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other programs sponsored by our sponsors and conflicts in allocating time among us and these other programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.

 

·We pay substantial fees to and expenses of our advisor, its affiliates and participating broker-dealers, which payments increase the risk that you will not earn a profit on your investment. For a summary of these fees, see the “Prospectus Summary—What are the fees that you will pay to the advisor and its affiliates?” section of this prospectus.

 

 4 

 

 

·Our advisor and its affiliates, including our property manager, receive fees in connection with transactions involving the acquisition and management of our investments. These fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us.

 

·There is no limit on the amount we can borrow to acquire a single real estate investment, but pursuant to our charter, we may not leverage our assets with debt financing such that our borrowings would be in excess of 300% of our net assets unless a majority of the members of our Conflicts Committee finds substantial justification for borrowing a greater amount. During the early stages of this offering and to the extent that financing in excess of this limit is available on attractive terms, our Conflicts Committee is more likely to approve debt in excess of this limit. High debt levels could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.

 

·Our charter prohibits the beneficial or constructive ownership of more than 9.8% of our common stock by any person, unless exempted by our board of directors, which may inhibit transfers of our common stock and large investors from purchasing your shares of common stock.

 

·This offering will be conducted on a “best efforts” basis, which means that our dealer manager will be required to use only its best efforts to sell the shares in the offering and has no firm commitment or obligation to purchase any of the shares. Therefore, we may not sell all or any of the shares that we are offering. If we are unable to raise substantial funds during our offering stage, we may not be able to acquire a diverse portfolio of real estate investments, which may cause the value of an investment in us to vary more widely with the performance of specific assets and cause our general and administrative expenses to constitute a greater percentage of our revenue. Raising fewer proceeds during our offering stage, therefore, could increase the risk that our stockholders will lose money in their investment.

 

· Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our advisor. To the extent these distributions exceed our net income or net capital gain, a greater proportion of your distributions will generally represent a return of capital as opposed to current income or gain, as applicable. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations. If our cash flow from operations is insufficient to cover our distributions, we expect to use the proceeds from this offering, the proceeds from the issuance of securities in the future or proceeds from borrowings to pay distributions. During the early stages of our operations, we will likely fund distributions from sources that will be categorized as return of capital.

 

·We may experience adverse business developments or conditions similar to those affecting certain programs sponsored by our sponsors, which could limit our ability to make distributions and could decrease the value of your investment.

 

·Disruptions in the financial markets and poor economic conditions could adversely affect our ability to implement our business strategy and generate returns to you.

 

·Our failure to qualify as a REIT for federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders.

 

·We may change our targeted investments without stockholder consent, which could adversely affect the value of our common stock and our ability to make distributions to you.

 

·Because the dealer manager is one of our affiliates, you will not have the benefit of an independent review of us or this prospectus customarily undertaken in underwritten offerings; the absence of an independent due diligence review increases the risks and uncertainty you face as a stockholder.

 

 5 

 

 

 

 

Have you conducted prior offerings for your shares?

 

Yes. On October 12, 2016, we commenced a best efforts private placement offering of our Class A shares of common stock to accredited investors only pursuant to a confidential private placement memorandum, which we refer to as the “private offering.” Through October 11, 2017, we had raised $25.6 million in gross offering proceeds from the sale of approximately 2.6 million Class A shares in the private offering. We ceased offering Class A shares in the private offering prior to commencement of this offering.

 

 

 

What is the role of the board of directors?

 

We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders as fiduciaries. We have four members on our board of directors, three of whom are independent of our advisor and its affiliates. Our charter requires that a majority of our directors be independent of our advisor and creates a committee of our board consisting solely of all of our independent directors. This committee, which we call the Conflicts Committee, is responsible for reviewing the performance of our advisor and must approve other matters set forth in our charter. See the “Conflicts of Interest—Certain Conflict Resolution Measures” section of this prospectus. Our directors are elected annually by the stockholders.

 

Subject to the investment objectives and limitations set forth in our charter and the investment policies approved by our board of directors, our advisor may not make any real property acquisitions, developments or dispositions on our behalf, including real property portfolio acquisitions, developments and dispositions, without the prior approval of the majority of our board of directors. The actual terms and conditions of transactions involving investments in real estate shall be determined by our advisor, subject to the oversight of our board of directors.

 

 

 

Who is your advisor?

 

Our advisor is PECO-Griffin REIT Advisor, LLC. Our advisor is jointly owned by our Phillips Edison sponsor and our Griffin sponsor. Our Phillips Edison sponsor is the managing member and owns 75% of our advisor, and our Griffin sponsor owns the remaining 25%.

 

 

 

What does the advisor do?

 

Our advisor manages our day-to-day operations and our portfolio of real estate investments, and will provide asset management, marketing, investor relations and other administrative services on our behalf, all subject to the supervision of our board of directors. We have entered into a management agreement with our property manager to provide property management services for most, if not all, of the properties or other real estate-related assets we acquire, provided our advisor is able to control the operational management of such acquisitions.

 

Our Phillips Edison sponsor and its team of real estate professionals, including Jeffrey S. Edison, Devin I. Murphy and R. Mark Addy, acting through our advisor, will make most of the decisions regarding the selection, negotiation, financing and disposition of real estate investments. A majority of our board of directors will approve proposed investments.

 

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What is the experience of your Phillips Edison sponsor?

 

Phillips Edison Limited Partnership, formed in 1991, was a privately owned fully integrated real estate operating company that acquired and operated neighborhood and community shopping centers throughout the United States. Phillips Edison Limited Partnership previously served as a sponsor for Phillips Edison Grocery Center REIT I, Inc. (“PECO I”) and Phillips Edison Grocery Center REIT II, Inc. (“PECO II”), both of which are publicly registered, non-traded REITs. PECO I and II seek to acquire and manage well-occupied grocery-anchored neighborhood and community shopping centers having a mix of national and regional retailers selling necessity-based goods and services in strong demographic markets throughout the United States. On October 4, 2017, PECO I acquired Phillips Edison Limited Partnership’s real estate and asset management business in a stock-and-cash transaction valued at approximately $1.0 billion. The resulting company will be an internally-managed, nontraded grocery-anchored shopping center REIT with an expected total enterprise value of $4.0 billion. As a result of this transaction, PECO I became our Phillips Edison sponsor on October 4, 2017. We do not believe that the transaction will adversely affect (1) the ability of our advisor and our property manager to conduct our operations and manage our portfolio of real estate investments, or (2) our ability to conduct this offering of our common stock.

 

Our Phillips Edison sponsor and its predecessor have operated with financial partners through both property-specific joint ventures and multi-asset discretionary private equity funds, as well as publicly registered, non-traded REITs. Led by senior executives with more than two decades of real estate experience and more than ten years together, our Phillips Edison sponsor and its predecessor and affiliates have owned, operated, managed and/or sponsored over 60 million square feet of space since 1991. Our Phillips Edison sponsor has built and refined its in-house, fully integrated real estate operating platform to manage multiple aspects of shopping center operations, including acquisitions, leasing, construction management, property management, finance, marketing and dispositions. As of December 31, 2016, our Phillips Edison sponsor and its affiliates owned, operated, managed and/or sponsored a portfolio consisting of approximately 39.7 million square feet, located in 33 states. Our Phillips Edison sponsor and its affiliates have over 5,300 tenants and long-standing relationships with national and regional companies with high credit ratings.

 

 

 

What is the experience of your Griffin sponsor?

 

Our Griffin sponsor, originally formed as a California corporation in 1995 and reorganized as a Delaware limited liability company in February 2017, is a privately owned real estate investment company specializing in the acquisition, financing and management of institutional-quality property in the United States. Led by senior executives with more than two decades of real estate experience collectively encompassing more than 650 transactions, our Griffin sponsor and its affiliates have acquired or constructed approximately 56 million square feet of space since 1995. As a principal, our Griffin sponsor has engaged in a full spectrum of transaction risk and complexity, ranging from ground-up development, opportunistic acquisitions requiring significant re-tenanting or asset re-positioning to structured single-tenant acquisitions. Our Griffin sponsor currently serves as sponsor for Griffin Capital Essential Asset REIT, Inc. (“GCEAR”) and Griffin Capital Essential Asset REIT II, Inc. (“GCEAR II”) and as a co-sponsor for Griffin-American Healthcare REIT III, Inc. (“GAHR III”) and Griffin-American Healthcare REIT IV, Inc. (“GAHR IV”), each of which are publicly registered, non-traded REITs. Our Griffin sponsor is also the sponsor of Griffin Institutional Access Real Estate Fund (“GIA Real Estate Fund”) and Griffin Institutional Access Credit Fund (“GIA Credit Fund”), both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Prior to completing its merger transaction with NorthStar Realty Finance in December 2014, our Griffin sponsor was also a co-sponsor of Griffin-American Healthcare REIT II, Inc. (“GAHR II”), which was also a publicly registered, non-traded REIT. As of December 31, 2016, our Griffin sponsor and its affiliates own, manage, sponsor and/or co-sponsor a portfolio consisting of approximately 42 million square feet of space, located in 30 states and the United Kingdom.

 

 

 

Will you use leverage?

 

Yes. We expect that upon full investment of the proceeds of this offering, assuming we sell the maximum amount, our aggregate borrowings will not exceed 50% of the total value of our assets (calculated after the close of the primary offering). Under our charter, the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (as defined in our charter in accordance with the Statement of Policy Regarding Real Estate Investment Trusts revised and adopted by the North American Securities Administrators Association on May 7, 2007, or the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if such excess is approved by a majority of the members of the Conflicts Committee and disclosed to stockholders in our next quarterly report following that borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In any event, we expect that the amount of our aggregate borrowings will be reasonable in relation to the fair value of our assets and will be reviewed by our board of directors at least quarterly.

 

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In addition, we do not intend to exceed the leverage limit in our charter, except in the early stages of our development when the costs of our investments are most likely to exceed our net offering proceeds. We believe that careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment.

 

 

 

How will you structure the ownership and operation of your assets?

 

We plan to own substantially all of our assets and conduct our operations through Phillips Edison Grocery Center Operating Partnership III, L.P., which we refer to as our Operating Partnership in this prospectus. Our wholly owned subsidiary, Phillips Edison Grocery Center OP GP III, LLC, is the sole general partner of our Operating Partnership and, as of the date of this prospectus, we are the sole limited partner of our Operating Partnership. We will present our financial statements, operating partnership income, expenses and depreciation on a consolidated basis with Phillips Edison Grocery Center OP GP III, LLC and our Operating Partnership. All items of income, gain, deduction (including depreciation), loss and credit will flow through our Operating Partnership and Phillips Edison Grocery Center OP GP III, LLC to us as each of these subsidiary entities will be disregarded for federal tax purposes. These tax items will not generally flow through us to our investors however.  Rather, our net income and net capital gain effectively will flow through us to the stockholders as and when dividends are paid to our stockholders. Because we plan to conduct substantially all of our operations through our Operating Partnership, we are considered an UPREIT.

 

 

 

What is an “UPREIT”?

 

UPREIT stands for “Umbrella Partnership Real Estate Investment Trust.” An UPREIT is a REIT that holds all or substantially all of its properties through a partnership in which the REIT holds a general partner or limited partner interest, approximately equal to the value of capital raised by the REIT through sales of its capital stock. Using an UPREIT structure may give us an advantage in acquiring properties from persons who may not otherwise sell their properties because of unfavorable tax results. Generally, a sale of property directly to a REIT is a taxable transaction to the selling property owner. In an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of his property may transfer the property to the UPREIT in exchange for limited partnership units in the partnership and defer taxation of gain until the seller later exchanges his limited partnership units for cash or, at our option, for shares of our common stock pursuant to the terms of the limited partnership agreement.

 

 

 

What is the impact of being an “emerging growth company”?

 

We do not believe that being an “emerging growth company,” as defined by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), will have a significant impact on our business or this offering. We have elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. This election is irrevocable. Also, because we are not a large accelerated filer or an accelerated filer under Section 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”), and will not be for so long as our shares of common stock are not traded on a securities exchange, we are not subject to auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. In addition, so long as we are externally managed by our advisor, we do not expect to be required to seek stockholder approval of executive compensation and “golden parachute” compensation arrangements pursuant to Section 14A(a) and (b) of the Exchange Act. We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year period or if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of any June 30.

 

 

 

What conflicts of interest will your advisor face?

 

Each of our Phillips Edison and Griffin sponsors and their respective affiliates and personnel will experience conflicts of interest in connection with the management of our business. Some of the material conflicts that our sponsors and their respective affiliates will face include the following:

 

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·Our Phillips Edison sponsor and its affiliates must determine which investment opportunities to recommend to us and to other operating Phillips Edison-advised entities or Phillips Edison-sponsored programs, including PECO I and PECO II;

 

·Because our Griffin sponsor is a sponsor of two public offerings selling shares of capital stock concurrently with this offering and one additional proposed public offering in registration with the Securities and Exchange Commission (the “SEC”), we may compete with these programs, as well as additional private and public programs that our Griffin sponsor may sponsor in the future, for the same investors when raising capital;

 

·Our advisor and its affiliates may structure the terms of joint ventures between us and other Phillips Edison- or Griffin-sponsored programs or Phillips Edison- or Griffin-advised entities;

 

·Our sponsors and their respective affiliates will have to allocate their time between us and other real estate programs and activities in which each is involved;

 

·Our advisor and its affiliates, including our property manager, will receive fees in connection with transactions involving the purchase, management and sale of our assets regardless of the quality of the asset acquired or the services provided to us;

 

·Our dealer manager is an affiliate of our Griffin sponsor and will receive fees in connection with this offering;

 

·The negotiations of the advisory agreement, the dealer manager agreement and the property management agreement (including the substantial fees our advisor and its affiliates will receive thereunder) were not at arm’s length; and

 

·In the future, we may internalize our management by acquiring assets and the key professionals from our sponsors and their affiliates. We cannot be sure of the terms relating to any such acquisition. Additionally, in an internalization transaction, the professionals at our sponsors who become our employees may receive more compensation than they receive from our sponsors or its affiliates. These possibilities may provide incentives to our advisor or these individuals to pursue an internalization transaction rather than an alternative strategy, even if such alternative strategy might otherwise be in our stockholders’ best interests.

 

See the “Conflicts of Interest” section of this prospectus for a detailed discussion of the various conflicts of interest relating to your investment, as well as the procedures that we have established to mitigate a number of these potential conflicts.

 

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What is the ownership structure of the company and the affiliated entities that perform services for you?

 

The following chart shows the ownership structure of the various affiliated entities that perform or are likely to perform important services for us as of the date of this prospectus.

 

 

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What are the fees that you will pay to the advisor and its affiliates?

 

Our advisor and its affiliates will receive compensation and reimbursement for services relating to this offering and the investment and management of our assets. The most significant items of compensation are included in the table below. Selling commissions and stockholder servicing fees vary for each class of shares offered and selling commissions and dealer manager fees may vary for different categories of purchasers. The table below assumes that (i) 90% of the amount of common stock sold in this primary offering is Class T common stock and 10% is Class I common stock, (ii) we do not reallocate shares being offered between our primary offering and distribution reinvestment plan and, (iii) based on this allocation, we sell all $1,500,000,000 of shares being offered at the highest possible selling commissions and dealer manager fees with respect to our primary offering (with no discounts to any categories of purchasers). The compensation set forth below may only be increased if approved by a majority of the members of our Conflicts Committee. The increase of such compensation does not require approval by stockholders.

 

Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering
        Organization and Offering Stage    
Selling Commissions   Griffin Capital Securities   Generally, up to 3.0% of gross offering proceeds from the sale of shares of our Class T common stock pursuant to our primary offering (all or a portion of which may be reallowed by our dealer manager to participating broker-dealers). No selling commissions are payable on Class I shares or shares of our common stock sold pursuant to the distribution reinvestment plan.   $40,500,000
             
Dealer Manager Fee   Griffin Capital Securities   With respect to shares of our Class T common stock, generally, up to 3.0% of gross offering proceeds from the sale of shares of our Class T common stock pursuant to the primary offering (all or a portion of which may be reallowed by our dealer manager to participating broker-dealers), of which 1.0% of the gross offering proceeds will be funded by us and up to 2.0% of the gross offering proceeds will be funded by our advisor. With respect to shares of our Class I common stock, generally, up to an amount equal to 1.5% of gross offering proceeds from the sale of shares of our Class I common stock pursuant to the primary offering (all or a portion of which may be reallowed by our dealer manager to participating broker-dealers), all of which will be funded by our advisor. However, our advisor intends to recoup the portion of the dealer manager fee it funds through the receipt of the Contingent Advisor Payment as part of our acquisition fees, as described below. To the extent that the dealer manager fee is less than 3.0% for any Class T shares sold and less than 1.5% for any Class I shares sold, such shares will have a corresponding reduction in the applicable purchase price.  No dealer manager fee is payable on shares of our common stock sold pursuant to the distribution reinvestment plan.   $42,750,000  ($40,500,000 for Class T shares and $2,250,000 for Class I shares)

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering
Other Organization and Offering Expenses   PECO-Griffin REIT Advisor, LLC   Estimated to be 1.0% of gross offering proceeds from our primary offering in the event we raise the maximum offering. Our advisor will pay organization and offering expenses up to 1.0% of gross offering proceeds from our primary offering, and we will reimburse our advisor for any amounts in excess of 1.0% up to a maximum of 3.5%. Our advisor intends to recoup the portion of the organization and offering expenses it funds through the receipt of the Contingent Advisor Payment, as described below.   $15,000,000
             
        Acquisition and Development Stage    
             
Acquisition Fees and Contingent Advisor Payment   PECO-Griffin REIT Advisor, LLC   We will pay our advisor a base acquisition fee of 2.0% of the contract purchase price of each property or other real estate investments we acquire. We will also pay our advisor an additional contingent advisor payment of 2.15% of contract purchase price of each property or other real estate investments we acquire (the “Contingent Advisor Payment”).  The Contingent Advisor Payment allows our advisor to recoup the portion of the dealer manager fee and other organization and offering expenses funded by our advisor. Therefore, the amount of the Contingent Advisor Payment paid upon the closing of an acquisition shall not exceed the then outstanding amounts paid by our advisor for dealer manager fees and other organization and offering expenses at the time of such closing. For these purposes, the amounts paid by our advisor and considered as “outstanding” will be reduced by the amount of the Contingent Advisor Payment previously paid. Notwithstanding the foregoing, the “Contingent Advisor Payment Holdback,” which is the initial $4.5 million of amounts to be paid by our advisor to fund the dealer manager fee and other organization and offering expenses, shall be retained by us until the later of the termination of our last public offering, or ________, 20__, at which time such amount shall be paid to our advisor or its affiliates.  Our advisor may waive or defer all or a portion of the acquisition fee at any time and from time to time, in its sole discretion.   $57,069,900 (maximum offering and no debt)/ $109,815,986 (maximum offering and leverage of 50% of the cost of our investments)
             
Acquisition Expenses   PECO-Griffin REIT Advisor, LLC   Actual expenses incurred by our advisor and unaffiliated third parties in connection with an acquisition, which we estimate to be approximately 1.0% of the contract purchase price of each property. In no event will the total of all acquisition fees and acquisition expenses payable with respect to a particular investment exceed 6.0% of the contract purchase price, unless such excess fees and expenses are approved by a majority of our directors, including a majority of the Conflicts Committee, not otherwise interested in the transaction and they determine the transaction is commercially competitive, fair and reasonable to us.   $13,751,784 (maximum offering and no debt)/ $26,199,687 (maximum offering and leverage of 50% of the cost of our investments)
             
Construction Management Fee   Phillips Edison & Company Ltd.   We expect to engage our property manager to provide construction management services for some of our properties. We will pay a construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project.   Not determinable at this time.

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering
Development Fee   Phillips Edison & Company Ltd.   We may engage our property manager to provide development services for some of our properties. We will pay a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project.   Not determinable at this time.
             
        Operational Stage    
             
Stockholder Servicing Fee   Griffin Capital Securities  

A quarterly fee that will accrue daily in an amount equal to 1/365th (1/366th during a leap year) of 1.0% of the most recent purchase price per share of Class T shares sold in our primary offering. The dealer manager will generally reallow the entire stockholder servicing fee to participating broker-dealers.

 

The stockholder servicing fees will be paid on each Class T share that is purchased in the primary offering. We do not pay stockholder servicing fees with respect to shares sold under our distribution reinvestment plan, although the amount of the stockholder servicing fee payable with respect to Class T shares sold in our primary offering will be allocated among all Class T shares, including those sold under our distribution reinvestment plan.

 

We will cease paying the stockholder servicing fee with respect to Class T shares held in any particular account, and those Class T shares will convert into a number of Class I shares determined by multiplying each Class T share to be converted by the applicable “Conversion Rate” described herein, on the earlier of (i) a listing of the Class I shares on a national securities exchange; (ii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of our assets; (iii) after the termination of the primary offering in which the initial Class T shares in the account were sold, the end of the month in which total underwriting compensation paid in the primary offering is not less than 10.0% of the gross proceeds of the primary offering from the sale of Class T and Class I shares; and (iv) the end of the month in which the total stockholder servicing fees paid with respect to such Class T shares purchased in a primary offering is not less than 4.0% (or a lower limit described below) of the gross offering price of those Class T shares purchased in such primary offering (excluding shares purchased through our distribution reinvestment plan). If we redeem a portion, but not all of the Class T shares held in a stockholder’s account, the total stockholder servicing fee limit and amount of stockholder servicing fees previously paid will be prorated between the Class T shares that were redeemed and those Class T shares that were retained in the account. Likewise, if a portion of the Class T shares in a stockholder’s account is sold or otherwise transferred in a secondary transaction, the total stockholder servicing fee limit and amount of stockholder servicing fees previously paid will be prorated between the Class T shares that were transferred and the Class T shares that were retained in the account.

  $13,500,000 annually, and $54,000,000 in total (assuming the maximum stockholder servicing fee paid with respect to all Class T shares sold is 4.0% of the gross offering price of those Class T shares sold).

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering
       

With respect to item (iv) above, all of the Class T shares held in a stockholder’s account will automatically convert into Class I shares as of the last calendar day of the month in which the 4.0% limit on stockholder servicing fees (or a lower limit, provided that, in the case of a lower limit, the agreement between our dealer manager and the broker-dealer in effect at the time Class T shares were first issued to such account sets forth the lower limit and our dealer manager advises our transfer agent of the lower limit in writing) in a particular account is reached.

 

We will further cease paying the stockholder servicing fee on any Class T share that is redeemed or repurchased, as well as upon our dissolution, liquidation or the winding up of our affairs, or a merger or other extraordinary transaction in which we are a party and in which the Class T shares as a class are exchanged for cash or other securities.

 

If we liquidate (voluntarily or otherwise), dissolve or wind up our affairs, then, immediately before such liquidation, dissolution or winding up, our Class T shares will automatically convert to Class I shares at the applicable Conversion Rate and our net assets, or the proceeds therefrom, will be distributed to the holders of Class I shares, which will include all converted Class T shares, in accordance with their proportionate interests.

 

With respect to the conversion of Class T shares into Class I shares described above, each Class T share will convert into an equivalent amount of Class I shares based on the respective estimated net asset value (“NAV”) per share for each class. We currently expect that the conversion will be on a one-for-one basis, as we expect the NAV per share of each Class T share and Class I share to be effectively the same. Following the conversion of their Class T shares into Class I shares, those stockholders continuing to participate in our distribution reinvestment plan will receive Class I shares going forward at the then-current distribution reinvestment price per Class I share.

   
             
Property Management Fee   Phillips Edison & Company Ltd.   Property management fees equal to 4.0% of the monthly gross receipts from the properties managed by our property manager, but no less than $3,000 per month for each property managed, will be payable monthly to our property manager. Our property manager may subcontract the performance of its property management and leasing duties to third parties, and our property manager may pay a portion of its property management or leasing fees to the third parties with whom it subcontracts for these services. We will reimburse the costs and expenses incurred by our property manager on our behalf, including employee compensation, legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, as well as fees and expenses of third-party service providers.   Actual amounts are dependent upon gross revenues of specific properties and actual property management fees or will be dependent upon the total equity and debt capital we raise and the results of our operations and therefore cannot be determined at the present time.

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering
Asset Management Fee   PECO-Griffin REIT Advisor, LLC   Monthly fee equal to one-twelfth of 1.0% of the cost of each asset. For purposes of this calculation, “cost” equals the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but will exclude acquisition fees associated with the property. The asset management fee will be based only on the portion of the cost attributable to our investment in an asset if we do not own all or a majority of an asset and do not manage or control the asset.     The actual amounts are dependent upon the total equity and debt capital we raise and the results of our operations; we cannot determine these amounts at the present time.
             
Leasing Fee   Phillips Edison & Company Ltd.   We expect to engage our property manager to provide leasing services with respect to our properties. We will pay a leasing fee to our property manager in an amount that is usual and customary for comparable services rendered based on the geographic market of each property.   Not determinable at this time.
             
Other Operating Expenses   PECO-Griffin REIT Advisor, LLC and Phillips Edison & Company Ltd.   We will reimburse the expenses incurred by our advisor and our property manager in connection with their provision of services to us, including the portion of the overhead of both the advisor and the property manager that is related to the provision of such services, including certain personnel costs of the advisor and the property manager.   Actual amounts are dependent upon the results of our operations; we cannot determine these amounts at the present time.
             
        Liquidation/Listing Stage    
             
Disposition Fees   PECO-Griffin REIT Advisor, LLC   For substantial assistance in connection with the sale of properties or other investments, we will pay our advisor or its affiliates 2.0% of the contract sales price of each property or other investment sold, including a sale or distribution of all of our assets; provided, however, that total real estate commissions paid (to our advisor and others) in connection with the sale may not exceed the lesser of 6% of the contract sales price and a competitive real estate commission.  The Conflicts Committee will determine whether our advisor or its affiliates have provided substantial assistance to us in connection with the sale of an asset or a liquidity event.   Actual amounts depend on the results of our operations; we cannot determine these amounts at the present time.
             
Subordinated Participation in  Net Sale Proceeds (not payable if we are listed on an exchange)   PECO-Griffin REIT Advisor, LLC   Our advisor will receive from time to time, when available, 15.0% of remaining “net sales proceeds” after return of capital contributions plus payment to investors of an annual 6.0% cumulative, pre-tax, non-compounded return on the capital contributed by investors. “Net sales proceeds” generally refers to the proceeds of sale transactions less selling expenses incurred by or on our behalf, including legal fees, closing costs or other applicable fees.   Actual amounts depend on the results of our operations; we cannot determine these amounts at the present time.
             
Subordinated Incentive Listing Distribution (payable only if we are listed on an exchange)   PECO-Griffin REIT Advisor, LLC   Upon the listing of our shares on a national securities exchange, our advisor will receive a distribution from our Operating Partnership equal to 15.0% of the amount by which the sum of our market value plus distributions paid prior to such listing exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded return to investors.   Actual amounts depend on the results of our operations; we cannot determine these amounts at the present time.

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering
Subordinated Distribution Due Upon Termination of Advisory Agreement   PECO-Griffin REIT Advisor, LLC  

Upon termination or non-renewal of the advisory agreement by the company with or without cause, our advisor will be entitled to receive distributions from our Operating Partnership payable in the form of a non-interest bearing promissory note equal to 15.0% of the amount by which the sum of our market value plus distributions paid through the termination date exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded return to investors. In addition, our advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.

 

Payment of the promissory note will be deferred until we receive net proceeds from the sale of properties after the termination date. If the promissory note has not been paid in full on the earlier of (a) the date our common stock is listed or (b) within three years from the termination date, then our advisor may elect to convert the balance of the fee into units of our Operating Partnership or shares of our common stock. In addition, if we merge or otherwise enter into a reorganization and the promissory note has not been paid in full, the note must be paid in full upon the closing date of such transaction.

  Actual amounts depend on the results of our operations; we cannot determine these amounts at the present time.

 

 

 

How many real estate investments do you currently own?

 

As of the date of this prospectus, we own a fee simple interest in one grocery-anchored shopping center containing 78,779 rentable square feet located on approximately 9.1 acres of land in St. Cloud, Florida (“Publix at St. Cloud”). Currently, Publix at St. Cloud is 100% leased with 16 tenants. Publix Super Markets, Inc. (“Publix”), a regional market-leading grocery store chain with stores located in Florida, Georgia, Alabama, South Carolina, Tennessee and North Carolina, occupies 54,379 rentable square feet at Publix at St. Cloud. No other tenant occupies more than 10% of the total rentable square feet at Publix at St. Cloud. The Publix lease expires in October 2023. Publix has seven options to extend the term of its lease by five years each.

 

Publix at St. Cloud was constructed in 2003. The table below sets forth a schedule of expiring leases for Publix at St. Cloud by square footage and by annualized base rent as of December 19, 2016 (the date on which we purchased the property).

 

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Year  Number of
Expiring
Leases
   Annualized
Base Rent
   % of
Annualized
Base Rent
   Leased
Rentable
Square Feet
Expiring
   % of
Rentable
Square Feet
Expiring
 
2017   4   $87,520    8.4%   4,800    6.1%
2018   3    110,722    10.7%   4,800    6.1%
2019   1    47,099    4.5%   1,890    2.4%
2020                    
2021   4    171,897    16.6%   8,841    11.2%
2022   1    22,800    2.2%   1,200    1.5%
2023   1    535,633    51.6%   54,379    69.0%
2024                    
2025   1    34,048    3.3%   1,669    2.1%
2026   1    28,800    2.8%   1,200    1.5%
Thereafter                    

 

Annualized base rent of expiring leases, for each of the years indicated above, is calculated based on the contractual rent as of December 19, 2016 multiplied by 12 months.

 

The average effective annual rental rate per square foot for each of the five years ended December 31, 2015 for Publix at St. Cloud was as follows. We calculate average effective annual rental rate per square foot as the annualized contractual base rental income, net of free rent, for the year divided by the average leased square feet.

 

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Year1  Average Effective
Annual Rental Rate per
Square Foot
 
2011  $12.51 
2012  $12.50 
2013  $12.34 
2014  $12.35 
2015  $12.41 

 

We currently have no plans for significant capital improvement of Publix at St. Cloud, and we believe that Publix at St. Cloud is suitable for its intended purpose and is adequately insured. There are a number of comparable grocery-anchored shopping centers in the market area that may compete with Publix at St. Cloud.

 

Publix at St. Cloud secured an $11.4 million bridge loan (the “Bridge Loan”) with our Phillips Edison sponsor. The Bridge Loan had a maturity date of December 31, 2018, at which point the outstanding balance of the principal and all accrued and unpaid interest would be due and payable. The Bridge loan incurred interest at an annual rate of LIBOR plus 2.25%. Pursuant to our right under the Bridge Loan, we repaid the Bridge Loan in full on August 14, 2017.

 

Except as disclosed in a supplement to this prospectus, we have not identified any additional real estate investments that it is reasonably probable we will acquire or originate with the proceeds from this offering. Because our stockholders will not have the opportunity to evaluate additional investments before we make them, we are considered a “blind pool.” As additional acquisitions become probable, we will supplement this prospectus to provide information regarding likely acquisitions to the extent material to an investment decision with respect to our common stock. We will also describe material changes to our portfolio, including the closing of property acquisitions, by means of a supplement to this prospectus.

 

 

 

Will you acquire properties or other assets in joint ventures?

 

Possibly. Among other reasons, joint venture investments permit us to own interests in large assets without unduly restricting the diversity of our portfolio. We may also want to acquire properties and other investments through joint ventures in order to diversify our portfolio by investment size or investment risk. In determining whether to invest in a particular joint venture, our advisor will evaluate the real estate assets that such joint venture owns or is being formed to own under the same criteria as our other investments.

 

 

 

If I buy shares, will I receive distributions and how often?

 

Our board of directors has declared cash distributions on the outstanding shares of our Class A common stock based on daily record dates for the periods from December 1, 2016 through August 31, 2017, which distributions we paid or expect to pay on a monthly basis. Distributions are calculated based on stockholders of record each day during these periods at a rate of $0.0016438356 per share per day.

 

We expect to continue to authorize distributions based on daily record dates and expect to pay distributions on a monthly basis. We intend to use daily record dates for the determination of who is entitled to a distribution so that investors may generally begin earning distributions immediately upon our acceptance of their subscription. We expect to pay distributions monthly and continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions or other factors make it imprudent to do so. The timing and amount of distributions will be determined by our board of directors in its sole discretion and may vary from time to time.

 

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To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our common 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.

 

Our board of directors considers many factors before authorizing a cash distribution, including current and projected cash flow from operations, capital expenditure needs, general financial conditions and REIT qualification requirements. We expect to have little, if any, cash flow from operations available for cash distributions until we make substantial investments. It is therefore likely that, at least during the early stages of our development, and from time to time during our operational stage, our board will declare cash distributions that will be paid in advance of our receipt of cash flow that we expect to receive during a later period. In these instances, where we do not have sufficient cash flow to cover our distributions, we expect to use the proceeds from this offering, the proceeds from the issuance of securities in the future or proceeds from borrowings to pay distributions. We may borrow funds, issue new securities or sell assets to make and cover our declared distributions, all or a portion of which could be deemed a return of capital. If we fund cash distributions from borrowings, sales of assets or the net proceeds from this offering, then we will have fewer funds available for the acquisition of real estate and real estate-related assets and your overall return may be reduced. Further, to the extent cash distributions exceed cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gains. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations.

 

 

 

May I reinvest my distributions in shares of Phillips Edison Grocery Center REIT III, Inc.?

 

Yes. We have adopted a distribution reinvestment plan. You may participate in our distribution reinvestment plan by checking the appropriate box on the subscription agreement or by filling out an enrollment form we will provide to you at your request. The purchase prices for Class A, Class T and Class I shares purchased under the distribution reinvestment plan will initially be $10.29. Once we establish a NAV per share, shares issued pursuant to our distribution reinvestment plan will be priced at the NAV per share of our Class A, Class T and Class I common stock, as determined by our advisor or another firm chosen for that purpose. We expect to establish a NAV per share no later than the 150th day following the second anniversary of the date we commence this offering. No selling commissions, dealer manager fees or stockholder servicing fees are payable on shares sold under our distribution reinvestment plan. We may amend or terminate the distribution reinvestment plan for any reason at any time upon 10 days’ written notice to the participants. For more information regarding the distribution reinvestment plan, see the “Description of Shares—Distribution Reinvestment Plan” section of this prospectus.

 

 

 

Will the distributions I receive be taxable as ordinary income?

 

Yes and no. Generally, distributions that you receive, including distributions that are reinvested pursuant to our distribution reinvestment plan, will be taxed as ordinary income to the extent they are from current or accumulated earnings and profits. Participants in our distribution reinvestment plan will also be treated for tax purposes as having received an additional distribution to the extent that they purchase shares under the distribution reinvestment plan at a discount to fair market value. As a result, participants in our distribution reinvestment plan may have tax liability with respect to their share of our taxable income, but they will not receive cash distributions to pay such liability.

 

As a REIT, we are only required to distribute 90% of our taxable income each year in order to maintain our REIT status. We expect that some portion of your distributions will not be subject to tax in the year in which it is received because depreciation expense reduces the amount of taxable income but does not reduce cash available for distribution. The portion of your distribution that is not subject to tax immediately is considered a return of capital for tax purposes and will reduce the tax basis of your investment. Distributions that constitute a return of capital, in effect, defer a portion of your tax until your investment is sold or we are liquidated, at which time you will be taxed at capital gains rates. However, because each investor’s tax considerations are different, you should consult with your tax advisor. You should also review the section of this prospectus entitled “Federal Income Tax Considerations.”

 

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How will you use the proceeds raised in this offering?

 

We intend to use substantially all of the net proceeds from our primary offering of up to $1,500,000,000 of shares of Class T and Class I common stock to acquire and manage a diversified portfolio of grocery-anchored neighborhood and community shopping centers located in strong demographic markets throughout the United States. Depending primarily upon the number of shares we sell in this primary offering, we estimate that we will use 91.3% of the gross proceeds from the sale of Class T shares and 95.1% of the gross proceeds from the sale of Class I shares in the primary offering for investments, assuming the maximum offering amount, while the remainder of the gross proceeds from the primary offering will be used to pay organization and offering expenses, including selling commissions and the dealer manager fee and, upon investment in properties and other assets, to pay a fee to our advisor for its services in connection with the selection and acquisition of our real estate investments. For more information regarding the use of proceeds, see the “Estimated Use of Proceeds” section of this prospectus.

 

 

 

What kind of offering is this?

 

We are offering, on a “best efforts” basis, up to $1,500,000,000 of shares of our Class T and Class I common stock in the primary offering at prices of $10.94 per share and $10.00 per share, respectively, with discounts available to some categories of investors with respect to Class T shares. We are also offering up to a maximum of $200,000,000 of shares of our Class A, Class T and Class I common stock pursuant to our distribution reinvestment plan at a purchase price of $10.29 per Class A, Class T and Class I share. The Class T shares are subject to selling commissions and stockholder servicing fees to which the Class I shares are not. Class I shares are only available to investors who: (i) purchase shares through fee-based programs, also known as wrap accounts, (ii) purchase shares through participating broker-dealers that have alternative fee arrangements with their clients, (iii) purchase shares through certain registered investment advisers, (iv) purchase shares through bank trust departments or any other organization or person authorized to act in a fiduciary capacity for its clients or customers, or (v) are an endowment, foundation, pension fund or other institutional investor. We are offering to sell any combination of Class T and Class I shares in our primary offering. Class A shares sold pursuant to our distribution reinvestment plan will only be sold to stockholders that previously purchased Class A shares in our private offering.

 

 

 

How does a “best efforts” offering work?

 

When shares are offered on a “best efforts” basis, the dealer manager will be required to use only its best efforts to sell the shares in the offering and has no firm commitment or obligation to purchase any of the shares. Therefore, we may not sell all or any of the shares that we are offering.

 

We will not sell any shares to Pennsylvania investors unless we raise a minimum of $75,000,000 in gross offering proceeds (including sales made to residents of other jurisdictions) from the sale of shares of our common stock, whether in this offering or in separate private transactions. Pending satisfaction of this condition, all subscription payments by Pennsylvania investors will be placed in a separate account held by our escrow agent in trust for the Pennsylvania subscribers’ benefit, pending release to us. Pennsylvania residents should also note the special escrow procedures described below under “Plan of Distribution—Special Notice to Pennsylvania Investors.”

 

If we have not reached the $75,000,000 threshold for Pennsylvania investors within 120 days of the date that we first accept a subscription payment from a Pennsylvania investor, then we will, within 10 days of the end of that 120-day period, notify Pennsylvania investors in writing of their right to receive refunds, with interest. If you request a refund within 10 days of receiving that notice, then we will arrange for the escrow agent to promptly return by check your subscription amount with interest. Amounts held in the Pennsylvania escrow account from Pennsylvania investors not requesting a refund will continue to be held for subsequent 120-day periods until we raise at least $75,000,000 or until the end of the subsequent escrow periods. At the end of each subsequent escrow period, we will again notify you of your right to receive a refund of your subscription amount with interest. In the event we do not raise gross offering proceeds of $75,000,000 before the termination of this primary offering, we will promptly return all funds held in escrow for the benefit of Pennsylvania investors (in which case, Pennsylvania investors will not be required to request a refund of their investment). Purchases by persons affiliated with us or our advisor will not count toward the Pennsylvania minimum.

 

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How long will this offering last?

 

The termination date of our primary offering will be ________, 2019, unless extended by our board of directors for one year to ________, 2020. Under rules promulgated by the SEC, if we have filed a registration statement relating to a follow-on offering, then we could continue our primary offering until such follow-on offering registration statement has been declared effective. If we continue our primary offering beyond two years from the date of this prospectus, then we will provide that information in a prospectus supplement. We may continue to offer shares under our distribution reinvestment plan beyond two years from the date of this prospectus until we have sold $200,000,000 of shares through the reinvestment of distributions. In many states, we will need to renew the registration statement or file a new registration statement to continue the offering beyond one year from the date of this prospectus. We may terminate this offering at any time.

 

If our board of directors determines that it is in our best interest, then we may conduct additional offerings upon the termination of this offering. Our charter does not restrict our ability to conduct offerings in the future.

 

 

 

Who can buy shares?

 

An investment in our shares is only suitable for persons who have adequate financial means and who will not need immediate liquidity from their investment. Residents of many states can buy shares in this offering provided that they have either (i) a net worth of at least $70,000 and an annual gross income of at least $70,000 or (ii) a net worth of at least $250,000. For the purpose of determining suitability, net worth does not include an investor’s home, home furnishings or personal automobiles. The minimum suitability standards are more stringent for investors in certain other states. See “Suitability Standards.”

 

 

 

Who can invest in each class of our common stock and what are the differences among the classes?

 

Class T shares are available to all investors. Class I shares are only available to investors who: (i) purchase shares through fee-based programs, also known as wrap accounts, (ii) purchase shares through participating broker-dealers that have alternative fee arrangements with their clients, (iii) purchase shares through certain registered investment advisers, (iv) purchase shares through bank trust departments or any other organization or person authorized to act in a fiduciary capacity for its clients or customers, or (v) are an endowment, foundation, pension fund or other institutional investor.

 

The following summarizes the differences in fees and selling commissions between the classes of our common stock. None of the fees listed below are payable by us with respect to shares sold under our distribution reinvestment plan.

 

    Class T Shares     Class I Shares  
Price Per Share   $ 10.94     $ 10.00  
Selling Commissions     3.0     None  
Dealer Manager Fees     3.0 %(1)      1.5 %(1) 
Stockholder Servicing Fee     1.0 %(2)      None  

 

(1)Our dealer manager will receive dealer manager fees in the amounts of up to (i) 3.0% of the gross offering proceeds for sales of Class T shares and (ii) 1.5% of the gross offering proceeds for sales of Class I shares. For sales of Class T shares, 2/3 of the dealer manager fee will be funded by our advisor, and the remainder will be funded by us. For sales of Class I shares, all of the dealer manager fee will be funded by our advisor.

 

(2)We will also pay a quarterly stockholder servicing fee that will accrue daily in the amount of 1/365th (or 1/366th during leap years) of 1.0% of the most recent purchase price per share of Class T shares sold in our primary offering.

 

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The fees and expenses listed above will be allocated on a class-specific basis. The stockholder servicing fee is a class-specific expense that is allocated among all outstanding Class T shares and is not paid from the amounts paid by each individual Class T stockholder to purchase his or her Class T shares. The payment of class-specific expenses is expected to result in a different amount of distributions being paid with respect to the Class T shares. Specifically, we expect to reduce the amount of distributions that would otherwise be paid on all Class T shares (including those sold under our distribution reinvestment plan) to account for the ongoing stockholder servicing fees payable on Class T shares. In addition, if the stockholder servicing fee paid with respect to Class T shares exceeds the amount distributed to holders of Class I shares in a particular period (such excess amount is referred to herein as the “Excess Class T Fee”), the NAV per Class T share would be permanently reduced by an amount equal to the Excess Class T Fee for the applicable period divided by the number of Class T shares outstanding at the end of the applicable period, reducing both the NAV of the Class T shares used for conversion purposes and the applicable Conversion Rate described herein. To calculate the NAV for our Class A, Class T and Class I shares, we would first determine the NAV of our entire company and then use such aggregate NAV to determine the NAV for each of our Class A, Class T and Class I shares by making any necessary adjustments applicable to each class of shares. If the NAV of our classes are different, then changes to our assets and liabilities that are allocable based on NAV may also be different for each class. Generally, we do not expect the respective NAVs of our Class A, Class T and Class I shares to differ for any reason other than for possible adjustments to the NAV of our Class T shares to account for the stockholder servicing fee, as discussed above.

 

If we liquidate (voluntarily or otherwise), dissolve or wind up our affairs, then, immediately before such liquidation, dissolution or winding up of our company, our Class T shares will automatically convert to Class I shares at the applicable Conversion Rate (discussed herein) and our assets, or the proceeds therefrom, will be distributed between the holders of Class A shares and Class I shares ratably in proportion to the respective NAV for each class. Each holder of shares of a particular class of common stock will be entitled to receive, ratably with each other holder of shares of such class, that portion of such aggregate assets available for distribution as the number of outstanding shares of such class held by such holder bears to the total number of outstanding shares of such class then outstanding. In the event that we have not previously calculated a NAV for our Class A and Class I shares prior to a liquidation, we will calculate the NAV for our Class A and Class I shares, after the conversion of all Class T shares into Class I shares, in connection with such a liquidation specifically to facilitate the equitable distribution of assets or proceeds to the share classes. To calculate the NAV for our Class A and Class I shares, we would first determine the NAV of our entire company and then use such aggregate NAV to determine the NAV for each of our Class A and Class I shares by making any necessary adjustments applicable to each class of shares.

 

 

 

Who might benefit from an investment in our shares?

 

An investment in our shares may be beneficial for you if you meet the minimum suitability standards described in this prospectus, seek to diversify your personal portfolio with a real estate-based investment, seek to receive current income, seek to preserve capital, seek to obtain the benefits of potential long-term capital appreciation and are able to hold your investment for an indefinite period of time. On the other hand, we caution persons who require immediate liquidity or guaranteed income, or who seek a short-term investment, that an investment in our shares will not meet those needs.

 

 

 

Is there any minimum investment required?

 

Yes. We require a minimum investment of at least $2,500. After you have satisfied the minimum investment requirement, any additional purchases must be in increments of at least $100. The investment minimum for subsequent purchases does not apply to shares purchased pursuant to our distribution reinvestment plan.

 

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Are there any special restrictions on the ownership or transfer of shares?

 

Yes. Our charter contains restrictions on the ownership of our shares that prevent any one person from beneficially or constructively owning more than 9.8% of our aggregate outstanding shares unless exempted by our board of directors. These restrictions are designed to enable us to comply with ownership restrictions imposed on REITs by the Internal Revenue Code. Our charter also limits your ability to sell your shares unless (i) the prospective purchaser meets the suitability standards in our charter regarding income and/or net worth and (ii) you are transferring all of your shares and the transfer complies with the minimum purchase requirements.

 

 

 

Are there any special considerations that apply to employee benefit plans subject to ERISA or other retirement plans that are investing in shares?

 

Yes. The section of this prospectus entitled “ERISA Considerations” describes the effect the purchase of shares will have on individual retirement accounts and retirement plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or the Internal Revenue Code. ERISA is a federal law that regulates the operation of certain tax-advantaged retirement plans. Any retirement plan trustee or individual considering purchasing shares for a retirement plan or an individual retirement account should carefully read this section of the prospectus.

 

We may make some investments that generate “excess inclusion income” which, when passed through to our tax-exempt stockholders, can be taxed as unrelated business taxable income (“UBTI”) or, in certain circumstances, can result in a tax being imposed on us. Although we do not expect the amount of such income to be significant, there can be no assurance in this regard.

 

 

 

May I make an investment through my IRA, SEP or other tax-deferred account?

 

Yes. You may make an investment through your individual retirement account (“IRA”), a simplified employee pension (“SEP”) plan or other tax-deferred account. In making these investment decisions, you should consider, at a minimum, (i) whether the investment is in accordance with the documents and instruments governing your IRA, SEP plan or other account, (ii) whether the investment satisfies the fiduciary requirements associated with your IRA, SEP plan or other account, (iii) whether the investment will generate UBTI to your IRA, SEP plan or other account, (iv) whether there is sufficient liquidity for such investment under your IRA, SEP plan or other account, (v) the need to value the assets of your IRA, SEP plan or other account annually or more frequently, and (vi) whether the investment would constitute a prohibited transaction under applicable law.

 

 

 

How do I subscribe for shares?

 

If you choose to purchase shares in this offering, you will need to complete and sign a subscription agreement (in the form attached to this prospectus as Appendix B) for a specific number of shares and pay for the shares at the time of your subscription.

 

 

 

If I buy shares in this offering, how may I later sell them?

 

At the time you purchase the shares, they will not be listed for trading on any securities exchange or over-the-counter market. In fact, we expect that there will not be any public market for the shares when you purchase them, and we cannot be sure if one will ever develop. In addition, our charter imposes restrictions on the ownership of our common stock that will apply to potential purchasers of your shares. As a result, if you wish to sell your shares, you may not be able to do so promptly or at all, or you may only be able to sell them at a substantial discount from the price you paid.

 

After you have held your shares for at least one year, you may be able to have your shares repurchased by us pursuant to our share repurchase program. Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the share repurchase program. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the share repurchase program. We will repurchase shares on the last business day of each month (and in all events on a date other than a dividend payment date). The price at which we will repurchase the shares is as follows:

 

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·for those shares held by the redeeming stockholder for at least one year, 90.0% of the lesser of the price paid to acquire the shares from us or the applicable NAV per share;
   
·for those shares held by the redeeming stockholder for at least two years, 95.0% of the lesser of the price paid to acquire the shares from us or the applicable NAV per share;
   
·for those shares held by the redeeming stockholder for at least three years, 97.5% of the lesser of the price paid to acquire the shares from us or the applicable NAV per share; and
   
·for those shares held by the redeeming stockholder for at least four years, 100% of the lesser of the price paid to acquire the shares from us or the applicable NAV per share.

 

The terms of our share repurchase program are more generous with respect to repurchases sought upon a stockholder’s death, “determination of incompetence” or “qualifying disability”:

 

·there is no one-year holding requirement; and
   
·the repurchase price is the price paid to acquire the shares until such time as we provide an estimated NAV per share, at which time the repurchase price will be the applicable NAV per share.

 

The share repurchase program also contains numerous restrictions on your ability to sell your shares to us. During any calendar year, we may repurchase no more than 5.0% of the weighted average number of shares outstanding during the prior calendar year. Further, the cash available for repurchases on any particular date will generally be limited to the proceeds from the distribution reinvestment plan during the preceding four fiscal quarters, less amounts already used for repurchases since the beginning of that period; however, subject to the limitations described above, we may use other sources of cash at the discretion of our board of directors. In addition, our board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase. We may amend, suspend or terminate the program at any time upon 30 days’ notice.

 

 

 

Will you register as an investment company?

 

Neither we nor any of our subsidiaries intend to register as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”). If we or our subsidiaries were obligated to register as investment companies, then we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:

 

·limitations on capital structure;
   
·restrictions on specified investments;
   
·prohibitions on transactions with affiliates; and
   
·compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

 

Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:

 

·pursuant to Section 3(a)(1)(A), is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities (the “primarily engaged test”); or

 

·pursuant to Section 3(a)(1)(C), is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of such issuer’s total assets (exclusive of United States government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities” excludes United States government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).

 

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We believe that we and our Operating Partnership will not be required to register as an investment company. With respect to the 40% test, most of the entities through which we and our Operating Partnership will own our assets will be majority-owned subsidiaries that will not themselves be investment companies and will not be relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7).

 

With respect to the primarily engaged test, we and our Operating Partnership will be holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our Operating Partnership, we and our Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.

 

If any of the subsidiaries of our Operating Partnership fail to meet the 40% test, then we believe they will usually, if not always, be able to rely on Section 3(c)(5)(C) of the Investment Company Act for an exception from the definition of an investment company. Otherwise, they should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that any of the subsidiaries of our Operating Partnership relying on Section 3(c)(5)(C) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. If any subsidiary relies on Section 3(c)(5)(C), then we expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets. For more information related to compliance with the Investment Company Act, see the “Investment Objectives and Policies—Investment Limitations Under the Investment Company Act of 1940” section of this prospectus.

 

 

 

What are your potential liquidity strategies?

 

Subject to then-existing market conditions and the sole discretion of our board of directors, we may consider the following in order to provide increased liquidity to our stockholders:

 

·list our shares on a national securities exchange;
   
·merge, reorganize or otherwise transfer our company or its assets to another entity;
   
·commence selling our properties and liquidate our company;
   
·provide increased capacity to repurchase shares through our share repurchase program in connection with an offering as an “NAV REIT,” which is a term used to describe a REIT that values its shares as often as daily but at least quarterly on a NAV basis; or
   
·otherwise create a liquidity event for our stockholders.

 

We cannot, however, assure you that we will pursue one or more of these alternatives following the completion of this offering. Our charter does not require us to pursue a liquidity transaction at any time. If we determine that market conditions are not favorable for one of the above-described liquidity events, then we also reserve the right to engage in a follow-on offering of stock. Our board of directors has the sole discretion to continue operations after completion of the offering, including engaging in a follow-on offering, if it deems such continuation is in the best interests of our stockholders.

 

 

 

Will I be notified of how my investment is doing?

 

Yes, we will provide you with periodic updates on the performance of your investment in us, including:

 

·detailed quarterly distribution reports;

 

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·an annual report; and
   
·three quarterly financial reports.

 

We will provide this information to you via one or more of the following methods, in our discretion and with your consent, if necessary:

 

·United States mail or other courier;
   
·facsimile;
   
·electronic delivery; or
   
·posting on our web site at www.grocerycenterREIT3.com.

 

To assist Financial Industry Regulatory Authority (“FINRA”) members and their associated persons that participate in this offering in meeting their customer account statement reporting obligations pursuant to applicable FINRA and National Association of Securities Dealers (“NASD”) Conduct Rules, we disclose in each annual report distributed to stockholders a per share estimated value of our shares, the method by which it was developed and the date of the estimated valuation.

 

Initially, we will report the net investment amounts of our shares as our estimated value per share, which net investment amounts will be based on the “amount available for investment/net investment amount” percentages shown in our estimated use of proceeds table. This amount will be 96.0% of the $10.94 primary offering price of our Class T shares of common stock and 100% of the $10.00 primary offering price of our Class I shares of common stock. These amounts will equal $10.50 and $10.00, respectively, for our Class T and Class I shares, which is the purchase price of our primary offering shares, less the associated selling commission, dealer manager fee, and estimated organization and other offering expenses paid by us as shown in our estimated use of proceeds table. These estimated per share values will be accompanied by any disclosures required under the FINRA and NASD Conduct Rules. No later than the 150th day following the second anniversary of the date we commence this offering, we will provide an estimated NAV per share. In determining our NAV per share, we intend to follow the prescribed methodologies of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Associate (“IPA”) in April 2013 (the “IPA Guidelines”). Once we announce a NAV per share, we generally expect to update the NAV per share every 12 months.

 

Until we report a NAV, the initial reported value based on the offering price as adjusted for selling commissions, the dealer manager fee and our organization and offering expenses will likely differ from the price that a stockholder would receive in the near term upon a resale of his or her shares or upon a liquidation of our company because (i) there is no public trading market for the shares at this time; (ii) the estimated value will not reflect, and will not be derived from, the fair market value of our assets, nor will it represent the amount of net proceeds that would result from an immediate liquidation of our assets; (iii) the estimated value will not take into account how market fluctuations affect the value of our investments; and (iv) the estimated value will not take into account how developments related to individual assets may increase or decrease the value of our portfolio.

 

 

 

When will I get my detailed tax information?

 

Your Form 1099-DIV tax information, if required, will be mailed by January 31 of each year.

 

 

 

Who can help answer my questions about the offering?

 

If you have more questions about the offering, or if you would like additional copies of this prospectus, you should contact your registered representative or contact:

 

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Griffin Capital Securities, LLC

18191 Von Karman Avenue

Suite 300

Irvine, CA 92612

Telephone: (949) 270-9300

Email: chuang@griffincapital.com

Attention: Charles Huang

 

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Risk Factors

 

An investment in our common stock involves various risks and uncertainties. You should carefully consider the following risk factors in conjunction with the other information contained in this prospectus before purchasing our common stock. The risks discussed in this prospectus could adversely affect our business, operating results, prospects and financial condition. This could cause the value of our common stock to decline and could cause you to lose all or part of your investment. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

 

Risks Related to an Investment in Us

 

There is no public trading market for our shares; therefore, it will be difficult for you to sell your shares.

 

There is no current public market for our shares and our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, list our shares on an exchange by a specified date or provide any other liquidity event for our stockholders. Our charter limits your ability to transfer or sell your shares unless the prospective stockholder meets the applicable suitability and minimum purchase standards. Our charter also prohibits the beneficial or constructive ownership by a person of more than 9.8% of our stock, unless exempted by our board of directors, which may inhibit large investors from purchasing your shares. Moreover, our share repurchase program includes numerous restrictions that limit your ability to sell your shares to us, and our board of directors may amend, suspend or terminate our share repurchase program upon 30 days’ notice without stockholder approval. We describe these restrictions in detail under “Description of Shares—Share Repurchase Program” in this prospectus. Therefore, it will be difficult for you to sell your shares. Even if you are able to sell your shares before a liquidity event or a listing, you would likely have to sell them at a substantial discount to their public offering price. It is also likely that your shares would not be accepted as the primary collateral for a loan. You should purchase our shares only as a long-term investment because of the illiquid nature of the shares.

 

If we are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions.

 

Our ability to achieve our investment objectives and to pay distributions depends upon the performance of our advisor in the acquisition of our investments, including the determination of any financing arrangements. Competition from competing entities may reduce the number of suitable investment opportunities offered to us or increase the bargaining power of property owners seeking to sell. Additionally, any disruptions or dislocations in the credit markets that materially impact the cost and availability of debt to finance real estate acquisitions could result in a further reduction of suitable investment opportunities and create a competitive advantage to other entities that have greater financial resources than we do. We can give no assurance that our advisor will be successful in obtaining suitable investments on financially attractive terms or that, if our advisor makes investments on our behalf, our objectives will be achieved. If we, through our advisor, are unable to find suitable investments promptly upon receipt of our offering proceeds, then we will hold the proceeds from this offering in an interest-bearing account or invest the proceeds in short-term assets. In the event we are unable to timely locate suitable investments, we may be unable or limited in our ability to pay distributions and we may not be able to meet our investment objectives. If we would continue to be unsuccessful in locating suitable investments, then we may ultimately decide to liquidate.

 

If we raise substantial offering proceeds in a short period of time, then we may not be able to invest all of the net offering proceeds promptly, which may cause our distributions and your investment returns to be lower than they otherwise would.

 

We could suffer from delays in locating suitable investments. The more money we raise in this offering, the more difficult it will be to invest the net offering proceeds promptly. Therefore, the large size of this offering increases the risk of delays in investing our net offering proceeds. Our reliance on our advisor to locate suitable investments for us at times when the management of our advisor is simultaneously seeking to locate suitable investments for other affiliated programs could also delay the investment of the proceeds of this offering. Delays we encounter in the selection, acquisition and development of income-producing properties would likely limit our ability to pay distributions to our stockholders and reduce our stockholders’ overall returns.

 

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Because our stockholders will not have the opportunity to evaluate all additional investments we may make before we make them, we are considered a “blind pool.” We may make investments with which our stockholders do not agree.

 

As of the date of this prospectus, we own one grocery-anchored shopping center and, except as disclosed in a supplement to this prospectus, we have not identified any additional investments that are reasonably probable to be acquired with the proceeds from our offering stage. As a result, we cannot provide our stockholders with any information to assist them in evaluating the merits of any specific assets that we may acquire. We will seek to invest substantially all of the net proceeds from our offering stage, after the payment of fees and expenses, in real estate investments. Our board of directors and our advisor have broad discretion when identifying, evaluating and making such investments. Our stockholders will have no opportunity to evaluate the transaction terms or other financial or operational data concerning specific investments before we invest in them. As a result, our stockholders must rely on our board of directors and our advisor to identify and evaluate our investment opportunities, and our board of directors and our advisor may not be able to achieve our business objectives, may make unwise decisions or may make investments with which our stockholders do not agree.

 

If we do not raise substantial funds, then we will be limited in the number and type of investments we may make, and the value of your investment in us is more likely to be adversely affected by the negative performance of any sizeable asset as well as by our fixed operating expenses.

 

This offering is being made on a “best efforts” basis and no individual or firm has agreed to purchase any of our stock. The amount of proceeds we raise in this offering may be substantially less than the amount we would need to achieve a broadly diversified property portfolio. If we are unable to raise substantial funds, then we will make fewer investments resulting in less diversification in terms of the type, location, number and size of investments that we make. In that case, there is an increased likelihood that any single asset’s performance would materially reduce our overall profitability. We are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. In addition, any inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, and our net income and the distributions we make to stockholders would be reduced.

 

Limited participation in our distribution reinvestment plan by Class A and Class I stockholders may limit the amount of cash we have available for the repurchase of shares pursuant to our share repurchase program and for other uses.

 

We will offer Class A and Class I shares pursuant to our distribution reinvestment plan at a purchase price of $10.29 per share, which is greater than the purchase price of $10.00 per share of Class A shares sold in our private placement and is also greater than the purchase price of $10.00 per share of Class I shares sold in our primary offering. Consequently, Class A and Class I stockholders may choose not to reinvest the distributions they may receive from us in additional shares of our common stock. To the extent that there is limited participation in our distribution reinvestment plan, a greater portion of distributions will be paid in cash and we will have less cash available for other uses. Additionally, the cash available for repurchases pursuant to our share repurchase program will generally be limited to the proceeds from the distribution reinvestment plan during the period consisting of the preceding four fiscal quarters, less any cash already used for repurchases since the beginning of that period. As a result, limited participation in our distribution reinvestment plan will decrease the amount of funds available for the repurchase of shares pursuant to our share repurchase program.

 

Because we are dependent upon our advisor and its affiliates to conduct our operations, any adverse changes in the financial health of our advisor or its affiliates or our relationship with them could hinder our operating performance and the return on our stockholders’ investment.

 

We are dependent on our advisor to manage our operations and our portfolio of real estate assets. Our advisor has no operating history and it will depend largely upon the fees and other compensation that it will receive from us in connection with the purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of our advisor or our relationship with our advisor could hinder its ability to successfully manage our operations and our portfolio of investments.

 

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Our ability to achieve our investment objectives and to conduct our operations is dependent upon the performance of our advisor, which is jointly owned by our Phillips Edison sponsor (75%) and our Griffin sponsor (25%). Our sponsors’ business is sensitive to trends in the general economy, as well as the commercial real estate and credit markets. Our results of operations and financial condition could also suffer to the extent that any decline in our sponsors’ revenues and operating results impacts the performance of our advisor.

 

The loss of or the inability to hire additional or replacement key real estate and debt finance professionals at Phillips Edison could delay or hinder implementation of our investment strategies, which could limit our ability to make distributions and decrease the value of your investment.

 

Our success depends to a significant degree upon the contributions of Messrs. Edison, Murphy and Addy, each of whom would be difficult to replace. Neither we nor our advisor have employment agreements with these individuals. Messrs. Edison, Murphy and Addy may not remain associated with Phillips Edison. If any of these persons were to cease their association with us, then our operating results could suffer. We do not intend to maintain key person life insurance on any person.

 

We believe that our future success depends, in large part, upon Phillips Edison and its affiliates’ ability to retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense, and Phillips Edison and its affiliates may be unsuccessful in attracting and retaining such skilled individuals. If Phillips Edison loses or is unable to obtain the services of highly skilled professionals, our ability to implement our investment strategies could be delayed or hindered and the value of your investment may decline.

 

If we make distributions from sources other than our cash flow from operations, then we will have fewer funds available for the acquisition of properties, your overall return may be reduced and the value of a share of our common stock may be diluted.

 

Our organizational documents permit us to make distributions from any source. If our cash flow from operations is insufficient to cover our distributions, then we expect to use the proceeds from this offering, the proceeds from the issuance of securities in the future, or proceeds from borrowings to pay distributions. If we fund distributions from borrowings, sales of properties or the net proceeds from this offering, then we will have fewer funds available for the acquisition of real estate and real estate-related assets resulting in potentially fewer investments, less diversification of our portfolio and a reduced overall return to you. In addition the value of your investment in shares of our common stock may be diluted because funds that would otherwise be available to make investments would be diverted to fund distributions. Further, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gains. There is no limit on the amount of distributions that we can fund from sources other than from cash flows from operations. Both PECO I and PECO II have historically funded a portion of the distributions paid to their respective stockholders from sources other than cash flow from operations. During the early stages of our operations, we will likely fund distributions from sources that will be categorized as return of capital.

 

Our advisor pays our dealer manager all or a portion of the dealer manager fee in connection with the sale of Class T and Class I shares in our primary offering, and if it is unable or fails to do so in the future, our net offering proceeds and your returns would be lower than they otherwise would be.

 

Our advisor has agreed to pay, or cause its affiliates to pay, all or a portion of the dealer manager fee to our dealer manager in connection with the sale of Class T and Class I shares in the primary offering. If our advisor or its affiliates are unable or fail to pay dealer manager fees in the future, then we may have to revise the terms of the offering to provide that we would pay all of the dealer manager fees in connection with the sale of Class T and Class I shares and potentially increase the respective offering prices. Our payment of such additional dealer manager fees would reduce our net offering proceeds from the sale of Class T and Class I shares, which would reduce our returns and the value of your investment.

 

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Future interest rate increases in response to inflation may inhibit our ability to conduct our business and acquire or dispose of real property or real estate-related debt investments at attractive prices and your overall return may be reduced.

 

We will be exposed to inflation risk with respect to income from any long-term leases on real property that do not provide for automatic step ups in rent. High inflation may in the future tighten credit, increase borrowing rates and reduce your returns. Further, if interest rates rise, such as during an inflationary period, the cost of acquisition capital to purchasers may also rise, which could adversely impact our ability to dispose of our assets at attractive sales prices and reduce your returns.

 

Our rights and the rights of our stockholders to recover claims against our directors and officers are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.

 

Maryland law provides that a director has no liability in that capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that our directors and officers will not be liable to us or our stockholders for monetary damages and that we will generally indemnify them for losses unless our directors are negligent or engage in misconduct or our independent directors are grossly negligent or engage in willful misconduct. As a result, you and we may have more limited rights against our directors and officers than might otherwise exist under common law, which could reduce our and your recovery from these persons if they act in a negligent manner. Our charter also requires us, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of the final disposition of a proceeding to any individual who is a present or former director or officer and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity or any individual who, while a director or officer and at our request, serves or has served as a director, officer, partner, member, manager or trustee of another corporation, partnership, limited liability company, joint venture, trust, employment benefit plan or other enterprise and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity. See the “Management—Limited Liability and Indemnification of Directors, Officers, Employees and Other Agents” section of this prospectus for a detailed discussion of the limited liability of our directors, officers, employees and other agents.

 

We may change our targeted investments without stockholder consent.

 

We expect to allocate at least 90% of our portfolio to investments in well-occupied, grocery-anchored neighborhood and community shopping centers leased to a mix of national, regional, and local creditworthy tenants selling necessity-based goods and services in strong demographic markets throughout the United States. We may allocate up to 10% of our portfolio to other real estate properties and real estate-related loans and securities such as mortgage, mezzanine, bridge and other loans; debt and derivative securities related to real estate assets, including mortgage-backed securities; and the equity securities of other REITs and real estate companies. We do not expect our non-controlling equity investments in other public companies to exceed 5% of the proceeds of this offering, assuming we sell the maximum offering amount. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, our current targeted investments. A change in our targeted investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common stock and our ability to make distributions to our stockholders.

 

Risks Related to Conflicts of Interest

 

Our advisor and its affiliates, including all of our executive officers, some of our directors and other key real estate professionals will face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.

 

All of our executive officers and some of our directors are also officers, directors, managers or key professionals of our advisor and other affiliated Phillips Edison entities. Our advisor and its affiliates will receive substantial fees from us. These fees could influence our advisor’s advice to us as well as the judgment of affiliates of our advisor. Among other matters, these compensation arrangements could affect their judgment with respect to:

 

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·the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement, the dealer manager agreement and the property management agreement;
   
·offerings of equity by us, which entitle our dealer manager to dealer manager fees and stockholder servicing fees and will likely entitle our advisor to increased acquisition and asset management fees;
   
·acquisitions of investments, which entitle our advisor to acquisition and asset management fees, and, in the case of acquisitions or investments from other Phillips Edison- or Griffin-sponsored programs, might entitle affiliates of our advisor to disposition fees in connection with its services for the seller;
   
·borrowings to acquire properties and other investments, which borrowings will increase the acquisition and asset management fees payable to our advisor;
   
·whether and when we seek to list our common stock on a national securities exchange, which listing could entitle our advisor to the subordinated incentive listing distribution;
   
·whether and when we seek to commence a follow-on offering as a “NAV REIT,” which offering could entitle our advisor to additional fees; and
   
·whether and when we seek to sell the company or its assets, which sale could entitle our advisor to disposition fees and to the subordinated participation in net sales proceeds and terminate the asset management fee.

 

The fees our advisor receives in connection with the acquisition and management of assets are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. Additionally, the cost of assets on which the asset management fee is based is inclusive of acquisition expenses paid in connection with the acquisition of assets. This may influence our advisor to recommend riskier transactions to us and to recommend acquisitions at greater purchase prices.

 

Our advisor will face conflicts of interest relating to the acquisition of assets and such conflicts may not be resolved in our favor, which could limit our ability to make distributions and reduce your overall investment return.

 

We rely on our Phillips Edison sponsor and its key real estate professionals to identify suitable investment opportunities for us. The executive officers and several of the other key real estate professionals at our Phillips Edison sponsor are also the key real estate professionals at the advisors to other Phillips Edison-sponsored programs. As such, Phillips Edison-sponsored programs rely on many of the same real estate professionals as will future programs. Certain investment opportunities that may be suitable for us may also be suitable for other Phillips Edison programs, including PECO I and PECO II, which both generally seek to acquire properties that meet our target investment criteria. Generally, our advisor will not pursue any opportunity to acquire any real estate properties that are directly competitive with our specific investment strategies, unless and until the opportunity is first presented to us, subject to certain exceptions, including the rotation of investment opportunities between us, PECO I and PECO II. See the “Conflicts of Interest—Our Affiliates’ Interests in Other Real Estate Programs—Allocation of Investment Opportunities” section of this prospectus. Thus, the executive officers and real estate professionals of our Phillips Edison sponsor could direct attractive investment opportunities to other entities or investors. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions. For a detailed description of the conflicts of interest that our advisor will face, see generally the “Conflicts of Interest” section of this prospectus.

 

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Our advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our advisor, which conflicts could result in a disproportionate benefit to the other venture partners at our expense.

 

If approved by our Conflicts Committee, we may enter into joint venture agreements with other Phillips Edison- or Griffin-sponsored programs or affiliated entities for the acquisition, development or improvement of properties or other investments. We may also enter into joint ventures with third parties in which an affiliate of our advisor provides separate management services. Our officers and the officers and key employees of our sponsors will face conflicts of interest in determining which program should enter into any particular joint venture agreement. These persons may also face a conflict in structuring the terms of the relationship between our interests and the interests of the Phillips Edison-affiliated co-venturer and in managing the joint venture. Any joint venture agreement or transaction between us and a Phillips Edison- or Griffin-affiliated co-venturer and any joint venture with a third party in which the venture is managed by an affiliate of our advisor will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated parties. These joint ventures may benefit the other joint venture parties or affiliates of our advisor at our expense, increasing the risk of loss on your investment.

 

Our Phillips Edison sponsor, the real estate professionals assembled by our Phillips Edison sponsor, their affiliates and our officers will face competing demands relating to their time, and this may cause our operations and your investment to suffer.

 

We rely on our Phillips Edison sponsor, the real estate professionals it has assembled, and their affiliates and officers for the day-to-day operation of our business. Our Phillips Edison sponsor and its real estate professionals and affiliates have interests in other Phillips Edison programs and engage in other business activities. As a result of their interests in other Phillips Edison programs and the fact that they have engaged in and they will continue to engage in other business activities, they will face conflicts of interest in allocating their time among us, our advisor and other Phillips Edison-sponsored programs and other business activities in which each is involved. Furthermore, some or all of these individuals may become employees of another Phillips Edison-sponsored program in an internalization transaction or, if we internalize our advisor, may not become our employees as a result of their relationship with other Phillips Edison-sponsored programs. If these events occur, the returns on our investments, and the value of our stockholders’ investments, may decline.

 

Because other real estate programs offered through our dealer manager will conduct offerings concurrently with our offering, our dealer manager faces potential conflicts of interest arising from competition among us and these other programs for investors and investment capital, and such conflicts may not be resolved in our favor.

 

Our Griffin sponsor is the sponsor of another non-traded REIT that is raising capital in ongoing public offerings of common stock. Additionally, Griffin may sponsor additional programs in the future that may raise capital during a portion of the same period in which we seek to raise capital. Our dealer manager is or will be the dealer manager for such Griffin-sponsored programs. Affiliates of our dealer manager may profit more from the sale of other Griffin-sponsored programs than from the sale of our shares. As a result, our dealer manager may face conflicts of interests when selling our shares and the shares of other programs.

 

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Our executive officers and some of our directors face conflicts of interest related to their positions with our sponsors and their affiliates, which could hinder our ability to implement our business strategy and to generate returns to you.

 

Our executive officers and some of our directors are also executive officers, directors, managers and key professionals of our sponsors and other affiliated entities. Their loyalties to these other entities could result in actions or inactions that breach their fiduciary duties to us and are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. If we do not successfully implement our business strategy, then we may be unable to generate the cash needed to make distributions to you and to maintain or increase the value of our assets.

 

If we terminate our advisory agreement, our advisor may be entitled to distributions from our Operating Partnership, which may discourage us from terminating our advisory agreement.

 

Our operating partnership agreement will require us to pay a performance-based termination distribution to our advisor if we terminate our advisor prior to listing our shares for trading on an exchange or, absent such listing, in respect of its participation in net sale proceeds. The subordinated distribution will provide a 15% subordinated return to the advisor only if stockholders receive a return of their invested capital plus a 6% cumulative, non-compounded annual return from inception through the termination date. To avoid paying this distribution, our board of directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest.

 

Risks Related to This Offering and Our Corporate Structure

 

Because we rely on affiliates of our sponsors to provide advisory, property management and dealer manager services, if Phillips Edison or Griffin is unable to meet its obligations, we may be required to find alternative providers of these services, which could result in a significant and costly disruption of our business.

 

Our Phillips Edison and Griffin sponsors jointly own our advisor. Additionally, our Phillips Edison sponsor owns and controls our property manager and our Griffin sponsor owns and controls our dealer manager. The operations of our advisor, our property manager and our dealer manager rely substantially on Phillips Edison and/or Griffin. In the event that Phillips Edison and/or Griffin become unable to meet their respective obligations as they become due, we might be required to find alternative service providers, which could result in a significant disruption of our business and would likely adversely affect the value of your investment in us. Further, given the non-solicitation provision contained in our advisory agreement, it would be difficult for us to utilize any current employees of our sponsors that provide services to us.

 

Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.

 

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, our charter prohibits a person from beneficially or constructively owning more than 9.8% of our outstanding shares, unless exempted by our board of directors. This restriction may delay, defer or prevent a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all, or substantially all, of our assets) that might provide a premium price for holders of our common stock.

 

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Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.

 

Our charter permits our board of directors to issue up to 1,010,000,000 shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of stock of any class or series that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also delay, defer or prevent a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all, or substantially all, of our assets) that might provide a premium price to holders of our common stock.

 

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if our subsidiaries or we become an unregistered investment company, then we could not continue our business.

 

Neither we nor any of our subsidiaries intend to register as investment companies under the Investment Company Act. If our subsidiaries or we were obligated to register as investment companies, then we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:

 

·limitations on capital structure;
   
·restrictions on specified investments;
   
·prohibitions on transactions with affiliates; and
   
·compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

 

Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:

 

·pursuant to Section 3(a)(1)(A), is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities (the “primarily engaged test”); or
   
·pursuant to Section 3(a)(1)(C), is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of such issuer’s total assets (exclusive of United States government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities” excludes United States government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).

 

We believe that we and our Operating Partnership will not be required to register as an investment company. With respect to the 40% test, most of the entities through which we and our Operating Partnership will own our assets will be majority-owned subsidiaries that will not themselves be investment companies and will not be relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7).

 

With respect to the primarily engaged test, we and our Operating Partnership will be holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our Operating Partnership, we and our Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.

 

We believe that any of the subsidiaries of our Operating Partnership that fail to meet the 40% test will usually, if not always, be able to rely on Section 3(c)(5)(C) of the Investment Company Act for an exception from the definition of an investment company. Otherwise, they should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that any of the subsidiaries of our Operating Partnership relying on Section 3(c)(5)(C) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. If any subsidiary relies on Section 3(c)(5)(C), then we expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets. See the “Investment Objectives and Policies—Investment Limitations Under the Investment Company Act of 1940” section of this prospectus.

 

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Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exception from the definition of an investment company under the Investment Company Act.

 

If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, then we may need to modify our investment portfolio in order to maintain our REIT qualification or exception from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT qualification and Investment Company Act considerations.

 

You may not be able to sell your shares under our share repurchase program and, if you are able to sell your shares under the program, you may not be able to recover the amount of your investment in our shares.

 

Our board of directors has approved the share repurchase program, but may amend, suspend or terminate our share repurchase program at any time upon 30 days’ notice without stockholder approval. During any calendar year, we may purchase no more than 5.0% of the weighted-average number of shares outstanding during the prior calendar year. Our stockholders must hold their shares for at least one year in order to participate in the share repurchase program, except for repurchases sought upon a stockholder’s death, “qualifying disability” and “determination of incompetence.” The cash available for repurchase on any particular date will generally be limited to the proceeds from the distribution reinvestment plan during the period consisting of the preceding four fiscal quarters, less amounts already used for repurchases since the beginning of that period; however, subject to the limitations described above, we may use other sources of cash at the discretion of our board of directors. In addition, our board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase. Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the share repurchase program. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the share repurchase program. These limits may prevent us from accommodating all repurchase requests made in any year. These restrictions would severely limit your ability to sell your shares should you require liquidity and would limit your ability to recover the value you invested. Therefore, in making a decision to purchase shares of our common stock, you should not assume that you will be able to sell any of your shares back to us pursuant to our share repurchase program.  For a more detailed description of the share repurchase program, see the “Description of Shares—Share Repurchase Program” section of this prospectus.

 

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The offering prices of shares of our common stock to be sold in this primary offering were not established on an independent basis and bear no relationship to the net value of our assets. The offering price is likely to be higher than the amount our stockholders would receive per share if we were to liquidate at this time. We will use our “amount available for investment/net investment amount” as the estimated value of our shares until we provide an estimated NAV per share based on the value of our assets. Even when we begin to estimate the NAV of our shares, the value of our shares will be based upon a number of assumptions that may not be accurate or complete.

 

We set the primary offering prices of our Class T and Class I shares arbitrarily. The primary offering prices of our shares bear no relationship to our book or asset values or to any other established criteria for valuing shares. Because the offering prices are not based upon any independent valuation, the offering prices are likely to be higher than the proceeds that our stockholders would receive upon liquidation or a resale of their shares if they were to be listed on an exchange or actively traded by broker-dealers, primarily because (i) of the upfront fees paid in connection with the sale of our Class T shares, (ii) through October 11, 2017 we had sold approximately 2.6 million shares of our Class A common stock at an average purchase price of approximately $9.85 per share and received average net proceeds of approximately $9.00 per share in private transactions, (iii) we incurred certain organization and other offering expenses in connection with our private offering, (iv) we have paid cash distributions to Class A stockholders that exceed our cash flow from operations, and (v) we have issued stock dividends to Class A stockholders.

 

To assist FINRA members and their associated persons that participate in this offering of common stock in meeting their customer account statement reporting obligations pursuant to applicable FINRA and NASD Conduct Rules, we will disclose in each annual report distributed to stockholders a per share estimated value of our shares deemed per FINRA rules to be developed in a manner reasonably designed to ensure it is reliable, the method by which it was developed, and the date of the estimated valuation.

 

Initially, we will report the net investment amounts of our shares as our estimated values per share, which net investment amount will be based on the “amount available for investment/net investment amount” percentages shown in our estimated use of proceeds table. This amount is 96.0% of the $10.94 primary offering price of our Class T shares of common stock and 100% of the $10.00 primary offering price of our Class I shares of common stock. These amounts will equal $10.50 and $10.00, respectively, for our Class T and Class I shares, which is the purchase price of our primary offering shares, less the associated selling commission, dealer manager fee, and estimated organization and other offering expenses paid by us as shown in our estimated use of proceeds table. This amount does not take into account the stockholder servicing fee that we pay in connection with Class T shares sold in the primary offering. No later than 150 days after the second anniversary of the date on which we commence this offering, we will provide an estimated NAV per share that we will use as our estimated value per share. This value will be based on valuations of our assets and liabilities performed at least annually, by, or with the material assistance or confirmation of, a third-party valuation expert or service and will comply with the IPA Valuation Guidelines. Once we announce an estimated NAV per share we generally expect to update the estimated NAV per share on an annual basis. Our estimated per share value will be accompanied by any disclosures required under the FINRA and NASD Conduct Rules.

 

Until we report an estimated NAV, the initial reported values will likely differ from the price that a stockholder would receive in the near term upon a resale of his or her shares or upon a liquidation of our company. Even when determining the estimated value of our shares by estimating a NAV per share, we will estimate the value of our shares based upon a number of assumptions that may not be accurate or complete. Accordingly, these estimates may not be an accurate reflection of the fair market value of our investments and will not likely represent the amount of net proceeds that would result from an immediate sale of our assets.

 

Because the current offering prices for our Class T and Class I shares in this public offering exceed the net tangible book value per share, investors in this offering will experience immediate dilution in the net tangible book value of their shares.

 

We are offering shares of our Class T common stock and our Class I common stock in this primary public offering at $10.94 and $10.00 per share, respectively. Our current public offering prices for our Class T and Class I shares exceed our net tangible book value per share, which amount is the same for both classes and is equivalent to the net tangible book value per share of our Class A common stock. Our net tangible book value per share is calculated as total book value of assets minus total book value of liabilities, divided by the total number of shares of common stock outstanding. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the company in accordance with our investment objectives. However, net tangible book value does reflect certain dilution in value of our common stock from the issue price in this offering primarily as a result of (i) the substantial fees paid in connection with this offering and our primary private offering, including selling commissions and fees reallowed by our dealer manager to participating broker dealers, (ii) the incursion by our advisor of approximately $2.2 million in reimbursable organization and other offering costs (which exclude selling commissions and dealer manager fees) on our behalf in connection with our private offering, (iii) the fees and expenses paid to our advisor and its affiliates in connection with the selection, acquisition and management of our investments, (iv) general and administrative expenses, (v) accumulated depreciation and amortization of real estate investments, (vi) the sale of approximately 2.6 million shares of our Class A common stock in private transactions at an average purchase price of approximately $9.85 per share for which we received average net proceeds of approximately $9.00 per share, (vii) the payment of distributions to Class A stockholders that exceed our cash flow from operations, and (viii) the issuance of stock dividends to Class A stockholders. To the extent that we reimburse our advisor for organization and offering expenses incurred in connection with our private offering, we will reimburse our advisor using the proceeds from our private offering. As of June 30, 2017, the net tangible book value per share for our Class A common stock, which was the only class outstanding as of June 30, 2017, was $5.50.

 

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The actual value of shares that we repurchase under our share repurchase program may be substantially less than what we pay.

 

Under our share repurchase program, shares may be repurchased at varying prices depending on (i) the number of years the shares have been held, (ii) the purchase price paid for the shares, and (iii) whether the repurchases are sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence.” The maximum price that may be paid under the program is $10.94 per share, which is the offering price of our Class T shares of common stock in the primary portion of this offering (ignoring purchase price discounts for certain categories of purchasers). Although this purchase price represents the most recent price at which most investors are willing to purchase Class T shares in this offering, this value is likely to differ from the price at which a stockholder could resell his or her shares for the reasons discussed in the risk factor above. Thus, when we repurchase shares of our Class T common stock at $10.94 per share, the actual value of the shares that we repurchase is likely to be less, and the repurchase is likely to be dilutive to our remaining stockholders. Even at lower repurchase prices, the actual value of the shares may be substantially less than what we pay and the repurchase may be dilutive to our remaining stockholders.

 

Because the dealer manager is one of our affiliates, you will not have the benefit of an independent review of us or the prospectus customarily undertaken in underwritten offerings; the absence of an independent due diligence review increases the risks and uncertainty you face as a stockholder.

 

The dealer manager, Griffin Capital Securities, LLC, is one of our affiliates. Accordingly, the due diligence investigation of us by the dealer manager cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer.

 

Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.

 

Potential investors in this offering do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 1,010,000,000 shares of capital stock, of which 1,000,000,000 shares are designated as common stock and 10,000,000 are designated as preferred stock. Our board of directors may increase the number of authorized shares of capital stock without stockholder approval. After you purchase shares in this offering, our board may elect to (i) sell additional equity securities in future public or private offerings, (ii) issue equity interests in private offerings, (iii) issue share-based awards to our independent directors or to our officers or employees or to the officers or employees of our sponsors or any of their affiliates, (iv) issue shares to our advisor or its successors or assigns, in payment of an outstanding fee obligation or (v) issue shares of our common stock to sellers of properties or assets we acquire in connection with an exchange of limited partnership interests of our Operating Partnership. To the extent we issue additional equity interests after our investors purchase shares in this offering, their percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our real estate investments, our investors may also experience dilution in the book value and fair value of their shares.

 

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Payment of substantial fees and expenses to our advisor and its affiliates will reduce cash available for investment and distribution and increases the risk that you will not be able to recover the amount of your investment in our shares.

 

Our advisor and its affiliates will perform services for us in connection with the offer and sale of our shares, the selection and acquisition of our investments, the management and leasing of our properties and the administration of our other investments. We will pay them substantial fees for these services, which will result in immediate dilution to the value of your investment and will reduce the amount of cash available for investment or distribution to stockholders. Depending primarily upon the number of shares we sell in this primary offering, we estimate that we will use 91.3% of the gross proceeds from the sale of Class T shares and 95.1% of the gross proceeds from the sale of Class I shares in the primary offering for investments, assuming the maximum offering amount.

 

We also pay significant fees to our advisor and its affiliates during our operational stage. Those fees include property management fees, asset management fees and obligations to reimburse our advisor and its affiliates for expenses they incur in connection with their providing services to us, including certain personnel services.

 

These fees and other potential payments increase the risk that the amount available for distribution to common stockholders upon a liquidation of our portfolio would be less than the purchase price of the shares in this offering. Substantial consideration paid to our advisor and its affiliates also increases the risk that you will not be able to resell your shares at a profit, even if our shares are listed on a national securities exchange. See the “Management Compensation” section of this prospectus.

 

Our advisor may receive economic benefits from its status as a special limited partner without bearing any of the risk associated with owning properties.

 

Our advisor is a special limited partner in our Operating Partnership. As the special limited partner, our advisor may be entitled to receive certain distributions, including an incentive distribution of net proceeds from the sale of properties after we have received and paid to our stockholders the threshold return. We will bear all of the risk associated with the properties but, as a result of the incentive distributions to our advisor, we may not be entitled to all of our Operating Partnership’s proceeds from a property sale and certain other events.

 

If we are unable to obtain funding for future capital needs, cash distributions to our stockholders could be reduced and the value of our investments could decline.

 

If we need additional capital in the future to improve or maintain our properties or for any other reason, we may have to obtain financing from sources beyond our cash flow from operations, such as borrowings, sales of assets or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, then our investments may generate lower cash flows or decline in value, or both, which would limit our ability to make distributions to you and could reduce the value of your investment.

 

Our board of directors could opt into certain provisions of the Maryland General Corporation Law in the future, which may discourage others from trying to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.

 

Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders or affiliates of interested stockholders are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Also under Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation are excluded from the vote on whether to accord voting rights to the control shares. Should our board opt into these provisions of Maryland law, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. See the “Description of Shares—Business Combinations” and “Description of Shares—Control Share Acquisitions” sections of this prospectus.

 

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Because Maryland law permits our board to adopt certain anti-takeover measures without stockholder approval, investors may be less likely to receive a “control premium” for their shares.

 

In 1999, the State of Maryland enacted legislation that enhances the power of Maryland corporations to protect themselves from unsolicited takeovers. Among other things, the legislation permits our board, without stockholder approval, to amend our charter to:

 

·stagger our board of directors into three classes;

 

·require a two-thirds stockholder vote for removal of directors;

 

·provide that only the board can fix the size of the board;

 

·provide that all vacancies on the board, however created, may be filled only by the affirmative vote of a majority of the remaining directors in office; and

 

·require that special stockholder meetings may only be called by holders of a majority of the voting shares entitled to be cast at the meeting.

 

Under Maryland law, a corporation can opt to be governed by some or all of these provisions if it has a class of equity securities registered under the Exchange Act and has at least three independent directors. Our charter does not prohibit our board from opting into any of the above provisions permitted under Maryland law. Becoming governed by any of these provisions could discourage an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our securities. For more information about Subtitle 8 provisions of Maryland law discussed here, see the “Description of Shares—Subtitle 8” section of this prospectus.

 

We could incur significant costs associated with being self-managed and may not be able to retain or replace key personnel; and we may increase our exposure to litigation if we internalize our management functions.

 

We may internalize management functions provided by our advisor, our property manager and their respective affiliates by acquiring assets and personnel from our advisor, our property manager or their affiliates. In the event we were to acquire our advisor or our property manager, we cannot be sure of the terms relating to any such acquisition.

 

If we internalize management functions, then we would no longer bear the costs of the various fees and expenses we expect to pay to our advisor and to our property manager under their respective agreements; however, our direct expenses would increase due to the inclusion of general and administrative costs, including legal, accounting, and other expenses related to corporate governance, SEC reporting and compliance. We would also incur the compensation and benefits costs of our officers and other employees and consultants that are now paid by our advisor, our property manager or their affiliates. In addition, we may issue equity awards to directors, officers, employees and consultants, which awards would decrease net income and may further dilute your investment. If the expenses we assume as a result of an internalization are higher than the expenses we will no longer pay to our advisor, our property manager and their affiliates, then our net income per share and funds from operations per share would be lower than they otherwise would have been had we not acquired these entities, potentially decreasing the amount of funds available for distribution.

 

Additionally, if we internalize our management functions, then we would employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances. Also, there can be no assurances that we would be successful in retaining key personnel at our advisor or property manager in the event of an internalization transaction. In addition, we could have difficulty integrating the functions currently performed by our advisor, our property manager and their affiliates. Currently, the officers and employees of our sponsors and their affiliates perform asset management, property management, and general and administrative functions, including accounting and financial reporting, for multiple entities. We may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization transaction effectively could result in our incurring additional costs and/or experiencing deficiencies in our disclosures controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs and our management’s attention could be diverted from effectively managing our properties and overseeing other real estate-related assets.

 

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In addition, in recent years, internalization transactions have been the subject of stockholder litigation. Stockholder litigation can be costly and time-consuming, and there can be no assurance that any litigation expenses we might incur would not be significant or that the outcome of litigation would be favorable to us.

 

Risks Related to Investments in Real Estate

 

Economic and regulatory changes that impact the real estate market generally may decrease the value of our investments and weaken our operating results.

 

The properties we acquire and their performance are subject to the risks typically associated with real estate, including:

 

·downturns in national, regional and local economic conditions;

 

·increased competition for real estate assets targeted by our investment strategy;

 

·adverse local conditions, such as oversupply or reduction in demand and changes in real estate zoning laws that may reduce the desirability of real estate in an area;

 

·vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;

 

·changes in the supply of or the demand for similar or competing properties in an area;

 

·changes in interest rates and the availability of permanent mortgage financing, which may render the sale of a property or loan difficult or unattractive;

 

·changes in governmental regulations, including those involving tax, real estate usage, environmental and zoning laws;

 

·the illiquidity of real estate investments generally; and

 

·periods of high interest rates and tight money supply.

 

Any of the above factors, or a combination thereof, could result in a decrease in the value of our investments, which would have an adverse effect on our results of operations, reduce the cash available for distributions and the return on your investment.

 

We depend on our tenants for revenue, and, accordingly, our revenue and our ability to make distributions to our stockholders is dependent upon the success and economic viability of our tenants.

 

We depend upon tenants for revenue. Rising vacancies across commercial real estate result in increased pressure on real estate investors and their property managers to find new tenants and keep existing tenants. A property may incur vacancies either by the expiration of a tenant lease, the continued default of a tenant under its lease or the early termination of a lease by a tenant. If vacancies continue for a long period of time, then we may suffer reduced revenues resulting in less cash available to distribute to stockholders. We may have to offer inducements, such as free rent and tenant improvements, to compete for or to maintain attractive tenants. In addition, if we are unable to attract additional or replacement tenants, the resale value of the property could be diminished, even below our cost to acquire the property, because the market value of a particular property depends principally upon the value of the cash flow generated by the leases associated with that property. Such a reduction on the resale value of a property could also reduce the value of our stockholders’ investments.

 

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Retail conditions may adversely affect our base rent and, subsequently, our income.

 

Some of our leases may provide for base rent plus contractual base rent increases. A number of our retail leases may also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue which we may derive from percentage rent leases could decline upon a general economic downturn.

 

Our revenue will be affected by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space and adversely affect the returns on our stockholders’ investments.

 

In the retail sector, a tenant occupying all or a large portion of the gross leasable area of a retail center, commonly referred to as an anchor tenant, may become insolvent, may suffer a downturn in business or may decide not to renew its lease. Any of these events could result in a reduction or cessation in rental payments to us and could adversely affect our financial condition. A lease termination or cessation of operations by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases may permit cancellation or rent reduction if another tenant terminates its lease or ceases its operations at that shopping center. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases. In the event that we are unable to re-lease the vacated space to a new anchor tenant, then we may incur additional expenses in order to re-model the space to be able to re-lease the space to more than one tenant.

 

A high concentration of our properties in a particular geographic area, or with tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.

 

We expect that our properties will be diverse according to geographic area and industry of our tenants. If, however, we have a concentration of properties in any particular geographic area, then any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if tenants of our properties are concentrated in a certain industry or retail category, any adverse effect on that industry generally would have a disproportionately adverse effect on our portfolio.

 

Our retail tenants will face competition from numerous retail channels, which may reduce our profitability and ability to pay distributions.

 

Retailers at our properties will face continued competition from discount or value retailers, factory outlet centers, wholesale clubs, mail order catalogues and operators, television shopping networks and shopping via the internet. Such competition could adversely affect our tenants and, consequently, our revenues and funds available for distribution.

 

If we enter into long-term leases with retail tenants, those leases may not result in fair value over time.

 

Long-term leases may not allow for significant changes in rental payments and if we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases, then significant increases in future property operating costs could result in receiving less than fair value from these leases. Such circumstances would adversely affect our revenues and funds available for distribution.

 

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The bankruptcy or insolvency of a major tenant may adversely affect our operations and our ability to pay distributions to stockholders.

 

The bankruptcy or insolvency of a significant tenant or a number of smaller tenants would have an adverse impact on our financial condition and may adversely affect our ability to pay distributions to our stockholders. Generally, under bankruptcy law, a debtor tenant has 120 days to exercise the option of assuming or rejecting the obligations under any unexpired lease for nonresidential real property, which period may be extended once by the bankruptcy court. If the tenant assumes its lease, then the tenant must cure all defaults under the lease and may be required to provide adequate assurance of its future performance under the lease. If the tenant rejects the lease, then we will have a claim against the tenant’s bankruptcy estate. Although rent owing for the period between filing for bankruptcy and rejection of the lease may be afforded administrative expense priority and paid in full, pre-bankruptcy arrears and amounts owing under the remaining term of the lease will be afforded general unsecured claim status (absent collateral securing the claim). Moreover, amounts owing under the remaining term of the lease will be capped. Other than equity and subordinated claims, general unsecured claims are the last claims paid in a bankruptcy and, therefore, funds may not be available to pay such claims at all or in full.

 

Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on our stockholders’ investment.

 

We will face competition from various entities for investment opportunities in retail properties, including other REITs, pension funds, insurance companies, investment funds and companies, partnerships, and developers. Many of these entities have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a tenant or the geographic location of its investments. Competition from these entities may reduce the number of suitable investment opportunities offered to us or increase the bargaining power of property owners seeking to sell.

 

We may be unable to successfully integrate and operate acquired properties, which may have a material adverse effect on our business and operating results.

 

Even if we make acquisitions on favorable terms, we may not be able to successfully integrate and operate them. We may be required to invest significant capital and resources after an acquisition to maintain or grow that investment. In addition, we may need to adapt our management, administrative, accounting, and operational systems, or hire and retain sufficient operational staff, to integrate and manage successfully any future acquisitions of additional assets. These and other integration efforts may disrupt our operations, divert our advisor’s attention away from day-to-day operations, or cause us to incur unanticipated costs. The difficulties of integration may be increased by the necessity of coordinating operations in geographically dispersed locations. Our failure to integrate successfully any acquisitions into our portfolio could have a material adverse effect on our business and operating results. Further, acquired properties may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. The failure to discover such issues prior to such acquisition could have a material adverse effect on our business and results of operations.

 

We may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so, limiting our ability to pay cash distributions to our stockholders.

 

Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties on the terms that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. We can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties on the terms we want could reduce our cash flow and limit our ability to make distributions to our stockholders and could reduce the value of our stockholders’ investments. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Our inability to sell a property when we desire to do so may cause us to reduce our selling price for the property. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a property could adversely affect our ability to pay distributions to our stockholders.

 

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We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.

 

A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance and exist in order to protect the yield expectations of lenders. We expect that some of our properties will be subject to lock-out provisions. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties when we may desire to do so. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

 

We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.

 

The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will survive for only a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property.

 

CC&Rs may restrict our ability to operate a property.

 

We expect that some of our properties will be contiguous to other parcels of real property, comprising part of the same retail center. In connection with such properties, we will be subject to significant covenants, conditions and restrictions, known as “CC&Rs,” that restrict the operation of such properties and any improvements on such properties, and relate to granting easements on such properties. Moreover, the operation and management of the contiguous properties may affect our properties that are subject to CC&Rs. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions to our stockholders.

 

If we sell a property by providing financing to the purchaser, then we will bear the risk of default by the purchaser, which could delay or reduce the distributions available to our stockholders.

 

We intend to use our best efforts to sell for cash any of our properties that we decide to offer for sale. However, in some instances, we may sell our properties by providing financing to purchasers. When we provide financing to a purchaser, we will bear the risk that the purchaser may default, which could reduce our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of the sale to our stockholders, or the reinvestment of the proceeds in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively affect our ability to pay cash distributions to our stockholders.

 

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If we set aside insufficient capital reserves, then we may be required to defer necessary capital improvements.

 

If we do not have enough reserves for capital to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, then we may be required to defer necessary improvements to a property. Deferred improvements may cause that property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow because of fewer potential tenants being attracted to the property. If this happens, then we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively affected.

 

Our operating expenses may increase in the future and, to the extent such increases cannot be passed on to tenants, our cash flow and our operating results would decrease.

 

Operating expenses, such as expenses for fuel, utilities, labor and insurance, are not fixed and may increase in the future. There is no guarantee that we will be able to pass such increases on to our tenants. To the extent such increases cannot be passed on to tenants, any such increase would cause our cash flow and our operating results to decrease.

 

Our real properties will be subject to property taxes that may increase in the future, which could adversely affect our cash flow.

 

Our real properties will be subject to real property taxes that may increase as tax rates change or as the real properties are assessed or reassessed by taxing authorities. We anticipate that certain of our leases will generally provide that the property taxes, or increases therein, are charged to the tenants as an expense related to the real properties that they occupy, while other leases will generally provide that we are responsible for paying these taxes. In any case, as the owner of the properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If real property taxes increase, then our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes even if otherwise stated under the terms of the lease. If we fail to pay any such taxes, then the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale. In addition, we are generally responsible for real property taxes related to any vacant space or unimproved land.

 

Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows and the return on our stockholders’ investments.

 

We will attempt to adequately insure all of our real properties against casualty losses. There are certain types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Such insurance policies may not be available at reasonable costs, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses. Changes in the cost or availability of insurance could expose us to uninsured casualty losses. If any of our properties incur a casualty loss that is not fully insured, then the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government.

 

Future joint venture partners could take actions that may decrease the value of an investment to us and lower our stockholders’ overall return.

 

We may enter into joint ventures to acquire properties and other assets. We may also purchase and renovate properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:

 

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·that our co-venturer, co-tenant or partner in an investment could become insolvent or bankrupt;

 

·that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;

 

·that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions, requests, policies or objectives; or

 

·that such co-venturer, co-tenant or partner may grant us a right of first refusal or buy/sell right to buy out such co-venturer or partner, and that we may be unable to finance such a buy-out if it becomes exercisable or we are required to purchase such interest at a time when it would not otherwise be in our best interest to do so. If our interest is subject to a buy/sell right, then we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase an interest of a co-venturer subject to the buy/sell right, in which case we may be forced to sell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest.

 

Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment and therefore your return on investment.

 

Costs of complying with governmental laws and regulations related to environmental protection and human health and safety may reduce our net income and the cash available for distributions to our stockholders.

 

Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials, and other health and safety-related concerns.

 

Some of these laws and regulations impose joint and several liability on the tenants, owners or operators of real property for the costs to investigate or remediate contaminated properties, regardless of fault, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. Our tenants’ operations, the condition of properties at the time we buy them, operations near our properties, such as the presence of underground storage tanks, and activities of unrelated third parties may affect our properties.

 

The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Some of these laws and regulations have been amended to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Any expenditures, fines, penalties, or damages we must pay may reduce our ability to make distributions and may reduce the value of our stockholders’ investments.

 

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The costs of defending against claims of environmental liability or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.

 

Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The costs of defending against claims of environmental liability or of paying personal injury claims could reduce the amounts available for distribution to our stockholders. Generally, we expect that the real estate properties that we acquire will have been subject to Phase I environmental assessments at the time they were acquired. A Phase I environmental assessment or site assessment is an initial environmental investigation to identify potential environmental liabilities associated with the current and past uses of a given property.

 

Costs associated with complying with the Americans with Disabilities Act may decrease cash available for distributions.

 

Our properties are generally subject to the Americans with Disabilities Act of 1990, as amended (the “Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. We cannot assure our stockholders, however, that we will be able to acquire properties or allocate responsibilities in this manner. Any of our funds used for Disabilities Act compliance will reduce our net income and the amount of cash available for distributions to our stockholders.

 

Risks Related to Real Estate-Related Investments

 

Our investments in mortgage, mezzanine, bridge and other loans as well as our investments in mortgage-backed securities, collateralized debt obligations and other debt may be affected by unfavorable real estate market conditions, which could decrease the value of those assets and the return on your investment.

 

If we make or invest in mortgage, mezzanine or other real estate-related loans, then we will be at risk of defaults by the borrowers on those loans. These defaults may be caused by many conditions beyond our control, including interest rate levels and local and other economic conditions affecting real estate values. We will not know whether the values of the properties ultimately securing our loans will remain at the levels existing on the dates of origination of those loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans. Our investments in mortgage-backed securities, collateralized debt obligations and other real estate-related debt will be similarly affected by real estate market conditions.

 

If we make or invest in mortgage, mezzanine, bridge or other real estate loans, our loans will be subject to interest rate fluctuations that will affect our returns as compared to market interest rates; accordingly, the value of our stockholders’ investment would be subject to fluctuations in interest rates.

 

If we make or invest in fixed rate, long-term loans and interest rates rise, the loans could yield a return that is lower than then-current market rates. An interest rate decrease will adversely affect us to the extent that loans are prepaid because we may not be able to reinvest the proceeds at as high of an interest rate. Our revenues will also decrease if we invest in variable-rate loans and interest rates decrease. For these reasons, if we invest in mortgage, mezzanine, bridge or other real estate loans, then our returns on those loans and the value of our stockholders’ investment will be subject to fluctuations in interest rates.

 

We have not established investment criteria limiting geographical concentration of our mortgage investments or requiring a minimum credit quality of borrowers.

 

We have not established any limit upon the geographic concentration of properties securing mortgage loans acquired or originated by us or upon the credit quality of borrowers of uninsured mortgage assets acquired or originated by us. As a result, properties securing our mortgage loans may be overly concentrated in certain geographic areas and the underlying borrowers of our uninsured mortgage assets may have low credit quality. We may experience losses due to geographic concentration or low credit quality.

 

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Mortgage investments that are not United States government insured and non-investment-grade mortgage assets involve risk of loss.

 

We may originate and acquire uninsured and non-investment-grade mortgage loans and mortgage assets, including mezzanine loans, as part of our investment strategy. While holding these interests, we will be subject to risks of borrower defaults, bankruptcies, fraud and special hazard losses that are not covered by standard hazard insurance. In addition, the costs of financing the mortgage loans could exceed the return on the mortgage loans. In the event of any default under mortgage loans held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan. To the extent we suffer such losses with respect to our investments in mortgage loans, the value of our stockholders’ investments may be adversely affected.

 

We may invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.

 

Our mortgage loan assets may be non-recourse loans. If a borrower defaults under a non-recourse mortgage loan, then the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan may be less than the amount owed under the mortgage loan. As to those mortgage loan assets that provide for recourse against the borrower and its assets generally, we cannot assure our stockholders that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.

 

Interest rate fluctuations may adversely affect our income and affect the value of our mortgage assets, net income and common stock.

 

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations can adversely affect our income in many ways and present a variety of risks including the risk of variances in the yield curve, a mismatch between asset yields and borrowing rates and changing prepayment rates.

 

Variances in the yield curve may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Short-term interest rates are ordinarily lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our assets may bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our mortgage loan assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested in mortgage loans, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.

 

Prepayment rates on our mortgage loans may adversely affect our yields.

 

The value of our mortgage loan assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control and, consequently, such prepayment rates cannot be predicted with certainty. To the extent we originate mortgage loans, we expect that such mortgage loans will have a measure of protection from prepayment in the form of prepayment lock-out periods or prepayment penalties. This protection, however, may not be available with respect to investments that we acquire but do not originate. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to fully recoup our cost of acquisition of certain investments.

 

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Before making any investment, we will consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment. These considerations will affect our decision whether to originate or purchase such an investment and the price offered for such an investment. No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions and the quality of management of the underlying property. Our inability to assess investment yields accurately may result in our purchasing assets that do not perform as well as expected, which may adversely affect the value of our stockholders’ investments.

 

Volatility of values of mortgaged properties may adversely affect our mortgage loans.

 

Real estate property values and net operating income derived from real estate properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described in this prospectus relating to general economic conditions and owning real estate investments. In the event its net operating income decreases, a borrower may have difficulty paying our mortgage loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could also cause us to suffer losses.

 

Mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties.

 

We may make and acquire mezzanine loans. These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.

 

Our investments in subordinated loans and subordinated mortgage-backed securities may be subject to losses.

 

We may acquire or originate subordinated loans and invest in subordinated mortgage-backed securities. If a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy our loan, then we may suffer a loss of principal or interest. If a borrower declares bankruptcy, then we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, then our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill periods”), and control decisions made in bankruptcy proceedings relating to borrowers.

 

The CMBS in which we may invest are subject to all of the risks of the underlying mortgage loans and the risks of the securitization process.

 

CMBS, or commercial mortgage-backed securities, are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities are subject to all of the risks of the underlying mortgage loans.

 

In a rising interest rate environment, the value of CMBS may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of CMBS may also change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole. In addition, CMBS are subject to the credit risk associated with the performance of the underlying mortgage properties. In certain instances, third-party guarantees or other forms of credit support can reduce the credit risk.

 

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CMBS are also subject to several risks created through the securitization process. Subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes delinquent loans, there is a risk that the interest payment on subordinate CMBS will not be fully paid. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated.

 

Our investments in real estate-related common equity securities will be subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities, each of which may result in losses to us.

 

We may make equity investments in other REITs and other real estate companies. We may invest in a public company that owns commercial real estate or real estate-related assets when we believe its stock is trading at a discount to that company’s net asset value. We may eventually seek to acquire or gain a controlling interest in the companies that we target. We do not expect our non-controlling equity investments in other public companies to exceed 5.0% of the proceeds of this offering, assuming we sell the maximum offering amount, or to represent a substantial portion of our assets at any one time. Our investments in real estate-related common equity securities will involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related common equity securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments discussed in this prospectus.

 

Real estate-related common equity securities are generally unsecured and may be subordinated to other obligations of the issuer. As a result, investments in real estate-related common equity securities are subject to risks of: (i) limited liquidity in the secondary trading market, (ii) substantial market price volatility resulting from changes in prevailing interest rates, (iii) subordination to the prior claims of banks and other senior lenders to the issuer, (iv) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (v) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (vi) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic downturn. These risks may adversely affect the value of outstanding real estate-related common equity securities and the ability of the issuers thereof to make distribution payments.

 

Risks Associated with Debt Financing

 

We may incur mortgage indebtedness and other borrowings, which increases our risk of loss due to foreclosure.

 

We may obtain lines of credit and long-term financing that may be secured by our properties and other assets. In some instances, we may acquire real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt. We may also incur mortgage debt on properties that we already own in order to obtain funds to acquire additional properties. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the dividends paid deduction and excluding net capital gain). We, however, can give you no assurance that we will be able to obtain such borrowings on satisfactory terms.

 

If we mortgage a property and there is a shortfall between the cash flow from that property and the cash flow needed to service mortgage debt on that property, then the amount of cash available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of your investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, then we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We may give full or partial guaranties to lenders of mortgage debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.

 

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We may also obtain recourse debt to finance our acquisitions and meet our REIT distribution requirements.  Recourse debt would allow the lender to proceed against our properties and then against our other assets if the debt was not satisfied by the properties.  If we have insufficient income to service our recourse debt obligations, our lenders could institute proceedings against us to foreclose upon the properties as well as our other assets.  If a lender successfully forecloses upon any of our assets, then our ability to pay cash distributions to our stockholders will be limited and you could lose all or part of your investment.

 

High mortgage interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.

 

We may not be able to finance the purchase of properties if mortgage debt is unavailable at reasonable interest rates. If we place mortgage debt on properties, then we run the risk of being unable to refinance the properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. Our cash flow would be reduced if any of these events occur. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

 

We may not be able to access financing sources on attractive terms, which could adversely affect our ability to execute our business plan.

 

We may finance our assets over the long term through a variety of means, including credit facilities, issuance of commercial mortgage-backed securities, and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long-term financing for our assets. If our strategy is not viable, then we will have to find alternative forms of long-term financing for our assets. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders and funds available for operations, as well as for future business opportunities.

 

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.

 

When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or replace our advisor. These or other limitations may limit our flexibility and our ability to achieve our operating plans.

 

Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

 

We expect that we will incur indebtedness in the future. Increases in interest rates may increase our interest costs, which would reduce our cash flows and our ability to pay distributions. In addition, if we need to repay existing debt during periods of higher interest rates, we might have to sell one or more of our investments in order to repay the debt, the timing of which might not permit realization of the maximum return on such investments.

 

We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and decrease the value of your investment.

 

Our charter limits our leverage to 300% of our net assets, and we may exceed this limit with the approval of a majority of the Conflicts Committee of our board of directors. High debt levels would cause us to incur higher interest charges and higher debt service payments and may also be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment. See the “Investment Objectives and Policies—Borrowing Policies” section of this prospectus.

 

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Federal Income Tax Risks

 

Failure to qualify as a REIT would reduce our net earnings available for investment or distribution.

 

We expect DLA Piper LLP (US) to render an opinion to us that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code for our taxable year ending December 31, 2017 and that our proposed method of operations will enable us to meet the requirements for qualification and taxation as a REIT beginning with our taxable year ending December 31, 2017. This opinion will be based upon, among other things, our representations as to the manner in which we are and will be owned and the manner in which we will invest in and operate assets. However, our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Internal Revenue Code. DLA Piper LLP (US) will not review our compliance with the REIT qualification standards on an ongoing basis, and we may fail to satisfy the REIT requirements in the future. Also, this opinion will represent the legal judgment of DLA Piper LLP (US) based on the law in effect as of the date of the opinion. The opinion of DLA Piper LLP (US) is not binding on the Internal Revenue Service (the “IRS”) or the courts. Future legislative, judicial or administrative changes to the federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.

 

If we fail to qualify as a REIT for any taxable year after electing REIT status, then we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction and we would no longer be required to make distributions. If this occurs, then we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. For a discussion of the REIT qualification tests and other considerations relating to our election to be taxed as REIT, see the “Federal Income Tax Considerations” section of this prospectus.

 

You may have current tax liability on distributions that you elect to reinvest in our common stock.

 

If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, you will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the shares of common stock received. See the “Description of Shares—Distribution Reinvestment Plan—Tax Consequences of Participation” section of this prospectus.

 

Failure to qualify as a REIT would subject us to federal income tax, which would reduce the cash available for distribution to you.

 

We expect to operate in a manner that is intended to cause us to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2017. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, then we would be required to pay federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to you. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, then we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.

 

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Even if we qualify as a REIT for federal income tax purposes, then we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you.

 

Even if we qualify as a REIT for federal income tax purposes, then we may be subject to some federal, state and local taxes on our income or property. For example:

 

In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (which is determined without regard to the dividends paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income. Prior to the commencement of this offering, any preferential dividends that we may pay are not eligible for the dividends paid deduction and such accounts may be subject to corporate income taxes.

 

We will be subject to a 4.0% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

 

If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, then we must pay a tax on that income at the highest corporate income tax rate.

 

If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, then our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by one of our taxable REIT subsidiaries (“TRSs”) or the sale met certain “safe harbor” requirements under the Internal Revenue Code.

 

REIT distribution requirements could adversely affect our ability to execute our business plan.

 

We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4.0% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.

 

From time to time, we may generate taxable income greater than our net income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations, then we could be required to borrow funds, sell investments (possibly at disadvantageous prices) or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4.0% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

 

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We may be forced to forego otherwise attractive opportunities to maintain our REIT status, which may delay or hinder our ability to meet our investment objectives and reduce your overall return.

 

To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of your investment.

 

Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.

 

If (i) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (ii) we are a “pension-held REIT,” (iii) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or (iv) the residual interests in any real estate mortgage investment conduits (“REMICs”), we acquire (if any) generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (iii), gains realized on the sale of common stock by such tax-exempt stockholder may be subject to federal income tax as unrelated business taxable income under the Internal Revenue Code. See the “Federal Income Tax Considerations—Taxation of Phillips Edison Grocery Center REIT III, Inc.—Taxable Mortgage Pools” section of this prospectus.

 

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans that would be treated as sales for federal income tax purposes.

 

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of assets, other than foreclosure property, deemed held primarily for sale to customers in the ordinary course of business where such sales do not qualify for a safe harbor under the Internal Revenue Code. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us.

 

It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through TRSs. However, to the extent that we engage in such activities through TRSs, the income associated with such activities may be subject to full corporate income tax.

 

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

 

To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% (20% for taxable years after 2017) of the value of our total assets can be represented by securities of one or more TRSs. See the “Federal Income Tax Considerations—Taxation of Phillips Edison Grocery Center REIT III, Inc” section of this prospectus. If we fail to comply with these requirements at the end of any calendar quarter, then we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could reduce our income and amounts available for distribution to our stockholders

 

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Liquidation of assets may jeopardize our REIT qualification.

 

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

 

Characterization of any repurchase agreements we enter into to finance our investments as sales for tax purposes rather than as secured lending transactions would adversely affect our ability to qualify as a REIT.

 

We may enter into repurchase agreements with a variety of counterparties to achieve our desired amount of leverage for the assets in which we invest. When we enter into a repurchase agreement, we generally sell assets to our counterparty to the agreement and receive cash from the counterparty. The counterparty is obligated to resell the assets back to us at the end of the term of the transaction. We believe that for federal income tax purposes we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that we did not own these assets during the term of the repurchase agreements. In that case, we could fail to qualify as a REIT if tax ownership of these assets was necessary for us to meet the income or asset tests discussed in “Federal Income Tax Considerations—Taxation of Phillips Edison Grocery Center REIT III, Inc.”

 

Complying with REIT requirements may limit our ability to hedge effectively.

 

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (i) interest rate risk on liabilities incurred to carry or acquire real estate, (ii) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, or (iii) risk with respect to the extinguishment of certain indebtedness or the disposition of certain property relating to prior hedging transactions described in (i) and/or (ii) above, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. See the “Federal Income Tax Considerations—Income Tests—Derivatives and Hedging Transactions” section of this prospectus. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

 

Ownership limitations may restrict change of control or business combination opportunities in which you might receive a premium for your shares.

 

In order for us to qualify as a REIT for each taxable year after 2017, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, and certain other entities including private foundations. To preserve our REIT qualification, our charter generally prohibits a person from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of the outstanding shares of our capital stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.

 

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Our ownership of and relationship with our taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

 

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for taxable years after 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A domestic TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We cannot assure you that we will be able to comply with the 25% (or 20%, as applicable) value limitation on ownership of TRS stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s length transactions.

 

The IRS may challenge our characterization of certain income from offshore TRSs.

 

We may form offshore corporate entities treated as TRSs. If we form such subsidiaries, we may receive certain “income inclusions” with respect to our equity investments in these entities. We intend to treat such income inclusions, to the extent matched by repatriations of cash in the same taxable year, as qualifying income for purposes of the 95% gross income test but not the 75% gross income test. See the “Federal Income Tax Considerations—Taxation of Phillips Edison Grocery Center REIT III, Inc.—Income Tests” section of this prospectus. Because there is no clear precedent with respect to the qualification of such income inclusions for purposes of the REIT gross income tests, no assurance can be given that the IRS will not assert a contrary position. If such income does not qualify for the 95% gross income test, then we could be subject to a penalty tax or we could fail to qualify as a REIT, in both events only if such inclusions (along with certain other non-qualifying income) exceed 5% of our gross income.

 

We may be subject to adverse legislative or regulatory tax changes.

 

At any time, the federal income tax laws or regulations governing REITs, or the administrative interpretations of those laws or regulations, may be amended. According to publicly-released statements, a top legislative priority of the new administration may be to enact significant reform of the Internal Revenue Code, including significant changes to taxation of business entities and the deductibility of interest expense and capital investment. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on us and our stockholders. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

 

Dividends payable by REITs do not qualify for the reduced tax rates.

 

In general, the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates. While this tax treatment does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates, to perceive investments in REITs to be relatively less attractive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

 

Retirement Plan Risks

 

If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or an owner of a retirement arrangement subject to Section 4975 of the Internal Revenue Code (such as an IRA) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.

 

There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. Fiduciaries and IRA owners investing the assets of such a plan or account in our common stock should satisfy themselves that:

 

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·the investment is consistent with their fiduciary and other obligations under ERISA and the Internal Revenue Code;

 

·the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;

 

·the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;

 

·the investment in our shares, for which no public market currently exists, is consistent with the liquidity needs of the plan or IRA;

 

·the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;

 

·our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and

 

·the investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

 

With respect to the annual valuation requirements described above, we expect to provide estimated values for our shares annually. Initially, we will report the net investment amounts of our Class T and Class I shares, which will be based on the “amount available for investment/net investment amount” percentages shown in our estimated use of proceeds table.

 

These estimated values are not likely to reflect the proceeds you would receive upon our liquidation or upon the sale of your shares. Accordingly, we can make no claim whether such estimated values will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the IRS may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common shares. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions.

 

Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In addition, the investment transaction must be undone. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA owners should consult with counsel before making an investment in our common stock.

 

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If our assets are deemed to be plan assets, our advisor and we may be exposed to liabilities under Title I of ERISA and the Internal Revenue Code.

 

In some circumstances where an ERISA plan holds an interest in an entity, the assets of the entity are deemed to be ERISA plan assets unless an exception applies. This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA or Section 4975 of the Internal Revenue Code, may be applicable, and there may be liability under these and other provisions of ERISA and the Internal Revenue Code. We believe that our assets should not be treated as plan assets because the shares should qualify as “publicly-offered securities” that are exempt from the look-through rules under applicable Treasury Regulations. We note, however, that because certain limitations are imposed upon the transferability of shares so that we may qualify as a REIT, and perhaps for other reasons, it is possible that this exemption may not apply. If that is the case, and if our advisor or we are exposed to liability under ERISA or the Internal Revenue Code, then our performance and results of operations could be adversely affected. Prior to making an investment in us, you should consult with your legal and other advisors concerning the impact of ERISA and the Internal Revenue Code on your investment and our performance.

 

The Department of Labor’s revised fiduciary rule could adversely affect the marketing of our shares.

 

The Department of Labor recently issued a final regulation that modifies the definition of a “fiduciary” under ERISA. The regulation provides that a routine solicitation directed to an IRA, a benefit plan participant or beneficiary, or to certain smaller plans will be characterized as a “recommendation” that will result in fiduciary status for the person or entity making the solicitation. The Department of Labor also issued new and modified prohibited transaction exemptions that are intended to facilitate the marketing of investments under the final regulation. The final regulation and the related exemptions are complex, but it is possible that the final regulation could have a negative effect on the marketing of investments in our shares to such plans or accounts due to uncertainty and/or restrictions under the regulation and the exemptions.

 

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Special Note Regarding Forward-Looking Statements

 

Some of the statements in this prospectus constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Forward-looking statements we make in this prospectus are subject to various risks and uncertainties that could cause actual results to vary from our forward-looking statements, including:

 

·the factors described in this prospectus, including those set forth under the sections captioned “Risk Factors” and “Investment Objectives and Policies;”

 

·our future operating results;

 

·our business prospects;

 

·changes in our business strategy;

 

·availability, terms and deployment of capital;

 

·availability of qualified personnel;

 

·changes in our industry, interest rates or the general economy;

 

·changes in governmental regulations, tax rates and similar matters;

 

·availability of investment opportunities in real estate and real estate-related assets;

 

·the degree and nature of our competition;

 

·the adequacy of our cash reserves and working capital; and

 

·the timing of cash flows, if any, from our investments.

 

Except as otherwise required by federal securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Estimated Use of Proceeds

 

The following table sets forth information about how we intend to use the proceeds raised in this primary offering assuming that we sell a mid-point range of $750,000,000 of shares and the maximum of $1,500,000,000 of shares, respectively, of common stock. Many of the amounts set forth below represent management’s best estimate since they cannot be precisely calculated at this time. The following tables assume that (i) 90% of the amount of common stock sold in this primary offering is Class T common stock and 10% is Class I common stock, (ii) we do not reallocate shares being offered between our primary offering and distribution reinvestment plan and, (iii) based on this allocation we sell all shares at the highest possible selling commissions and dealer manager fees (with no discounts to any categories of purchasers). Raising less than the maximum offering amount or selling a different percentage of Class T and Class I shares will alter the amounts of commissions, fees and expenses set forth below.

 

Depending primarily upon the number of shares we sell in this primary offering, we estimate that we will use 91.3% of the gross proceeds from the sale of Class T shares and 95.1% of the gross proceeds from the sale of Class I shares in the primary offering for investments, assuming the maximum offering amount, while the remainder of the gross proceeds from the primary offering will be used to pay organization and offering expenses, including selling commissions and the dealer manager fee and, upon investment in properties and other assets, to pay a fee to our advisor for its services in connection with the selection and acquisition of our real estate investments.

 

To the extent offering proceeds are used to pay distributions in anticipation of future cash flow from operating activities, the amount available for investment will be correspondingly reduced, your overall return may be reduced, our portfolio may be less diversified and the value of a share of our common stock may be diluted. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations, including from offering proceeds. See “Risks Related to This Offering and Our Corporate Structure.”

 

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The following table presents information regarding the use of proceeds raised in this offering with respect to Class T shares (excluding shares sold under our distribution reinvestment plan).

 

   Maximum Sale of
$1,350,000,000
of Class T Shares
in the Offering
   Sale of $675,000,000
of Class T Shares
in the Offering
(Midpoint Offering)
 
   Amount ($)   Percent of
Public Offering
Proceeds
   Amount ($)   Percent of
Public
Offering
Proceeds
 
Gross Offering Proceeds   1,350,000,000    100.00%   675,000,000    100.0%
Less Offering Expenses                    
Selling Commissions(1)   40,500,000    3.00%   20,250,000    3.00%
Dealer Manager Fee(1)   40,500,000    3.00%   20,250,000    3.00%
Advisor Funding of Dealer Manager Fee(1)   (27,000,000)   (2.00)%   (13,500,000)   (2.00)%
Other Organization and Offering Expenses(2)   13,500,000    1.00%   6,750,000    1.00%
Advisor Funding of Other Organization and Offering Expenses(2)   (13,500,000)   (1.00)%   (6,750,000)   (1.00)
                     
Amount Available for Investment/Net Investment Amount(3)   1,296,000,000    96.00%   648,000,000    96.00%
                     
Acquisition Fees(4)   24,650,499    1.83%   12,325,250    1.83%
Contingent Advisor Payment(4)   26,499,287    1.96%   13,249,643    1.96%
Acquisition Expenses(5)   12,325,250    0.91%   6,162,625    0.91%
                     
Targeted Investment Capital (6)   1,232,524,964    91.30%   616,262,482    91.30%

 

The following table presents information regarding the use of proceeds raised in this offering with respect to Class I shares (excluding shares sold under our distribution reinvestment plan).

 

   Maximum Sale of
$150,000,000
of Class I Shares
in the Offering
   Sale of $75,000,000
of Class I Shares
in the Offering
(Midpoint Offering)
 
   Amount ($)   Percent of
Public Offering
Proceeds
   Amount ($)   Percent of
Public
Offering
Proceeds
 
Gross Offering Proceeds   150,000,000    100.00%   75,000,000    100.0%
Less Offering Expenses                    
Dealer Manager Fee(1)   2,250,000    1.50%   1,125,000    1.50%
Advisor Funding of Dealer Manager Fee(1)   (2,250,000)   (1.50)%   (1,125,000)   (1.50)%
Other Organization and Offering Expenses(2)   1,500,000    1.00%   750,000    1.00%
Advisor Funding of Other Organization and Offering Expenses(2)   (1,500,000)   (1.00)%   (750,000)   (1.00)
                     
Amount Available for Investment/Net Investment Amount(3)   150,000,000    100.0%   75,000,000    100.0%
                     
Acquisition Fees(4)   2,853,067    1.90%   1,426,536    1.90%
Contingent Advisor Payment(4)   3,067,047    2.05%   1,533,524    2.05%
Acquisition Expenses(5)   1,426,534    0.95%   713,267    0.95%
                     
Targeted Investment Capital (6)   142,653,352    95.10%   71,326,676    95.10%

 

 

(1)           We will pay our dealer manager selling commissions in an amount up to 3.0% of the gross offering proceeds from the sale of Class T shares in our primary offering. Sales of Class I shares will not be subject to selling commissions. Our dealer manager will also receive a dealer manager fee in an amount up to 3.0% of the gross offering proceeds from the sale of Class T shares, of which 1.0% of the gross offering proceeds will be funded by us and up to 2.0% of the gross offering proceeds will be funded by our advisor, and up to 1.5% of the gross offering proceeds from the sale of Class I shares in our primary offering (all of which will be funded by our advisor). However, our advisor intends to recoup the portion of the dealer manager fee it funds through the receipt of the Contingent Advisor Payment, as described in note (4) below. To the extent that the dealer manager fee is less than 3.0% for any Class T shares sold and less than 1.5% for any Class I shares sold, such shares will have a corresponding reduction in the applicable purchase price. We will also pay our dealer manager a quarterly stockholder servicing fee with respect to Class T shares that will accrue daily in the amount of 1/365th (or 1/366th during leap years) of 1.0% of the most recent purchase price per Class T share sold in our primary offering. We have excluded the stockholder servicing fee from this table.

 

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(2)           Our advisor will fund an amount up to 1.0% of the gross offering proceeds from the sale of all share classes to pay organization and offering expenses. Organization and offering expenses consist of all expenses (other than selling commissions, dealer manager fees and stockholder servicing fees) to be paid by us in connection with the offering, including (a) legal, tax, accounting and escrow fees, (b) expenses for printing, engraving, amending, supplementing and mailing, (c) distribution costs, (d) compensation to employees while engaged in registering, marketing and wholesaling our common stock or providing administrative services relating thereto, (e) telegraph and telephone costs, (f) all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), (g) charges of transfer agents, registrars, trustees, escrow holders, depositories and experts, (h) fees, expenses and taxes related to the filing, registration and qualification of the sale of our common stock under federal and state laws, including accountants’ and attorneys’ fees and other accountable offering expenses, (i) amounts to reimburse our advisor for all marketing related costs and expenses such as compensation to and direct expenses of our advisor’s employees or employees of the advisor’s affiliates in connection with registering and marketing our common stock, (j) travel and entertainment expenses related to the offering and marketing of our common stock, (k) facilities and technology costs and other costs and expenses associated with the offering and ownership of our common stock and to facilitate the marketing of our common stock, including web site design and management, (l) costs and expenses of conducting training and educational conferences and seminars, (m) costs and expenses of attending broker-dealer sponsored retail seminars or conferences and (n) payment or reimbursement of bona fide due diligence expenses, including compensation to employees while engaged in the provision or support of bona fide due diligence services. These expenses will be paid by our advisor and reimbursed by us with proceeds from the offering, to the extent that such expenses exceed 1% of gross offering proceeds raised in our primary offering. In no event will our organization and offering expenses (excluding selling commissions, dealer manager fees and stockholder servicing fees) exceed 3.5% of the gross offering proceeds from our terminated or completed offering. If the organization and offering expenses exceed such limits, within 60 days after the end of the month in which the offering terminates or is completed, our advisor must reimburse us for any excess amounts. In the event we raise the maximum offering, we estimate that our organization and offering expenses will be 1.0% of gross offering proceeds raised in our primary offering.

 

(3)           Until we use our net investment proceeds to make investments, substantially all of the net investment proceeds of the offering may be invested in short-term, highly liquid investments, including government obligations, bank certificates of deposit, short-term debt obligations and interest-bearing accounts or other authorized investments as determined by our board of directors.

 

(4)           We will pay our advisor an acquisition fee equal to 2.0% of the contract purchase price for each property or real estate investment we acquire, which for purposes of this table we have assumed is an aggregate amount equal to our targeted investment capital, which is the estimated amount to be invested in properties. We will also pay our advisor an additional contingent advisor payment equal to 2.15% of the contract purchase price for each property or real estate investment we acquire (the “Contingent Advisor Payment”).  The Contingent Advisor Payment allows our advisor to recoup the portion of the dealer manager fee and other organization and offering expenses funded by our advisor. Therefore, the amount of the Contingent Advisor Payment paid upon the closing of an acquisition shall not exceed the then outstanding amounts paid by our advisor for dealer manager fees and other organization and offering expenses at the time of such closing. For these purposes, the amounts paid by our advisor and considered as “outstanding” will be reduced by the amount of the Contingent Advisor Payment previously paid.

 

Notwithstanding the foregoing, the Contingent Advisor Payment Holdback of the initial $4.5 million of amounts to be paid by our advisor to fund the dealer manager fee and other organization and offering expenses will be retained by us until the later of the termination of our last public offering, or _________, 20__, at which time such amount shall be paid to our advisor or its affiliates.

 

In the event we raise the maximum offering of $1.5 billion pursuant to this offering and utilize 50% leverage to acquire our properties or make other real estate investments pursuant to our acquisition strategy, we will pay our advisor acquisition fees (inclusive of the Contingent Advisor Payment) of approximately $109,815,986.

 

(5)           Acquisition expenses include expenses paid to our advisor and to third parties. Acquisition expenses paid to our advisor represent actual costs incurred on our behalf, including, certain payroll costs for acquisition-related efforts by our advisor’s personnel. Most notable would be acquisition-related efforts by the advisor’s internal legal, accounting and marketing teams. Acquisition expenses paid to third parties include customary third-party acquisition expenses we paid from offering proceeds including certain legal fees and expenses, costs of appraisals, accounting fees and expenses, title insurance premiums and other closing costs and miscellaneous expenses relating to the acquisition of real estate. For purposes of this table, we have assumed acquisition expenses of approximately 1% of the targeted investment amount, which is the estimated amount to be invested in properties. Notwithstanding the foregoing, pursuant to our charter, the total of all acquisition fees and acquisition expenses shall be reasonable, and shall not exceed an amount equal to 6% of the contract purchase price of the property, unless such excess fees and expenses are approved by a majority of our directors, including a majority of the Conflicts Committee, not otherwise interested in the transaction and they determine the transaction is commercially competitive, fair and reasonable to us. In the event we raise the maximum offering of $1.5 billion pursuant to this offering and utilize 50% leverage, we expect to incur acquisition expenses of approximately $26,199,687.

 

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(6)           Although a substantial portion of the amount available for investment presented in this table is expected to be invested in properties, we may use a portion of such amount (i) to repay debt incurred in connection with property acquisitions or other investment activities, (ii) to establish reserves if we or a lender deems appropriate, or (iii) for other corporate purposes, including, but not limited to, payment of distributions to stockholders, payment of the stockholder servicing fee, or payments of offering expenses in connection with future offerings pending the receipt of offering proceeds from such offerings, provided that these organization and offering expenses may not exceed the limitation of organization and offering expenses pursuant to our charter and FINRA rules. We may use an unlimited amount of offering proceeds for other corporate purposes, including to fund distributions, and have done so previously. If we use any net offering proceeds for any purposes other than making investments in properties or reducing debt, it may negatively affect the value of your investment.

 

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Potential Market Opportunity

 

We seek to acquire and operate well-occupied, grocery-anchored neighborhood and community shopping centers primarily leased to national and regional creditworthy tenants selling necessity-based good and services in strong demographic markets throughout the United States. We are focused on providing an investment vehicle that allows our stockholders to take advantage of the opportunity to participate in a carefully selected and professionally managed grocery-anchored real estate portfolio by utilizing the following investment and acquisition strategy:

 

·Grocery-Anchored Retail — We are focused on primarily acquiring well-occupied grocery-anchored neighborhood and community shopping centers serving the day-to-day shopping needs of the community in the surrounding trade area.

 

·National and Regional Tenants — We intend to acquire shopping centers primarily leased to national and regional retail tenants selling necessity-based goods and services to customers living in the local trade area.

 

·Diversification — We intend to own and operate a diversified grocery-anchored portfolio based on geography, industry, tenant mix and lease expirations, thereby mitigating risk.

 

·Infill Locations/Solid Markets — We intend to target properties in established or growing markets based on trends in population density, population growth, employment, household income, employment diversification and other key demographic factors having higher barriers to entry, which we believe limit additional competition.

 

·Triple-Net Leases — We intend to negotiate leases we enter into to provide for, or acquire properties with leases that provide for, tenant reimbursements of operating expenses, real estate taxes and insurance, providing a level of protection against rising expenses.

 

The Potential Opportunity

 

We intend to invest primarily in well-occupied, grocery-anchored neighborhood and community shopping centers with a mix of national, regional and local tenants that sell necessity-based goods and services to customers living in the local trade area. These centers will be well-located in more densely populated neighborhoods in the United States, where there are fewer opportunities for competing shopping centers to enter the market. We intend to be selective and prudent in investing capital and focus on acquiring higher quality assets with strong anchors in established or growing markets.

 

We expect to acquire centers where significant opportunities exist to create value through leasing and intensive property management. We believe that careful selection and institutional quality management of the shopping centers will allow us to maintain and enhance each property’s financial performance. As of the date of this prospectus, we own one grocery-anchored shopping center located in St. Cloud, Florida.

 

Our Phillips Edison sponsor has a seasoned real estate team with substantial experience in acquiring and operating retail properties through all market cycles. We believe that this team’s real estate experience and established network of owners and brokers will allow us to acquire assets at a discount to replacement cost.

 

Established Sourcing Network

 

Over the last 25 years, our Phillip Edison sponsor, its predecessor and its affiliates has acquired over 500 shopping centers through its national, regional and local network of relationships with real estate brokers and existing owners of shopping centers, including individuals, REITs, insurance companies and other institutional owners of real estate. We believe this direct access to a continuous source of investment opportunities, not available to smaller, regional operators, allows us to see nearly all of the marketed opportunities available for sale, as well as a substantial number of off-market deals.

 

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Our Phillips Edison sponsor’s reputation has been established through its acquisition history, consistent presence in the market and relationships with owners and brokers. Our Phillips Edison sponsor’s person-to-person marketing program provides continuous communication and market presence with owners and brokers. The program includes face-to-face meetings at owners’ and brokers’ offices, frequent telephone contact, networking at national and regional industry conferences, periodic e-blasts to over 30,000 shopping center professionals and e-postcards sent to our proprietary database of over 16,000 contacts. In 2014 and 2015, Phillips Edison ranked in the top five acquirers of shopping centers in Chain Store Age’s annual survey of the fastest growing acquirers based on retail square footage.

 

Potential Volume of Opportunities

 

According to CoStar Realty Information, Inc., the retail shopping center industry is comprised of over 115,000 retail shopping centers making retail one of the largest industries in the United States. The retail shopping center industry generates over 12 million jobs and accounts for approximately 9.2% of the entire United States workforce, which makes it an important segment of the economy and an important venue for retail commerce.

 

In 2015, this ownership of the more than 115,000 shopping centers in the United States was quite fragmented: only 4,077 (or 3.5%) were owned by the top 25 property owners (as illustrated in the chart below). This fragmentation of the retail shopping center industry has contributed to the long history of a healthy trading volume of shopping centers.

 

United States Shopping Center Ownership

 

 

 

Source: CoStar Realty Information, Inc. (www.CoStar.com); Real Capital Analytics;

International Council of Shopping Centers

 

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The Portfolio

 

We expect that the properties we acquire will be well-occupied, grocery-anchored neighborhood and community shopping centers that focus on serving the day-to-day needs of the community in the surrounding trade area. Grocers and other necessity-based tenants who supply these goods and services have historically been more resistant to economic fluctuations due to the nature of the goods and services they sell. Once we have substantially invested all of the proceeds of this offering, we expect to have a well-diversified portfolio based upon grocery-anchor tenants, national and regional tenants, geographic locations, tenant mix, industry diversity and lease expirations. We target properties in more densely populated locations with established or growing markets and higher barriers to entry.

 

Grocery-Anchored Necessity-Based Retail

 

We intend to invest primarily in well-occupied, grocery-anchored neighborhood and community shopping centers with a mix of national, regional and local tenants that sell necessity-based goods and services to the population living in the local trade area. Many of the products and services sold by our prospective tenants, such as groceries, dining, health and beauty services and dry cleaning, generally face less competition from the Internet than other consumer products, such as clothing, electronics, books and music. According to Business Intelligence Insider (January 2013), online grocery sales currently account for approximately 1% of total food sales and the category is expected to grow to represent 1-3% of total food sales through 2018. Additionally, unlike industries that are routinely affected by cyclical fluctuations in the economy, the grocery and necessity-based retail shopping center industry has historically been more resistant to economic downturns.

 

According to Progressive Grocer’s 80th (April 2013) and 83rd (April 2016) Annual Reports, or the Progressive Grocer reports, during the four-year period from 2012 through 2015, total store count for all grocers increased 2.6% to 38,015 stores and total sales for grocery stores increased by 7.7%, making total sales for the segment $649.1 billion as of December 31, 2015. During the one-year period from 2014 to 2015, there was a 1.7% increase in grocery sales, adding $10.7 billion in sales. All figures presented above pertain only to grocery stores in the United States. We believe this growth shows the continued strength of the grocery store segment.

 

Grocery-anchored and necessity-based shopping centers cater to retail tenants that provide goods and services necessary for daily life. In fact, according to the Food Marketing Institute’s Supermarket Facts (2016), the average consumer in the United States makes a trip to the grocery store 1.6 times per week and spends $31.92 on average per transaction. In addition, the United States Department of Agriculture’s Economic Research Report Number 143 (November 2012), indicates that 85% of consumers in the United States have a grocery store located within four miles from where they live and almost all people live within 10 miles of a grocery store. Many of these tenants also offer products or services that appeal to consumers trying to save money. Items such as food, postal services, discount merchandise, hardware and personal services tend to be required during both economic peaks and troughs, which may help to maintain more consistent consumer demand.

 

Due to this resilience of this sector, many necessity and discount-retailers have been less impacted by recessions than luxury or other retailers and are presently reporting a strong demand for new retail space. As reported by RBC Capital Markets in September, 2016, retailers in their database plan to open 79,461 stores over the period between January 2016 and January 2018. This level of new store openings is near a five-year high. We believe this demand for new stores is being led by well-capitalized, national retailers, especially franchises who are looking for retail space of 5,000 square feet and under. We believe these retailers have right-sized and have re-emerged leaner, nimbler and tailored to the current economy. Many of them have strong balance sheets and are expanding in order to take market share from weaker competitors.

 

Diversified Portfolio

 

We expect to acquire a well-diversified portfolio of properties based on grocery-anchor tenants, national and regional tenants, geographic locations, tenant mix, industry diversity, lease expirations and other factors. A diversified portfolio reduces the economic risk of any one geographic or tenant-related event to affect the cash flow or value of the portfolio. Our Phillips Edison sponsor’s current portfolio is located in 33 states and has over 5,300 tenants. As of the date of this prospectus, no one retailer accounts for more than 10% of the annual minimum rent of our Phillips Edison sponsor’s portfolio. There is no guarantee that our portfolio, once we have invested substantially all of the proceeds of this offering, will be as well diversified geographically or by tenant concentration.

 

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In-Fill Locations

 

New construction of shopping centers remains well below historical levels (as evidenced in the chart below) and there is little evidence that there will be any substantial increase in deliveries prior to 2018. We believe that this lack of new construction will create a lack of supply over the next three- to five-years. Existing vacancy will be absorbed initially and, as retailers lease existing vacancies, rents will increase as sales continue to improve for retailers and demand continues to increase. We believe this lack of new center development is pushing retailers towards existing grocery-anchored shopping centers.

 

Historical Retail Deliveries

 

 

Source: The CoStar Retail Report, National Retail Market Year-End 2016

 

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The supply fundamentals for infill grocery-anchored retail locations are in line with retail demand because grocers and other necessity-based retailers did not over-expand in recent years. These retailers are now benefiting from weakened competition and are expanding selectively, as well as upgrading existing locations. Well-positioned grocery-anchored centers are attracting other stronger and expanding tenants. According to the CoStar Retail Report, National Market Year-End 2016, occupancy in shopping centers continues to improve as indicated in the chart below. We believe these centers will experience increased property values as the economy rebounds and rents increase. We intend to focus our acquisition efforts on locations in established or growing retail markets in more densely populated locations. These in-fill locations have higher barriers to entry with fewer opportunities for competing shopping centers to enter the market.

 

Occupancy Growth in Shopping Centers

 

 

Demographics

 

The population of the United States is growing and is projected to increase by 58.8 million people between 2016 and 2040. This growing population is creating, and is likely to continue to create, an even larger demand for food and necessity-based goods and services that are found in grocery-anchored shopping centers.

 

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Management

 

Board of Directors

 

We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders as fiduciaries. The board is responsible for the management and control of our affairs. The board has retained our advisor to manage our day-to-day operations and the acquisition and distribution of our real estate investments, subject to the board’s supervision. Because of the numerous conflicts of interest created by the relationships among us, our advisor and various affiliates, many of the responsibilities of the board have been delegated to a committee that consists solely of independent directors. This committee is the Conflicts Committee and is discussed below and under “Conflicts of Interest.”

 

Our charter provides that a majority of the seats on the board must be for independent directors. Currently, we have three independent directors. An “independent director” is a person who is not one of our officers or employees or an officer or employee of our advisor, our sponsors or their affiliates, and has not been so for the previous two years and meets the other independence requirements set forth in our charter.

 

Each director will serve until the next annual meeting of stockholders and until his successor has been duly elected and qualified. The presence, in person or by proxy, of stockholders entitled to cast a majority of all the votes entitled to be cast at any stockholder meeting constitutes a quorum. With respect to the election of directors, each candidate nominated for election to the board of directors must receive a majority of the votes present, in person or by proxy, in order to be elected. Therefore, if a nominee receives fewer “for” votes than “withhold” votes in an election, then the nominee will not be elected.

 

Although our board of directors may increase or decrease the number of directors, a decrease may not have the effect of shortening the term of any incumbent director. Any director may resign at any time or may be removed with or without cause by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast at a meeting called for the purpose of the proposed removal. The notice of the meeting will indicate that the purpose, or one of the purposes, of the meeting is to determine if the director shall be removed.

 

Unless otherwise provided by Maryland law, the board of directors is responsible for selecting its own nominees and recommending them for election by the stockholders, provided that the Conflicts Committee nominates replacements for any vacancies among the independent director positions. Unless filled by a vote of the stockholders as permitted by Maryland General Corporation Law, a vacancy that results from the removal of a director will be filled by a vote of a majority of the remaining directors. Any vacancy on the board of directors for any other cause will be filled by a majority of the remaining directors, even if such majority is less than a quorum.

 

Our directors are accountable to us and our stockholders as fiduciaries. This means that our directors must perform their duties in good faith and in a manner each director believes to be in our and our stockholders’ best interests. Further, our directors must act with such care as a prudent person in a similar position would use under similar circumstances, including exercising reasonable inquiry when taking actions. However, our directors and executive officers are not required to devote all of their time to our business and must only devote such time to our affairs as their duties may require. We do not expect that our directors will be required to devote a substantial portion of their time to us in discharging their duties.

 

In addition to meetings of the various committees of the board, which committees we describe below, we expect our directors to hold at least four regular board meetings each year. Although we have no present intention to do so, our board has the authority to fix the compensation of all officers that it selects and may pay compensation to directors for services rendered to us in any other capacity.

 

Our general investment and borrowing policies are set forth in this prospectus. See the “Investment Objectives and Policies” section beginning on page 107 of this prospectus. Our directors may establish further written policies on investments and borrowings and will monitor our administrative procedures, investment operations and performance to ensure that our executive officers and advisor follow these policies and that these policies continue to be in the best interests of our stockholders. Unless modified by our directors, we will follow the policies on investments and borrowings set forth in this prospectus.

 

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Executive Officers and Directors

 

The following table sets forth information regarding our directors and executive officers. All of our executive officers are employees of our sponsors. Neither we nor our advisor expect that we will have any employees, and our executive officers are not exclusively dedicated to our operations.

 

Name*   Age**   Positions
Jeffrey S. Edison   57   Chairman of the Board and Chief Executive Officer
David W. Garrison   61   Independent Director
Richard J. Smith   66   Independent Director
(To Be Determined)       Independent Director
(To Be Determined)       Director
R. Mark Addy   55   President and Chief Operating Officer
Devin I. Murphy   57   Chief Financial Officer, Treasurer and Secretary
Jennifer L. Robison   40   Chief Accounting Officer
David C. Rupert   60   Vice President

 

 

*The address of each executive officer and director listed is 11501 Northlake Drive, Cincinnati, Ohio 45249.
** As of September 1, 2017.

 

The biographical descriptions below set forth certain information with respect to our executive officers and directors. The board has identified specific attributes of each director that the board has determined qualify that person for service on the board.

 

Jeffrey S. Edison has served as the Chairman of the Board of Directors and the Chief Executive Officer since April 2016. Mr. Edison has served as Chairman or Co-Chairman of the Board of Directors and Chief Executive Officer of PECO I since December 2009 and as Chairman of the Board of Directors and Chief Executive Officer of PECO II since August 2013. Mr. Edison co-founded Phillips Edison Limited Partnership and has served as a principal of Phillips Edison since 1995. Before founding Phillips Edison, from 1991 to 1995, Mr. Edison was a Senior Vice President from 1993 until 1995 and as a Vice President from 1991 until 1993, at Nations Bank’s South Charles Realty Corporation. From 1987 until 1990, Mr. Edison was employed by Morgan Stanley Realty Incorporated and The Taubman Company from 1984 to 1987. Mr. Edison holds a master’s degree in business administration from Harvard Business School and a bachelor’s degree in mathematics and economics from Colgate University.

 

Among the most important factors that led to our board of directors’ recommendation that Mr. Edison serve as our director are Mr. Edison’s leadership skills, integrity, judgment, knowledge of our company and our Phillips Edison sponsor, his prior experience as a director and chief executive officer of PECO I and PECO II and his commercial real estate expertise.

 

David W. Garrison has served as one of our directors since March 2017. Mr. Garrison has served as a director of PECO II since September 2013. Mr. Garrison is currently Chief Navigator of Garrison Growth, an international consulting services firm. From October 2002 to June 2013, Mr. Garrison served as Chief Executive Officer and director of iBahn Corp. (formerly STSN), a provider of broadband services for hotels. On September 6, 2013, iBahn Corp. filed for bankruptcy protection under the provisions of Chapter 11 of the United States Bankruptcy Code for the District of Delaware. Such action was dismissed by the court on February 3, 2015. From 2000 to 2001, Mr. Garrison was Chairman and Chief Executive Officer of Verestar, a satellite services company, where he also served on the board of Verestar's parent company, American Tower. From 1995 to 1998, Mr. Garrison was Chairman and Chief Executive Officer of Netcom, a pioneer Internet service provider. From January 2003 to July 2013, Mr. Garrison served as a director of SonicWall, Inc., where at various times he served on the Audit Committee, the Compensation Committee (Chair) and the Corporate Governance and Nominations Committee. From 1997 to 2002, Mr. Garrison served as an independent director of Ameritrade, the first online trading company, and he was also the chair of the Compensation Committee and lead independent director at different times. Mr. Garrison holds a bachelor of science degree from Syracuse University and a master of business administration degree from Harvard University.

 

Among the most important factors that led to the board of directors’ recommendation that Mr. Garrison serve as our director are Mr. Garrison’s integrity, judgment, leadership skills, commercial business experience, public company director experience and independence from management, our sponsors and their affiliates.

 

Richard J. Smith has served as one of our directors since March 2017. Mr. Smith served as Chief Financial Officer and Secretary of Phillips Edison & Company and PECO I from February 2010 to July 2013. He currently is a consultant, advising management teams in the development of strategic and financial plans, as well as improvements in systems, internal controls and financial reporting, recommend debt restructuring options and expanding lender relationships. Additionally, he is assisting Grant Thornton LLP with business development in the real estate sector. From 1996 to November 2009 he served as the Chief Financial Officer and Secretary of Ramco-Gershenson Properties Trust, a self-administered, publicly traded real estate investment trust that owns and manages a portfolio of 88 shopping centers, of which a large majority are anchored by grocery and/or value oriented retailers. In 1996 he served as the Vice President of The Hahn Company, a full-service owner and developer of super-regional malls throughout the United States. From 1993 to 1996 he served as the Chief Financial Officer and Treasurer of the Glimcher Realty Trust, a self-administered, publicly traded REIT that owns regional malls, community shopping centers and single-tenant retail properties nationwide. Mr. Smith holds a BBA in Accounting and Finance from Eastern Michigan University and is a certified public accountant. He is a board member of The Drees Company, one of the largest home builders in the United States, and The Michigan Legacy Art Park; and a member of The National Association of Real Estate Investment Trusts (NAREIT) and the International Council of Shopping Centers.

 

Among the most important factors that led to the board of directors’ recommendation that Mr. Smith serve as our director are Mr. Smith’s integrity, judgment, leadership skills, public company accounting and financial reporting experience and independence from management, our sponsors and their affiliates. 

 

R. Mark Addy has served as the President and Chief Operating Officer since April 2016. Mr. Addy has served as the President or Co-President of PECO I since April 2013 and as the Chief Operating Officer of PECO I since October 2010. Mr. Addy has served as the President or Co-President and Chief Operating Officer of PECO II since August 2013. Mr. Addy has also served as the President or Co-President of the PECO I advisor since October 2010. Mr. Addy served as Chief Operating Officer for Phillips Edison & Company, or PECO, from 2004 to October 2010. He served PECO as Senior Vice President from 2002 until 2004, when he became Chief Operating Officer. From 1987 until 2002, Mr. Addy practiced law with Santen & Hughes in the areas of commercial real estate, financing, leasing, mergers and acquisitions and general corporate law. While at Santen & Hughes, he represented PECO from its inception in 1991 to 2002. Mr. Addy received his law degree from the University of Toledo, where he was a member of the Order of the Barristers, and his bachelor’s degree in environmental science and chemistry from Bowling Green State University, where he received the President’s Award for academic achievement and was a member of the Order of the Omega leadership honor society.

 

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Devin I. Murphy has served as the Chief Financial Officer, Treasurer and Secretary since April 2016. Mr. Murphy has served as a principal and Chief Financial Officer of PECO since June 2013. Mr. Murphy has served as the Chief Financial Officer, Treasurer and Secretary of PECO I and PECO II since June 2013 and August 2013, respectively. From November 2009 to June 2013, he served as Vice Chairman of Investment Banking at Morgan Stanley. He began his real estate career in 1986 when he joined the real estate group at Morgan Stanley as an associate. Prior to rejoining Morgan Stanley in June 2009, Mr. Murphy was a managing partner of Coventry Real Estate Advisors, or Coventry, a real estate private equity firm founded in 1998 which sponsors a series of institutional investment funds that acquire and develop retail properties. Since its inception, Coventry has invested over $2.5 billion in retail assets. Prior to joining Coventry in March 2008, from February 2004 until November 2007, Mr. Murphy served as global head of real estate investment banking for Deutsche Bank Securities, Inc. At Deutsche Bank, Mr. Murphy ran a team of over 100 professionals located in eight offices in the United States, Europe and Asia. Mr. Murphy’s Deutsche Bank team was recognized as an industry leader and under his management executed over 500 separate transactions on behalf of clients representing total transaction volume exceeding $400 billion. Prior to joining Deutsche Bank, Mr. Murphy was with Morgan Stanley for 15 years. He held a number of senior positions at Morgan Stanley including co-head of United States real estate investment banking and head of the private capital markets group, or PCM. PCM is the team at Morgan Stanley responsible for raising equity capital for Morgan Stanley’s real estate private equity funds as well as private equity capital on behalf of clients. During the time that Mr. Murphy ran PCM, the team raised in excess of $5 billion of equity capital. Mr. Murphy served on the investment committee of the Morgan Stanley Real Estate Funds from 1994 until his departure in 2004. During his tenure on the investment committee, the Morgan Stanley Real Estate Funds invested over $6.5 billion of equity capital globally in transactions with a total transaction value in excess of $35 billion. Mr. Murphy has served as an advisory director for Hawkeye Partners, a real estate private equity firm headquartered in Austin, Texas, since March 2005 and for Trigate Capital, a real estate private equity firm headquartered in Dallas, Texas, since September 2007. Mr. Murphy received a master’s of business administration from the University of Michigan and a bachelor of arts with honors from the College of William and Mary. He is a member of the Urban Land Institute, the Pension Real Estate Association and the National Association of Real Estate Investment Trusts.

 

Jennifer L. Robison has served as the Chief Accounting Officer since April 2016. Ms. Robison has also served as the Chief Accounting Officer of PECO I and PECO II since March 2015. Ms. Robison has served as the Senior Vice President and Chief Accounting Officer of PECO since July 2014. From February 2005 to July 2014, Ms. Robison served as Vice President, Financial Reporting at Ventas, Inc., an S&P 500 company and one of the 10 largest equity REITs in the country. Prior to her time at Ventas, Ms. Robison served as an audit manager at Mountjoy Chilton Medley LLP from September 2003 to February 2005. Ms. Robison began her career at Ernst & Young LLP, serving most recently as assurance manager, and was an employee there from February 1996 to September 2003. She received a bachelor of arts in accounting from Bellarmine University, where she graduated magna cum laude. Ms. Robison is a certified public accountant and a member of the American Institute of Certified Public Accountants, the National Association of Real Estate Investments Trusts and the SEC Professional Group.

 

David C. Rupert has served as our Vice President since September 2016. Mr. Rupert serves as the Executive Vice President of GCEAR II, a position he has held since February 2014, and the President of GCEAR, a position he has held since July 2012, and as President of our Griffin sponsor, having re-joined that firm in September 2010. Mr. Rupert's more than 30 years of commercial real estate and finance experience includes over $9 billion of transactions executed on four continents: North America, Europe, Asia and Australia. From July 2009 to August 2010, Mr. Rupert co-headed an opportunistic hotel fund in partnership with The Olympia Companies, a hotel owner-operator with more than 800 employees, headquartered in Portland, Maine. From March 2008 through June 2009, Mr. Rupert was a partner in a private equity firm focused on Eastern Europe, in particular extended stay hotel and multifamily residential development, and large scale agribusiness in Ukraine. Mr. Rupert previously served as Chief Operating Officer of our Griffin sponsor from August 1999 through February 2008. From 1999 to 2000, Mr. Rupert served as President of CB5, a real estate and restaurant development company that worked closely with the W Hotel division of Starwood Hotels. From 1997 to 1998, Mr. Rupert provided consulting services in the United States and United Kingdom to Lowe Enterprises, a Los Angeles-headquartered institutional real estate management firm. From 1986 to 1996, Mr. Rupert was employed at Salomon Brothers in New York, where he served in various capacities, including the head of REIT underwriting, and provided advice, raised debt and equity capital and provided brokerage and other services for leading public and private real estate institutions and entrepreneurs. Since 1984, Mr. Rupert has served on the Advisory Board to Cornell University's Endowment for Real Estate Investments, and in August 2010 Mr. Rupert was appointed Co-Chairman of this Board. For more than 15 years, Mr. Rupert has lectured in graduate-level real estate and real estate finance courses in Cornell's masters-level Program in Real Estate, where he is a founding Board Member. Mr. Rupert received his B.A. from Cornell in 1979 and his M.B.A. from Harvard in 1986.

 

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Board Committees

 

Our board of directors has established two standing committees, consisting solely of independent directors: the Audit Committee and the Conflicts Committee. 

 

Audit Committee

 

The Audit Committee will operate pursuant to a written charter adopted by our board of directors. The Audit Committee charter will set forth the Audit Committee’s specific functions and responsibilities. The chair of our Audit Committee is [_______]. Among other things, the Audit Committee will assist the board in overseeing:

 

·our accounting and financial reporting processes;

 

·the integrity and audits of our financial statements;

 

·our compliance with legal and regulatory requirements;

 

·the qualifications and independence of our independent auditors; and

 

·the performance of our internal and independent auditors.

 

The Audit Committee also will be responsible for engaging independent public accountants, reviewing with the independent public accountants the plans and results of the audit engagement and considering and approving the audit and non-audit services and fees provided by the independent public accountants.

 

Conflicts Committee

 

In order to reduce or eliminate certain potential conflicts of interest, our charter creates a Conflicts Committee of our board of directors consisting solely of all of our independent directors, that is, all of our directors who are not affiliated with our advisor. Our charter authorizes the Conflicts Committee to act on any matter permitted under Maryland law. Both the board of directors and the Conflicts Committee must act upon those conflict-of-interest matters that cannot be delegated to a committee under Maryland law. Our charter also empowers the Conflicts Committee to retain its own legal and financial advisors. See the “Conflicts of Interest—Certain Conflict Resolution Measures” section of this prospectus.

 

Our charter requires that the Conflicts Committee discharge the board’s responsibilities relating to the nomination of independent directors and the compensation of our independent directors. Our Conflicts Committee also will discharge the board’s responsibilities relating to the compensation of our executives. Subject to the limitations in our charter, the Conflicts Committee may also create stock award plans. The chair of our Conflicts Committee is                 .

 

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Compensation of Directors

 

Any member of our board of directors who is also an employee of our advisor or our sponsors does not receive compensation for serving on our board of directors. We will pay each of our independent directors:

 

·an annual retainer of $30,000;

 

·$1,000 per each board meeting attended;

 

·$1,000 per each committee meeting attended;

 

·an annual retainer of $5,000 for the chair of the Audit Committee; and

 

·an annual retainer of $3,000 for the chair of the Conflicts Committee.

 

We also will reimburse our directors for their travel expenses incurred in connection with their attendance at board and committee meetings.

 

Board Participant

 

Our Griffin sponsor has the right to appoint one individual to participate in meetings of our board of directors and its committees. This individual will not have any voting rights with respect to decisions made by the board of directors or its committees and will not be compensated by us in connection with this role.

 

Limited Liability and Indemnification of Directors, Officers, Employees and Other Agents

 

We are permitted to limit the liability of our directors, officers and other agents, and to indemnify them, only to the extent permitted by Maryland law and our charter.

 

Maryland law permits us to include in our charter a provision limiting the liability of our directors and officers to our stockholders and us for money damages, except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services, or (ii) active and deliberate dishonesty established by a final judgment and that is material to the cause of action.

 

Maryland law also permits us to indemnify our present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless one or more of the following is established:

 

·the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty,

 

·the director or officer actually received an improper personal benefit in money, property or services, or

 

·in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

 

Our charter limits the liability of our directors and officers to us and our stockholders for monetary damages and requires us to indemnify our directors, officers, our advisor and its affiliates for losses they may incur by reason of their service in that capacity or in their service as a director, officer, partner, member, manager or trustee of another corporation, partnership, limited liability company, joint venture, trust or other entity, if all of the following conditions are met:

 

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·the party seeking exculpation or indemnification has determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;

 

·the party seeking exculpation or indemnification was acting on our behalf or performing services for us;

 

·in the case of an independent director, the liability or loss was not the result of gross negligence or willful misconduct by the independent director;

 

·in the case of a non-independent director, our advisor or one of its affiliates, the liability or loss was not the result of negligence or misconduct by the party seeking exculpation or indemnification; and

 

·the indemnification is recoverable only out of our net assets and not from the common stockholders.

 

The SEC and state regulators take the position that indemnification against liabilities arising under the Securities Act is against public policy and unenforceable. Furthermore, our charter prohibits the indemnification of our directors, our advisor, its affiliates or any person acting as a broker-dealer for liabilities arising from or out of a violation of state or federal securities laws, unless one or more of the following conditions are met:

 

·there has been a successful adjudication on the merits of each count involving alleged securities law violations;

 

·such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction; or

 

·a court of competent jurisdiction approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the SEC and of the published position of any state securities regulatory authority in which the securities were offered as to indemnification for violations of securities laws.

 

Our charter further provides that the advancement of funds to our directors and to our advisor and its affiliates for reasonable legal expenses and other costs incurred in advance of the final disposition of a proceeding for which indemnification is being sought is permissible only if all of the following conditions are satisfied: the legal proceeding must relate to acts or omissions with respect to the performance of duties or services on our behalf; the legal proceeding was initiated by a third party who is not a common stockholder or, if by a common stockholder acting in his or her capacity as such, a court of competent jurisdiction approves such advancement; and the person seeking the advancement undertakes to repay the amount paid or reimbursed by us, together with the applicable legal rate of interest thereon, if it is ultimately determined that such person is not entitled to indemnification.

 

We also will purchase and maintain directors and officers insurance on behalf of all of our directors, executive officers and board participant against liability asserted against or incurred by them in their official capacities with us, whether or not we are required or have the power to indemnify them against the same liability. We may incur significant costs to purchase this insurance on behalf of our directors, officers and board participant.

 

Our Advisor

 

Our advisor is PECO-Griffin REIT Advisor, LLC. Our advisor is jointly owned by our Phillips Edison sponsor and our Griffin sponsor. Our Phillips Edison sponsor is the managing member and owns 75% of our advisor. Our Griffin sponsor owns the remaining 25% of our advisor. Our advisor is a limited liability company that was formed in the State of Delaware on May 23, 2016. Our advisor has no prior operating history and no prior experience managing a public company. Our advisor has contractual and fiduciary responsibilities to us and our stockholders.

 

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Investment Committee

 

Our advisor has established an investment committee to review all advisory recommendations relating to the purchase or sale of investments made by our advisor to our board of directors. A majority of all members of the investment committee must approve the recommendations of the advisor before such recommendations are provided to our board of directors for final approval. The investment committee is comprised of three persons, two of whom are designated by our Phillips Edison sponsor and one of whom is designated by our Griffin sponsor. Our Phillips Edison sponsor has initially designated R. Mark Addy and David Wik as members of the investment committee and our Griffin sponsor has initially designated Michael Escalante as a member of the investment committee. Members of our investment committee are not separately compensated for their service as members of the investment committee, nor are members of our investment committee reimbursed by us for their expenses associated with the investment committee.

 

The Advisory Agreement

 

Under the terms of the advisory agreement, our advisor will use its commercially reasonable best efforts to present to us potential investment opportunities and to provide a continuing and suitable investment program for us consistent with our investment objectives and policies as determined and adopted from time to time by our board of directors. Pursuant to the advisory agreement, our advisor will manage and control our day-to-day business and affairs. Many of the services to be performed by our advisor in managing our day-to-day activities are summarized below. This summary is provided to illustrate the material functions that we expect our advisor will perform for us as our advisor, and it is not intended to include all of the services that may be provided to us by third parties. Our advisor, either directly or through one or more of its affiliates, will perform the following duties:

 

·locating, analyzing and selecting potential investments consistent with our investment objectives and policies;

 

·structuring and negotiating the terms and conditions of our investments, sales and joint ventures;

 

·acquiring properties and other investments on our behalf in compliance with our investment objectives and policies;

 

·arranging for financing and refinancing of properties and our other investments;

 

·coordinating with the property manager on its duties under any property management agreement;

 

·providing our officers and directors with periodic reports regarding our properties;

 

·assisting us in obtaining insurance;

 

·providing financial and operational planning services and portfolio management functions;

 

·monitoring and evaluating the performance of our properties and other investments, providing daily management services and supervising the various management and operational functions relating to our properties and other investments;

 

·managing communications with stockholders;

 

·maintaining our accounting systems, records and data as may be required to prepare and to file all periodic financial reports and returns required to be filed with the SEC and any other regulatory agency, including quarterly and annual financial statements;

 

·providing tax and compliance services;

 

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·engaging and supervising the performance of our agents, including our transfer agent; and

 

·performing any other services reasonably requested by us.

 

See “Management Compensation” below for a detailed discussion of the fees payable to our advisor under the advisory agreement. We also describe in that section our obligation to reimburse our advisor for organization and offering expenses to the extent such expenses exceed 1% of the gross proceeds from the primary portion of this offering, the costs of providing services to us and payments made by our advisor in connection with potential investments, whether or not we ultimately acquire the investment.

 

The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and us. It will be the duty of our board of directors to evaluate the performance of our advisor before entering into or renewing an advisory agreement. Either party may terminate the advisory agreement without cause or penalty upon 60 days’ written notice and, in such event, our advisor must cooperate with us and our directors in making an orderly transition of the advisory function. For more information regarding the terms of the advisory agreement, see the “Management Compensation” section of this prospectus.

 

Our advisor and its affiliates expect to continue to engage in other business ventures and, as a result, their resources will not be dedicated exclusively to our business. Pursuant to the advisory agreement, however, our advisor must devote sufficient resources to the administration of our company to discharge its obligations. Our advisor may assign the advisory agreement to an affiliate upon approval of our board of directors, including a majority of our independent directors.

 

Subject to the investment objectives and limitations set forth in our charter and the investment policies approved by our board of directors, our advisor may not make any real property acquisitions, developments or dispositions on our behalf, including real property portfolio acquisitions, developments and dispositions, without the prior approval of the majority of our board of directors. The actual terms and conditions of transactions involving investments in real estate are determined by our advisor, subject to the oversight of our board of directors.

 

Our advisor has agreed to fund all of our other organization and offering expenses up to 1.0% of the gross offering proceeds for shares of our common stock sold pursuant to our primary offering; however, our advisor intends to recoup such expenses through the Contingent Advisor Payment as part of our acquisition fees. Based on the experience of our sponsors and their affiliates, we anticipate that the other organization and offering expenses will not exceed 1.0% of the gross offering proceeds for shares of our common stock sold pursuant to our primary offering. Other organization and offering expenses include all expenses (other than selling commissions, dealer manager fees, and stockholder servicing fees) to be paid by us in connection with the offering, including (a) legal, tax, accounting and escrow fees, (b) expenses for printing, engraving, amending, supplementing and mailing, (c) distribution costs, (d) compensation to employees while engaged in registering, marketing and wholesaling our common stock or providing administrative services relating thereto, (e) telegraph and telephone costs, (f) all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), (g) charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, (h) fees, expenses and taxes related to the filing, registration and qualification of the sale of our common stock under federal and state laws, including accountants’ and attorneys’ fees and other accountable offering expenses, (i) amounts to reimburse our advisor for all marketing related costs and expenses such as compensation to and direct expenses of our advisor’s employees or employees of the advisor’s affiliates in connection with registering and marketing our common stock, (j) travel and entertainment expenses related to the offering and marketing of our common stock, (k) facilities and technology costs and other costs and expenses associated with the offering and ownership of our common stock and to facilitate the marketing of our common stock, including web site design and management, (l) costs and expenses of conducting training and educational conferences and seminars, (m) costs and expenses of attending broker-dealer sponsored retail seminars or conferences and (n) payment or reimbursement of bona fide due diligence expenses, including compensation to employees while engaged in the provision or support of bona fide due diligence services. With the exception of these other organization and offering expenses, we will reimburse our advisor for all of the costs it incurs in connection with the services provided to us under the advisory agreement, including, but not limited to:

 

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·acquisition expenses incurred by our advisor or its affiliates or expenses payable to unaffiliated persons incurred in connection with the selection and acquisition of properties;

 

·actual out-of-pocket cost of goods and services we use and obtain from entities not affiliated with our advisor, including brokerage and other fees paid in connection with the purchase, operation and sale of assets and travel;

 

·interest and other costs for borrowed money, including discounts, points and other similar fees, and expenses relating to financing services whether performed by a third party or internally by the advisor or one of its affiliates;

 

·taxes and assessments on income or property and taxes as an expense of doing business and any taxes otherwise imposed on us and our businesses, assets or income, including tax compliance and processing services;

 

·costs associated with insurance required in connection with our business (such as title insurance, property and general liability coverage, including customer goods legal liability coverage, or insurance covering losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters) or by our officers and the board (such as director and officer liability coverage) and all risk management services related thereto whether performed by a third party or internally by the advisor or its affiliates;

 

·expenses of managing, improving, developing, operating and selling properties we own, as well as expenses of other transactions relating to our properties, whether payable to one of our affiliates or a non-affiliated person;

 

·all expenses in connection with payments to our directors and meetings of our directors and our stockholders;

 

·expenses associated with any tender offers or with a listing or with the issuance and distributions of securities;

 

·expenses connected with payments of distributions;

 

·expenses of organizing, converting, modifying, merging, liquidating or dissolving us or of amending our charter, bylaws, operating partnership agreement or other governing documents;

 

·expenses of maintaining communications with our stockholders, including the cost of preparation, filing, printing, and mailing annual reports and other stockholder reports, proxy statements and other reports required by governmental entities;

 

·administrative service expenses, including all direct and indirect costs and expenses incurred by our advisor in fulfilling its duties to us including personnel costs (including reasonable wages and salaries and other employee-related expenses of all employees of our advisor or its affiliates who are directly engaged in our operation, management, administration, investor relations and marketing of our company, including taxes, insurance and benefits relating to such employees, and legal, travel and other out-of-pocket expenses that are directly related to the services provided by our advisor);

 

·investor relations, marketing, audit, accounting, tax, due diligence and legal fees, and other fees for consulting, advisory or professional services relating to our operations and all such fees incurred at the request, or on behalf of, our independent directors or any committee of our board, whether performed by a third party or internally by our advisor or its affiliates;

 

·costs associated with the maintenance of our website and third-party licensing fees for software and information technology; and

 

·out-of-pocket costs for us to comply with all applicable laws, regulations and ordinances; all other out-of-pocket costs necessary for our operation and our assets incurred by our advisor in performing its duties on our behalf.

 

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Although there is no specific limit as to the amount of the administrative services that our advisor or its affiliates may provide to us, the cost of these administrative services will be included in our operating expenses and therefore is subject to the reimbursement limitations described below. Commencing four full fiscal quarters after the acquisition of our first real estate investment following the commencement of this offering, we will not reimburse our advisor at the end of any fiscal quarter operating expenses that, in the four consecutive fiscal quarters then ended, exceed the greater of (i) 2.0% of our average invested assets, which means, for such period, the average monthly book value of our assets invested directly or indirectly in real estate properties and real estate-related investments, including equity interests in and loan receivables secured by real estate properties and real estate-related investments, during the 12-month period before deducting depreciation, amortization, bad debt and other similar non-cash reserves, or (ii) 25.0% of our net income, which is defined as our total revenues less total operating expenses for any given period excluding reserves for depreciation, amortization, bad debt and other similar non-cash reserves unless our independent directors have determined that such excess expenses were justified based on unusual and nonrecurring factors. The total operating expenses means all costs and expenses incurred by us, as determined under GAAP, that are in any way related to our operation or our business, including fees paid to the advisor, but excluding: (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer and registration of shares of our common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of our assets; (f) acquisition fees and expenses (including expenses relating to potential acquisitions that we do not close); (g) disposition fees on the sale of real property; and (h) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other real property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property). Our advisor will be required to reimburse the excess expenses to us unless our independent directors determine that the excess expenses were justified based on unusual and nonrecurring factors that they deem sufficient. Within 60 days after the end of any of our fiscal quarters for which total operating expenses for the 12 months then-ended exceed the limitation, we will send to our stockholders a written disclosure, together with an explanation of the factors our independent directors considered in arriving at the conclusion that the excess expenses were justified. However, at our advisor’s option, our advisor or its affiliates, as applicable, may defer receipt of any portion of the asset management fee or reimbursement of expenses and elect to receive such payments, without interest, in any subsequent fiscal year that our advisor designates.

 

Our advisor and its affiliates will be paid compensation, fees, expense reimbursements and distributions in connection with services provided to us. See the “Management Compensation” section of this prospectus. In the event the advisory agreement is terminated, our advisor and its affiliates will be paid all accrued and unpaid fees and expense reimbursements earned prior to the termination.

 

We have agreed to indemnify and hold harmless our advisor and its affiliates, including their respective officers, directors, equity holders, members, partners and employees, from all liability, claims, damages or losses arising in the performance of their duties under the advisory agreement, and related expenses, including reasonable attorneys’ fees, to the extent such liability, claims, damages or losses and related expenses are not fully reimbursed by insurance, provided that: (i) our advisor and its affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interest; (ii) our advisor and its affiliates were acting on behalf of or performing services for us; (iii) the indemnified claim was not the result of negligence or misconduct of our advisor or its affiliates or the result of a breach of the agreement by our advisor or its affiliates and (iv) any indemnification made to our advisor, its affiliates or their officers, managers or employees may be made only out of our net assets and not from our stockholders.

 

Our advisor will indemnify and hold us harmless from contract or other liability, claims, damages, taxes or losses and related expenses, including attorneys’ fees, to the extent that such liability, claims, damages, taxes or losses and related expenses are not fully reimbursed by insurance and are incurred by reason of our advisor’s gross negligence, bad faith, fraud, willful misfeasance, misconduct, or reckless disregard of its duties, but our advisor will not be held responsible for any action of our board of directors in following or declining to follow the advice or recommendation given by our advisor.

 

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Initial Investment by Our Advisor

 

Our advisor, an affiliate of our sponsors, has invested $200,000 in us through the purchase of approximately 22,222 shares of our Class A common stock at $9.00 per share. Our advisor may not sell any of these shares during the period it serves as our advisor. Our advisor will not vote any shares it acquires in any vote for the removal of directors or any vote regarding the approval or termination of any contract with our advisor or any of its affiliates.

 

Other Affiliates

 

Our Property Manager

 

We expect that a substantial majority of our real properties will be managed and leased by our property manager, which is affiliated with our Phillips Edison sponsor. Jeffrey S. Edison is an executive officer of our property manager. For more information about Mr. Edison’s background and experience, see the “Management—Other Affiliates—Our Phillips Edison Sponsor” section of this prospectus.

 

We will pay our property manager a monthly property management fee of 4.0% of the monthly gross receipts generated at our properties, but no less than $3,000 per month for each property managed, for services it provides in connection with operating and managing the property. Gross receipts, as defined in the property management agreement, consists of rent, profit we derive from the sale of utilities to tenants, and amounts tenants pay for common-area maintenance, real estate taxes, insurance, interest and any other payments of any nature (including attorneys’ fees and late fees and any proceeds of rent insurance). The property manager may reallow some or all of these fees to third parties for management services.

 

We expect to engage our property manager to provide leasing services with respect to our properties. We will pay a leasing fee in an amount that is usual and customary for comparable services rendered based on the geographic market of each property.

 

We also expect to engage our property manager to provide construction management and development services for some of our properties. We will pay construction management fees and development fees in amounts that are usual and customary for comparable services rendered to similar projects in the geographic market of each project.

 

Our property management agreement with our property manager has a one-year term, and is subject to automatic successive one-year renewals unless either party provides written notice of its intent to terminate 90 days prior to the expiration of the initial or renewal term. Each party also has the right to terminate the agreement upon 30 days’ prior written notice without penalty.

 

Our property manager hires, directs and establishes policies for employees who have direct responsibility for the operations of each real property it manages, which includes, but is not limited to, on-site managers and building and maintenance personnel. Our property manager also directs the purchase of equipment and supplies and supervises all maintenance activity.

 

Our Phillips Edison Sponsor

 

Our Phillips Edison sponsor has a fully integrated, scalable, national operating platform. Our Phillips Edison sponsor’s acquired portfolio of assets is managed by a seasoned team of more than 275 professionals with extensive knowledge and expertise in the retail sector. Our Phillips Edison sponsor’s management team has institutional experience investing and performing throughout a variety of market conditions and real estate cycles. Our Phillips Edison sponsor’s senior management team and associates adhere to the same organizational philosophy that emphasizes a culture of learning, teamwork and accountability, which has been, and will continue to be, critical to its success. Our Phillips Edison sponsor and its predecessor has worked hard to create a collaborative culture that promotes long-term professional development.

 

The management team also has long-term relationships with regional and national grocery tenants, other national and necessity-based anchor and junior-anchor tenants and many small store tenants. Their established relationships with these tenants and other players in the industry, including lenders, vendors, brokers and contractors should assist in providing reliable execution of our investment and operating strategies.

 

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On August 12, 2010, PECO I commenced its initial public offering of up to $1.785 billion in shares of its common stock, consisting of up to $1.5 billion in shares of common stock through its primary offering and $285.0 million in shares of its common stock through its dividend reinvestment plan. On February 7, 2014, PECO I terminated the primary portion of its initial public offering. As of December 31, 2016, PECO I continued to offer shares of its common stock through its dividend reinvestment plan. As of December 31, 2016, PECO I had issued 194.9 million shares of common stock, including 21.1 million shares issued through its dividend reinvestment plan, generating gross cash proceeds of $1.9 billion since the commencement of its initial public offering.

 

On October 4, 2017, PECO I acquired Phillips Edison Limited Partnership’s real estate and asset management business in a stock-and-cash transaction valued at approximately $1.0 billion. The resulting company will be an internally-managed, nontraded grocery-anchored shopping center REIT with an expected total enterprise value of $4.0 billion. As a result of this transaction, PECO I became our Phillips Edison sponsor on October 4, 2017. We do not believe that the transaction will adversely affect (1) the ability of our advisor and our property manager to conduct our operations and manage our portfolio of real estate investments, or (2) our ability to conduct this offering of our common stock.

 

On November 25, 2013, PECO II commenced its initial public offering of up to $2.475 billion in shares of its common stock, consisting of up to $2.0 billion in shares of common stock through its primary offering and $475.0 million in shares of its common stock through its dividend reinvestment plan. On September 15, 2015, PECO II terminated the primary portion of its initial public offering. As of December 31, 2016, PECO II continued to offer shares of its common stock through its dividend reinvestment plan. As of December 31, 2016, PECO II had issued 47.6 million shares of common stock, including 3.2 million shares issued through its distribution reinvestment plan, generating gross cash proceeds of $1.2 billion since the commencement of its initial public offering.

 

Our Phillips Edison sponsor’s national platform enables them to operate in markets throughout the United States. Corporate offices are located in Cincinnati, Ohio, New York, New York and Salt Lake City, Utah, with satellite offices in various other cities to ensure that management personnel are located in relatively close proximity to every portfolio property.

 

Our Phillips Edison sponsor’s portfolio management and operations functions are organized by four geographic regions plus a redevelopment region, with a dedicated team for each region that includes an asset manager, construction manager, legal support, leasing agents, property managers and finance and accounting support. This regionalization program allows for increased property focus, operational efficiencies and improved cross-functional communications.

 

The national platform is supported with scalable information technology systems and a disaster recovery system monitored with appropriate controls. For example, our Phillips Edison sponsor’s document approval system creates efficient, paperless communication and process approval between departments in real time. The system provides secure access to important documents, which are stored electronically and are accessible by query.

 

Our Phillips Edison sponsor’s in-house operating team is exclusively dedicated to its properties and those of Phillips Edison-advised entities and Phillips Edison-sponsored programs, including us. The fully integrated operating team, which includes acquisitions, due diligence, financing, leasing, research, dedicated legal support for leasing, property management and construction, controls every aspect of the property acquisition, leasing and management process. Key duties of each group are:

 

·Acquisitions generate constant deal flow, with a streamlined evaluation process and disciplined buying. This process is enhanced through our Phillips Edison sponsor's reputation, longstanding relationships with brokers and property owners and a constant market presence.

 

·Due diligence assesses issues and any foreseeable risks associated with a property being acquired, which might affect its value and price. This analysis includes site visits, tenant interviews, tenant sales reviews, verification of leases, and review of environmental and property conditions. Upon acquisition, the team disseminates the information to the organization for an effective and efficient transition to operations.

 

·Finance builds and leverages lender relationships to secure financing at the lowest cost while maintaining operating flexibility, underwrites all new acquisitions and forecasts operating results on an ongoing basis.

 

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·Leasing teams are responsible for understanding each shopping center's market and creating a tailored merchandising plan to obtain a tenant mix that enhances the retail shopping experience and optimizes the income stream. Agents are responsible for developing and cultivating relationships with existing and potential tenants through formal and informal meetings, telephone contact, portfolio reviews at tenants' headquarters and tenant “call-ins.”

 

·Research provides information including mapping, demographics, site specific data, market information, and trend and void analyses.

 

·A dedicated legal team negotiates the non-monetary provisions of leases and works closely with the leasing team to draft, review, and negotiate letters of intent, leases, lease amendments, lease renewals, and lease assignments while improving the quality of leases.

 

·Property management maintains an attractive, safe environment where retailers thrive and customers enjoy a pleasant shopping experience. This property focus includes constant review and supervision of every shopping center.

 

·Construction works closely with leasing and the legal team to provide cost estimating, analysis, conceptual design, and value engineering options. Supervision and management of all construction activities are completed in-house in an effort to minimize cost and time. Bidding and construction is completed through an established network of contractors.

 

·Accounting is a comprehensive internal function that manages tenant billing, collections, property level accounting, fund level accounting and external reporting. This enables the accounting group to prepare and file quarterly earnings with the SEC in house, reducing the reliance on third party vendors and providing additional controls and oversight.

 

·Asset management develops and executes strategic plans for each asset. Divided into five regions, the asset management team manages interdepartmental resources including leasing, construction, property management and finance, to maximize property level results through effective cross-functional communication and quality decision making.

 

The background and experience of the senior real estate professionals employed or retained by our Phillips Edison sponsor and its affiliates are described above in the “Management — Executive Officers and Directors” section of this prospectus with respect to Messrs. Edison, Addy and Murphy and Ms. Robison. The backgrounds of Robert F. Myers, David Wik, Tanya E. Brady and Keith A. Rummer, additional key employees of our Phillips Edison sponsor, are described below.

 

Robert F. Myers has served as Chief Operating Officer of PECO since October 2010. Mr. Myers joined PECO in 2003 as Senior Leasing Representative, was promoted to Regional Leasing Manager in 2005 and became Vice President of Leasing in 2006. He was named Senior Vice President of Leasing and Operations in 2009 prior to becoming Chief Operating Officer in 2010. Mr. Myers is active in ICSC, the International Council of Shopping Centers, where he has served as the State Director of Ohio/West Virginia for the last six years. He is also involved in a variety of community and charitable organizations including his church where he has been a board member for the last seven years, Joshua’s Place working with poverty stricken families to provide a variety of services and resources, Broken Bus Ministry working with the homeless and One Way Farm, a children’s home located in Fairfield, Ohio. Before joining PECO, Mr. Myers spent six years with Equity Investment Group, where he started as a property manager in 1997. He served as Director of Operations from 1998 to 2000 and as Director of Lease Renegotiations/Leasing Agent from 2000 to 2003. Mr. Myers received his bachelor's degree in business administration from Huntington College in 1995.

 

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David Wik currently serves as Senior Vice President, Acquisitions of PECO.  Prior to that, he served as Vice President of Acquisitions for PECO beginning in 2010 when he rejoined PECO. Since rejoining PECO, he has sourced the acquisition of over 100 grocery-anchored assets representing over $1 billion of investments for multiple REITs sponsored by PECO.  He had previously spent three years with PECO between 2003 and 2006 as an acquisitions officer where he sourced over $250 million for PECO’s value-add funds.  In between, he spent four years with Midland Atlantic Development where he started and ran an acquisition platform for the company, which had previously been focused purely on ground up development.  Prior to that, Mr. Wik was with PNC Bank in their commercial real estate lending group where he held various roles from analyst, to portfolio manager to relationship manager.  Mr. Wik is an active member of the International Council of Shopping Centers and member of the Board at Rivers Crossing Community Church.  Mr. Wik holds a bachelor’s degree in Business Administration in Real Estate and Marketing from the University of Cincinnati.

 

Tanya Brady has served as Senior Vice President and General Counsel for PECO since January 2015.  Ms. Brady joined PECO in 2013 as Vice President and Assistant General Counsel.  Ms. Brady has also served as Vice President and Assistant Secretary for PECO I and PECO II since January 2015. She has served as our Vice President and Assistant Secretary since April 2016.  Ms. Brady has over 18 years of experience in commercial real estate and corporate transactions.  She has experience in joint venture and fund formation matters, structuring and negotiating asset and entity-level acquisitions and dispositions and related financings, the sales and purchases of distressed loans, and general corporate matters. She also has commercial leasing and sale leaseback experience.  Prior to joining PECO, Ms. Brady was a partner at the law firm of Kirkland & Ellis LLP in Chicago, Illinois since April 2004.  Prior to that, she held associate positions at the law firms of Freeborn & Peters LLP in Chicago, Illinois from June 2003 through March 2004, King & Spalding LLP in Atlanta, Georgia from January 2001 through June 2003, and Scoggins & Goodman, P.C. in Atlanta, Georgia from October 1999 through January 2001.  Ms. Brady received a bachelor of civil law degree with honors from the National University of Ireland College of Law in Dublin, Ireland, and a juris doctor from DePaul University College of Law in Chicago.  Ms. Brady is a member of the National Association of Real Estate Investments Trusts (NAREIT), CREW Network and the International Council of Shopping Centers (ICSC).  She is licensed to practice in Illinois, Georgia, Ohio and Utah.

 

Keith A. Rummer has served as Chief Compliance Officer of PECO since February 2017 and as Senior Vice President and Chief Human Resources Officer of PECO since 2012. Prior to joining PECO, he served as Vice President, Associate Relations & Compliance with the global eyewear manufacturer/retailer Luxottica (brands LensCrafters, Pearle Vision, Sunglass Hut and others) from 2008 to 2012. He was previously employed as the Vice President, Director of Employee Relations, and as in-house employment counsel, for Fifth Third Bancorp from 2004 to 2008. He served as Corporate Counsel, Compliance Officer & Assistant Secretary for the healthcare staffing firm, AMN Healthcare, Inc. from 2001 to 2004. He held law firm associate positions at Paul, Plevin, Sullivan & Connaughton and Chapin, Fleming, McNitt & Shea & Carter from 1998 to 2001 after serving in the U.S. Navy Judge Advocate General’s Corps from 1994 to 1998. He received his bachelor’s degree with honors from Denison University and his juris doctorate with honors in law from The Ohio State University, Moritz College of Law. Mr. Rummer serves on the boards of the Alzheimer’s Association (Cincinnati Chapter) and the Employers Resource Association.

 

Our Griffin Sponsor and its Principals

 

Our Griffin sponsor is a privately owned real estate company formed in 1995 which sponsors real estate investment vehicles and manages institutional capital. Led by senior executives with more than two decades of real estate experience collectively encompassing over $22.0 billion of transaction value and more than 650 transactions, our Griffin sponsor and its affiliates have acquired or constructed approximately 56 million square feet of space since 1995.  This $22.0 billion of transaction value consists of the following components: (1) an aggregate of approximately $16.2 billion of real estate transactions (based on purchase price) attributed to the experience of Griffin’s senior executives prior to their affiliation with our Griffin sponsor; (2) an aggregate of approximately $3.2 billion of acquisitions (based on purchase price) made by GCEAR through 2016; (3) an aggregate of approximately $1.2 billion of acquisitions (based on purchase price) made by GCEAR II through 2016; (4) an aggregate of approximately $2.8 billion of acquisitions (based on purchase price) made by GAHR III through 2016; and (5) an aggregate of approximately $138.8 million of acquisitions (based on purchase price) made by GAHR IV through 2016.

 

As of December 31, 2016, our Griffin sponsor and its affiliates own, manage, sponsor and/or co-sponsor a portfolio consisting of approximately 42 million square feet of space, located in 30 states and the United Kingdom, representing approximately $7.3 billion in asset value, based on purchase price (including property information related to interests held in joint ventures).  This $7.3 billion in asset value consists of the following components:  (1) approximately $3.2 billion of assets under management owned by GCEAR as of December 31, 2016; (2) approximately $1.2 billion of assets under management owned by GCEAR II as of December 31, 2016; (3) approximately $2.8 billion of assets under management owned by GAHR III as of December 31, 2016; and (4) approximately $138.8 million of assets under management owned by GAHR IV as of December 31, 2016.

 

Our Griffin sponsor currently serves as sponsor for GCEAR and GCEAR II and as a co-sponsor for GAHR III and GAHR IV, each of which are publicly registered, non-traded REITs. Our Griffin sponsor is also the sponsor of GIA Real Estate Fund and GIA Credit Fund, both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the Investment Company Act. Griffin Capital, through its indirect wholly owned subsidiary, Griffin Capital Asset Management Company, LLC, indirectly owns 25% of our advisor.

 

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GCEAR, GCEAR II, GAHR III and GAHR IV each have similar investment goals to ours, including acquiring and operating commercial properties; providing stable cash flow; preserving and protecting capital; and realizing capital appreciation on the ultimate sale of properties. One difference in investment goals between us and GCEAR, GCEAR II, GAHR III and GAHR IV is the focus on a particular type of commercial property. While our focus is on grocery-anchored shopping centers, GCEAR and GCEAR II both focus on single-tenant net-lease office and industrial properties diversified by corporate credit, physical geography, product type and lease duration and GAHR III and GAHR IV both focus on medical office buildings, hospitals, skilled nursing facilities, senior housing and other healthcare-related facilities.

 

In November 2009, GCEAR commenced its initial public offering of up to a maximum of 82.5 million shares of common stock, and on April 26, 2013, GCEAR commenced a follow-on public offering of up to a maximum of $1.1 billion in shares of common stock. On April 22, 2014, GCEAR announced that it was no longer accepting subscriptions in the follow-on offering, as GCEAR expected to reach the maximum offering amount following the transfer agent’s reconciliation of pending subscriptions. On May 7, 2014, GCEAR filed a registration statement on Form S-3 for the registration of up to $75.0 million in shares pursuant to GCEAR’s distribution reinvestment plan. Having issued substantially all of the $75.0 million in shares registered pursuant to such Form S-3, GCEAR filed another Form S-3 on September 22, 2015 for the registration of up to $100 million in shares pursuant to GCEAR’s distribution reinvestment plan. As of December 31, 2015, GCEAR had issued and outstanding approximately 24.7 million total shares of its common stock, including shares issued pursuant to its distribution reinvestment plan, for gross proceeds of approximately $1.4 billion in its private offering, public offerings and distribution reinvestment plan offerings.

 

On February 26, 2014, GAHR III commenced its initial public offering of up to $1.9 billion in shares of its common stock, consisting of up to $1.865 billion in shares of common stock through its primary offering and $115.0 million in shares of its common stock through its distribution reinvestment plan. On March 12, 2015, GAHR III terminated the primary portion of its initial public offering. GAHR III continued to offer up to $35.0 million in shares of its common stock through its offering pursuant to its distribution reinvestment plan until the termination of the distribution reinvestment plan portion of its offering and deregistration of its offering on April 22, 2015. As of April 22, 2015, GAHR III had issued and outstanding approximately $1.8 billion in shares of common stock, excluding shares of its common stock issued pursuant to the distribution reinvestment plan.

 

On July 31, 2014, GCEAR II commenced its initial public offering, and offered up to a maximum of $2.2 billion in shares of common stock. On January 20, 2017, GCEAR II terminated the primary portion of its initial public offering. As of March 9, 2017, GCEAR II had issued and outstanding approximately 72.7 million total shares of its common stock, including shares issued pursuant to its distribution reinvestment plan and stock distributions, and had received gross proceeds of approximately $724.1 million in its public offering.

 

On February 16, 2016, GAHR IV commenced its initial public offering of up to $3.15 billion in shares of its common stock, consisting of up to $3.0 billion in shares of common stock through its primary offering and $150.0 million in shares of its common stock through its distribution reinvestment plan. As of February 24, 2017, GAHR IV had received and accepted subscriptions in its offering for approximately 15.0 million shares of its common stock, or approximately $149.0 million, excluding shares of its common stock issued pursuant to the distribution reinvestment plan.

 

Our Griffin sponsor has also sponsored 22 privately offered programs. These offerings have included eight single-tenant real estate tenant-in-common offerings, one hotel asset tenant-in-common offering, eight multi-tenant asset real estate tenant-in-common offerings, one development program consisting of three multifamily housing projects and four Delaware Statutory Trusts, one consisting of a nine-property restaurant portfolio, one consisting of an apartment community, one consisting of a single tenant occupied manufacturing facility and one consisting of a single tenant office building. Investors in these offerings (other than the Delaware Statutory Trust offerings) acquired an undivided interest in the offered property. From 2004 to 2016, these 22 privately offered programs raised approximately $337.9 million of gross offering proceeds from approximately 887 investors, which includes 869 third-party investors, as of December 31, 2016. With a combination of debt and offering proceeds, these same programs invested approximately $916.1 million in 37 properties.

 

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Some of the privately offered programs sponsored by our Griffin sponsor have experienced tenant vacancies due to bankruptcies and mergers or lease expirations through the course of the economic recession, which resulted in four property foreclosures and caused other properties to perform below expectations. As a result, our Griffin sponsor determined to preserve capital and suspended or reduced distributions for most of the remaining programs that are not single-tenant-property offerings. In addition, our Griffin sponsor defaulted on loans with respect to certain properties in order to commence workout negotiations. For many of these properties, vacancies and operational performance necessitated loan modifications in an effort to build adequate cash reserves to re-lease and stabilize the properties and to reduce debt loads to a manageable level. Our Griffin sponsor has completed workout negotiations and in certain instances the negotiations were not successful, resulting in foreclosure of the property by the lender. Our Griffin sponsor does not believe that any of these developments will have a material impact on the business of our Griffin sponsor.

 

The following table sets forth information with respect to the executive officers and other key personnel of our Griffin sponsor:

 

Name   Age*   Position
Kevin A. Shields   59   Chairman of the Board, Chief Executive Officer and Sole Director
David C. Rupert   60   President
Michael J. Escalante   57   Chief Investment Officer
Randy I. Anderson   49   Chief Economist
Joseph E. Miller   54   Chief Financial Officer
Mary P. Higgins   58   Vice President, General Counsel and Secretary
Howard S. Hirsch   51   Vice President, General Counsel — Securities

 

* As of September 1, 2017

 

The background and experience of Mr. Rupert is described above in the “Management — Executive Officers and Directors” section of this prospectus. The backgrounds of the other executive officers and key personnel of our Griffin sponsor are described below.

 

Kevin A. Shields has served as the Chairman of the Board of Directors of Griffin Capital Company, LLC, or Griffin Capital, since its formation in 1995 and has served as its Chief Executive Officer since September 2010, after serving as its President from 1995 to September 2010. Mr. Shields currently serves as a non-voting special observer of our board of directors and the board of directors of GAHR III. Mr. Shields is also currently the Chief Executive Officer and Chairman of the Board of Directors of GCEAR, positions he has held since the company’s formation in August 2008; as Chief Executive Officer and Chairman of the Board of Directors of GCEAR II, positions he has held since the company’s formation in November 2013; as President and a trustee of GIA Real Estate Fund, positions he has held since the company’s formation in November 2013; as President and trustee of GIA Credit Fund, positions he has held since January 2017. Mr. Shields is also the Chief Executive Officer of Griffin Capital Securities, LLC, or Griffin Securities. From November 2011 to December 2014, Mr. Shields also served as the Chief Executive Officer of Griffin-American Healthcare REIT Advisor, LLC. Before founding Griffin Capital, from 1993 to 1994, Mr. Shields was a Senior Vice President and head of the structured real estate finance group at Jefferies & Company, Inc., a Los Angeles-based investment bank. During his tenure at Jefferies, Mr. Shields focused on originating structured lease bond product. From 1992 to 1993, Mr. Shields was the President and Principal of Terrarius Incorporated, a firm engaged in the restructuring of real estate debt and equity on behalf of financial institutions, corporations, partnerships and developers. Prior to founding Terrarius, from 1986 to 1992, Mr. Shields served as a Vice President in the real estate finance department of Salomon Brothers Inc. in both New York and Los Angeles. During his tenure at Salomon Brothers, Mr. Shields initiated, negotiated, drafted and closed engagement, purchase and sale and finance agreements. Over the course of his 30-year real estate and investment-banking career, Mr. Shields has structured and closed over 200 transactions totaling in excess of $8 billion of real estate acquisitions, financings and dispositions. Mr. Shields holds a J.D. degree, an MBA, and a B.S. degree in finance and real estate from the University of California at Berkeley. Mr. Shields is a Registered Securities Principal of Griffin Securities, and holds Series 7, 63, 24 and 27 licenses. Mr. Shields is a full member of the Urban Land Institute, a member of the Policy Advisory Board for the Fisher Center for Real Estate, the former chair and current member of the Board of Directors for the Investment Program Association and an executive member of the Public Non-Listed REIT Council of the National Association of Real Estate Investment Trusts.

 

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Michael J. Escalante has served as Chief Investment Officer of Griffin Capital since June 2006, where he is responsible for overseeing all acquisition and disposition activities. Mr. Escalante has also served as President and Chief Investment Officer of GCEAR since June 2015 and August 2008, respectively, having previously served as its Vice President from the company’s formation in August 2008 to June 2015; as President of GCEAR II, a position he has held since the company’s formation in November 2013; and as a member of the board of directors of GCEAR II, a position he has held since February 2015. From November 2011 through December 2014, Mr. Escalante also served as the Chief Investment Officer of Griffin-American Healthcare REIT Advisor, LLC. With more than 25 years of real estate-related investment experience, he has been responsible for completing in excess of $6.0 billion of commercial real estate transactions, primarily throughout the United States. Prior to joining Griffin Capital in June 2006, Mr. Escalante founded Escalante Property Ventures in March 2005, a real estate investment management company, to invest in value-added and development-oriented infill properties within California and other western states. From 1997 to March 2005, Mr. Escalante served eight years at Trizec Properties, Inc., one of the largest publicly-traded United States office REITs, with his final position being Executive Vice President - Capital Transactions and Portfolio Management. While at Trizec, Mr. Escalante was directly responsible for all capital transaction activity for the western United States, which included the acquisition of several prominent office projects. Mr. Escalante’s work experience at Trizec also included hands-on operations experience as the REIT’s western United States regional director with bottom-line responsibility for asset and portfolio management of a 4.6 million square foot office/retail portfolio (11 projects/23 buildings) and associated administrative support personnel (110 total/65 company employees). Prior to joining Trizec, from 1987 to 1997, Mr. Escalante held various acquisitions, asset management and portfolio management positions with The Yarmouth Group, an international investment advisor. Mr. Escalante holds an M.B.A. from the University of California, Los Angeles, and a B.S. in commerce from Santa Clara University. Mr. Escalante is a full member of ULI and active in many civic organizations.

 

Randy I. Anderson, Ph. D CRE, joined Griffin Capital in 2014 as Chief Economist. Dr. Anderson serves as an Executive Vice President of Griffin Capital BDC Advisor, LLC, an SEC-registered investment adviser; and as Portfolio Manager/Co-Founder of GIA Real Estate Fund, where he is also Chairman of the Board. From 2012 to 2013, Dr. Anderson held several senior executive positions at Bluerock Real Estate LLC, including founding partner of the Bluerock Total Income+ Real Estate Fund, where he was the Portfolio Manager. Dr. Anderson served as the Howard Phillips Eminent Scholar Chair and Professor of Real Estate at the University of Central Florida from 2008 through 2013, where he was responsible for growing the real estate program, including the establishment of the Professional MS in Real Estate. While at the University of Central Florida, Dr. Anderson was a member of the University Foundation Investment Sub-Committee which provides investment advice for the endowment, was the academic member of the Florida Association of Realtors Education Foundation Advisory Board, and was an ex-officio board member of the Central Florida Commercial Association of Realtors. In 2007, Dr. Anderson was President, Chief Executive Officer, and founding partner of Franklin Square Capital Partners, where he helped establish, strategically organize, and capitalize the firm. From 2005 through 2007, Dr. Anderson also served as Chief Economist for CNL Financial Group as well as Divisional President for CNL Real Estate Advisors. Prior to CNL, Dr. Anderson was the Chief Economist and Director of Research for the Marcus and Millichap Company from 2002 through 2005 and Vice President of Research at Prudential Real Estate Advisors from 2001 through 2002.

 

Dr. Anderson is a former co-editor of the Journal of Real Estate Portfolio Management and the Journal of Real Estate Literature. Dr. Anderson received the Kinnard Young Scholar Award from the American Real Estate Society, an award which recognizes outstanding real estate scholarship for young academics, served as the Executive Director for the American Real Estate Society, was named a Homer Hoyt Fellow and a NAIOP Distinguished Fellow, and has been invited to guest lecture at leading global universities. Dr. Anderson received his B.A. in Finance from North Central College in 1991 as a Presidential Scholar and holds a Ph.D. in Finance as a Presidential Fellow from the University of Alabama, where he graduated with highest distinction in 1996.

 

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Joseph E. Miller has served as the Chief Financial Officer of Griffin Capital since February 2007. Mr. Miller also currently serves as Treasurer of GIA Real Estate Fund, a position he has held since May 2014. Mr. Miller is responsible for all of Griffin Capital’s accounting, finance, information technology systems and human resources functions. From November 2011 through December 2014, Mr. Miller also served as the Chief Financial Officer of Griffin-American Healthcare REIT Advisor, LLC. From August 2008 until June 15, 2016, Mr. Miller served as Chief Financial Officer and Treasurer of GCEAR, and from November 2013 until June 15, 2016, Mr. Miller served as Chief Financial Officer and Treasurer of GCEAR II. Mr. Miller has more than 25 years of real estate experience in public accounting and real estate investment firms. Prior to joining Griffin Capital, from 2001 to January 2007, Mr. Miller served as the Vice President and Corporate Controller, and later the Senior Vice President of Business Operations, for PS Business Parks, a publicly-traded REIT. At PS Business Parks, Mr. Miller was initially responsible for SEC filings, property-level accounting, and all financial reporting. Upon assuming the role of Senior Vice President of Business Operations, Mr. Miller was responsible for the financial operations of the real estate portfolio, policies and procedures of the organization, and information technology systems. From 1997 to 2001, Mr. Miller was the Corporate Controller for Maguire Properties, formerly Maguire Partners, where he was responsible for the accounting operations, treasury functions, and information technology systems. Before joining Maguire, from 1994 to 1997, Mr. Miller was an audit manager with Ernst & Young LLP where he was responsible for attestation engagements for financial services and real estate companies, and he also worked on initial public offering teams for real estate investment companies going public. Mr. Miller also worked with KPMG, where he became a certified public accountant. Mr. Miller received a B.S. in Business Administration, Accounting from California State University and an MBA from the University of Southern California.

 

Mary P. Higgins has served as the Vice President, General Counsel and Secretary of Griffin Capital since May 2006. Ms. Higgins also currently serves as Vice President, General Counsel and Secretary of GCEAR, positions she has held since the company’s formation in August 2008, and as Vice President and General Counsel of GCEAR II, positions she has held since the company’s formation in November 2013. From November 2011 through December 2014, Ms. Higgins also served as the Vice President, General Counsel and Secretary of Griffin-American Healthcare REIT Advisor, LLC. Prior to joining Griffin Capital in August 2004, Ms. Higgins was a partner at the law firm of Wildman, Harrold, Allen & Dixon LLP in Chicago, Illinois. Ms. Higgins has been Griffin Capital’s primary real estate transaction counsel for more than 10 years and has worked together with Griffin Capital’s principals on nearly all of their acquisition, due diligence, leasing, financing and disposition activities during that time period. Ms. Higgins has over 20 years of experience representing both public and private real estate owners, tenants and investors in commercial real estate matters, including development, leasing, acquisitions, dispositions, and securitized and non-securitized financings. Representative transactions include sales and dispositions of regional malls, including some of the premier regional malls in the nation; sale of a golf course in an UPREIT structure; a $38 million credit tenant loan transaction; acquisition of various Florida office properties for a $150 million office property equity fund; representation of the ground lessor in a subordinated development ground lease and a $350 million property roll up. Ms. Higgins additionally has commercial leasing experience. Ms. Higgins is the author of the chapter entitled “Due Diligence on Commercial Leases” in the Real Estate Transactions volume published by the Illinois Institute for Continuing Legal Education, and she is active in many civic organizations. Ms. Higgins earned her undergraduate degree in Law Firm Administration from Mallinckrodt College (now part of Loyola University) and her J.D. degree from DePaul University College of Law, both of which are located in Illinois.

 

Howard S. Hirsch has served as Vice President and General Counsel — Securities of Griffin Capital since June 2014. Mr. Hirsch also currently serves as Vice President and Assistant Secretary of GCEAR and Vice President and Assistant Secretary of GIA Real Estate Fund, positions he has held since January 2015; as Vice President and Assistant Secretary of GIA Credit Fund, positions he has held since January 2017; as Vice President and Secretary of GCEAR II, positions he has held since June 2014. Prior to joining Griffin Capital in June 2014, Mr. Hirsch was an equity shareholder at the law firm of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta, Georgia. From July 2007 through the time he joined Baker Donelson in April 2009, Mr. Hirsch was counsel at the law firm of Bryan Cave LLP in Atlanta, Georgia. Prior to joining Bryan Cave LLP, from July 1999 through July 2007, Mr. Hirsch worked at the law firm of Holland and Knight LLP in Atlanta, Georgia, where he was an associate and then a partner. Mr. Hirsch has over 18 years of experience in public securities offerings, SEC reporting, corporate and securities compliance matters and private placements. He previously handled securities, transactional and general corporate matters for various publicly traded and non-traded REITs. Mr. Hirsch’s experience also includes registrations under the Securities Act, reporting under the Exchange Act and advising boards of directors and the various committees of public companies. He has counseled public companies on corporate governance best practices and compliance matters, and has represented issuers on SEC, FINRA and blue sky regulatory matters in connection with registrations of public offerings of non-traded REITs and real estate partnerships. He also has experience representing broker-dealers on various FINRA compliance matters. Mr. Hirsch earned his B.S. degree from Indiana University and his J.D. degree from The John Marshall Law School in Chicago, Illinois.

 

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Dealer Manager

 

Griffin Capital Securities, LLC, a Delaware limited liability company and an affiliate of our advisor and our Griffin sponsor, serves as our dealer manager. Griffin Capital Securities, LLC was originally formed in 1991 as a California corporation and became approved as a member of FINRA in 1995.

 

Our dealer manager will provide wholesaling, sales promotional and marketing services to us in connection with this offering. Specifically, our dealer manager will ensure compliance with SEC rules and regulations and FINRA rules relating to the sales process. In addition, our dealer manager will oversee participating broker-dealer relationships, assist in the assembling of prospectus kits, assist in the due diligence process and ensure proper handling of investment proceeds. See the “Management Compensation” and “Plan of Distribution” sections of this prospectus.

 

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Management Compensation

 

Although we have executive officers who will manage our operations, we have no paid employees. Our advisor and the real estate professionals at our sponsors will manage our day-to-day affairs and our portfolio of real estate and real estate-related investments, subject to the board’s supervision. The table below assumes that (i) 90% of the amount of common stock sold in this primary offering is Class T common stock and 10% is Class I common stock, (ii) we do not reallocate shares being offered between our primary offering and distribution reinvestment plan, and (iii) based on this allocation, we sell all $1,500,000,000 of shares being offered at the highest possible selling commissions and dealer manager fees with respect to our primary offering (with no discounts to any categories of purchasers). The compensation set forth below may only be increased if approved by a majority of the members of our Conflicts Committee. The increase of such compensation does not require approval by stockholders.

 

Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering(1)
Organization and Offering Stage

Selling Commissions(2)

 

  Griffin Capital Securities   Generally, up to 3.0% of gross offering proceeds from the sale of shares of our Class T common stock pursuant to our primary offering (all or a portion of which may be reallowed by our dealer manager to participating broker-dealers). No selling commissions are payable on Class I shares or shares of our common stock sold pursuant to the distribution reinvestment plan.   $40,500,000

Dealer Manager Fee(2)

 

  Griffin Capital Securities   With respect to shares of our Class T common stock, generally, up to 3.0% of gross offering proceeds from the sale of shares of our Class T common stock pursuant to the primary offering (all or a portion of which may be reallowed by our dealer manager to participating broker-dealers), of which 1.0% of the gross offering proceeds will be funded by us and up to 2.0% of the gross offering proceeds will be funded by our advisor. With respect to shares of our Class I common stock, generally, up to an amount equal to 1.5% of gross offering proceeds from the sale of shares of our Class I common stock pursuant to the primary offering (all or a portion of which may be reallowed by our dealer manager to participating broker-dealers), all of which will be funded by our advisor. However, our advisor intends to recoup the portion of the dealer manager fee it funds through the receipt of the Contingent Advisor Payment as part of our acquisition fees, as described below. To the extent that the dealer manager fee is less than 3.0% for any Class T shares sold and less than 1.5% for any Class I shares sold, such shares will have a corresponding reduction in the applicable purchase price.  No dealer manager fee is payable on shares of our common stock sold pursuant to the distribution reinvestment plan.   $42,750,000  ($40,500,000 for Class T shares and $2,250,000 for Class I shares)

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering(1)
Other Organization and Offering Expenses(3)(4)   PECO-Griffin REIT Advisor, LLC   Estimated to be 1.0% of gross offering proceeds from our primary offering in the event we raise the maximum offering. Our advisor will pay organization and offering expenses up to 1.0% of gross offering proceeds from our primary offering, and we will reimburse our advisor for any amounts in excess of 1.0% up to a maximum of 3.5%. Our advisor intends to recoup the portion of the organization and offering expenses it funds through the receipt of the Contingent Advisor Payment, as described below.   $15,000,000
Acquisition and Development Stage
Acquisition Fees and Contingent Advisor Payment(5)   PECO-Griffin REIT Advisor, LLC   We will pay our advisor a base acquisition fee of 2.0% of the contract purchase price of each property or other real estate investments we acquire. We will also pay our advisor an additional  contingent advisor payment of 2.15% of contract purchase price of each property or other real estate investments we acquire  (the “Contingent Advisor Payment”).  The Contingent Advisor Payment allows our advisor to recoup the portion of the dealer manager fee and other organization and offering expenses funded by our advisor. Therefore, the amount of the Contingent Advisor Payment paid upon the closing of an acquisition shall not exceed the then outstanding amounts paid by our advisor for dealer manager fees and other organization and offering expenses at the time of such closing. For these purposes, the amounts paid by our advisor and considered as “outstanding” will be reduced by the amount of the Contingent Advisor Payment previously paid. Notwithstanding the foregoing, the Contingent Advisor Payment Holdback of the initial $4.5 million of amounts to be paid by our advisor to fund the dealer manager fee and other organization and offering expenses shall be retained by us until the later of the termination of our last public offering, or ________, 20__, at which time such amount shall be paid to our advisor or its affiliates.  Our advisor may waive or defer all or a portion of the acquisition fee at any time and from time to time, in its sole discretion.   $57,069,900 (maximum offering and no debt)/ $109,815,986 (maximum offering and leverage of 50% of the cost of our investments)

Acquisition Expenses(5)

 

  PECO-Griffin REIT Advisor, LLC   Actual expenses incurred by our advisor and unaffiliated third parties in connection with an acquisition, which we estimate to be approximately 1.0% of the contract purchase price of each property. In no event will the total of all acquisition fees and acquisition expenses payable with respect to a particular investment exceed 6.0% of the contract purchase price, unless such excess fees and expenses are approved by a majority of our directors, including a majority of the Conflicts Committee, not otherwise interested in the transaction and they determine the transaction is commercially competitive, fair and reasonable to us.   $13,751,784 (maximum offering and no debt)/ $26,199,687 (maximum offering and leverage of 50% of the cost of our investments)
Construction Management Fee(6)   Phillips Edison & Company Ltd.   We expect to engage our property manager to provide construction management services for some of our properties. We will pay a construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project.   Not determinable at this time.

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering(1)
Development Fee(5)   Phillips Edison & Company Ltd.   We may engage our property manager to provide development services for some of our properties. We will pay a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project.   Not determinable at this time.
Operational Stage
Stockholder Servicing Fee(7)   Griffin Capital Securities  

A quarterly fee that will accrue daily in an amount equal to 1/365th (1/366th during a leap year) of 1.0% of the most recent purchase price per share of Class T shares sold in our primary offering. The dealer manager will generally reallow the entire stockholder servicing fee to participating broker-dealers.

 

The stockholder servicing fees will be paid on each Class T share that is purchased in the primary offering. We do not pay stockholder servicing fees with respect to shares sold under our distribution reinvestment plan, although the amount of the stockholder servicing fee payable with respect to Class T shares sold in our primary offering will be allocated among all Class T shares, including those sold under our distribution reinvestment plan.

 

We will cease paying the stockholder servicing fee with respect to Class T shares held in any particular account, and those Class T shares will convert into a number of Class I shares determined by multiplying each Class T share to be converted by the applicable “Conversion Rate” described herein, on the earlier of (i) a listing of the Class I shares on a national securities exchange; (ii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of our assets; (iii) after the termination of the primary offering in which the initial Class T shares in the account were sold, the end of the month in which total underwriting compensation paid in the primary offering is not less than 10.0% of the gross proceeds of the primary offering from the sale of Class T and Class I shares; and (iv) the end of the month in which the total stockholder servicing fees paid with respect to such Class T shares purchased in a primary offering is not less than 4.0% (or a lower limit described below) of the gross offering price of those Class T shares purchased in such primary offering (excluding shares purchased through our distribution reinvestment plan). If we redeem a portion, but not all of the Class T shares held in a stockholder’s account, the total stockholder servicing fee limit and amount of stockholder servicing fees previously paid will be prorated between the Class T shares that were redeemed and those Class T shares that were retained in the account. Likewise, if a portion of the Class T shares in a stockholder’s account is sold or otherwise transferred in a secondary transaction, the total stockholder servicing fee limit and amount of stockholder servicing fees previously paid will be prorated between the Class T shares that were transferred and the Class T shares that were retained in the account.

  $13,500,000 annually, and $54,000,000 in total (assuming the maximum stockholder servicing fee paid with respect to all Class T shares sold is 4.0% of the gross offering price of those Class T shares sold).

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering(1)
       

With respect to item (iv) above, all of the Class T shares held in a stockholder’s account will automatically convert into Class I shares as of the last calendar day of the month in which the 4.0% limit on stockholder servicing fees (or a lower limit, provided that, in the case of a lower limit, the agreement between our dealer manager and the broker-dealer in effect at the time Class T shares were first issued to such account sets forth the lower limit and our dealer manager advises our transfer agent of the lower limit in writing) in a particular account is reached.

 

We will further cease paying the stockholder servicing fee on any Class T share that is redeemed or repurchased, as well as upon our dissolution, liquidation or the winding up of our affairs, or a merger or other extraordinary transaction in which we are a party and in which the Class T shares as a class are exchanged for cash or other securities.

 

If we liquidate (voluntarily or otherwise), dissolve or wind up our affairs, then, immediately before such liquidation, dissolution or winding up, our Class T shares will automatically convert to Class I shares at the applicable Conversion Rate and our net assets, or the proceeds therefrom, will be distributed to the holders of Class I shares, which will include all converted Class T shares, in accordance with their proportionate interests.

 

With respect to the conversion of Class T shares into Class I shares described above, each Class T share will convert into an equivalent amount of Class I shares based on the respective NAV per share for each class. We currently expect that the conversion will be on a one-for-one basis, as we expect the NAV per share of each Class T share and Class I share to be effectively the same. Following the conversion of their Class T shares into Class I shares, those stockholders continuing to participate in our distribution reinvestment plan will receive Class I shares going forward at the then-current distribution reinvestment price per Class I share.

   
Property Management   Phillips Edison & Company Ltd.   Property management fees equal to 4.0% of the monthly gross receipts from the properties managed by our property manager, but no less than $3,000 per month for each property managed, will be payable monthly to our property manager. Our property manager may subcontract the performance of its property management and leasing duties to third parties, and our property manager may pay a portion of its property management or leasing fees to the third parties with whom it subcontracts for these services. We will reimburse the costs and expenses incurred by our property manager on our behalf, including employee compensation, legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, as well as fees and expenses of third-party service providers.     Actual amounts are dependent upon gross revenues of specific properties or will be dependent upon the total equity and debt capital we raise and the results of our operations and therefore cannot be determined at the present time.

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering(1)
Asset Management Fee(7)   PECO-Griffin REIT Advisor, LLC   Monthly fee equal to one-twelfth of 1.0% of the cost of each asset.  For purposes of this calculation, “cost” equals the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but will exclude acquisition fees associated with the property.  The asset management fee will be based only on the portion of the cost attributable to our investment in an asset if we do not own all or a majority of an asset and do not manage or control the asset.     Actual amounts are dependent upon the total equity and debt capital we raise and the results of our operations; we cannot determine these amounts at the present time.
Leasing Fee   Phillips Edison & Company Ltd.   We expect to engage our property manager to provide leasing services with respect to our properties. We will pay a leasing fee to our property manager in an amount that is usual and customary for comparable services rendered based on the geographic market of each property.   Not determinable at this time.
Other Operating Expenses(4)(7)   PECO-Griffin REIT Advisor, LLC and Phillips Edison & Company Ltd.   We will reimburse the expenses incurred by our advisor and our property manager in connection with their provision of services to us, including the portion of the overhead of both the advisor and the property manager that is related to the provision of such services, including certain personnel costs of the advisor and the property manager.   Actual amounts are dependent upon the results of our operations; we cannot determine these amounts at the present time.
Disposition Fees(8)   PECO-Griffin REIT Advisor, LLC   For substantial assistance in connection with the sale of properties or other investments, we will pay our advisor or its affiliates 2.0% of the contract sales price of each property or other investment sold, including a sale or distribution of all of our assets; provided, however, that total real estate commissions paid (to our advisor and others) in connection with the sale may not exceed the lesser of 6% of the contract sales price and a competitive real estate commission.  The Conflicts Committee will determine whether our advisor or its affiliates have provided substantial assistance to us in connection with the sale of an asset or a liquidity event.   Actual amounts depend on the results of our operations; we cannot determine these amounts at the present time.
Subordinated Participation in  Net Sale Proceeds (not payable if we are listed on an exchange)(9)(10)   PECO-Griffin REIT Advisor, LLC   Our advisor will receive from time to time, when available, 15.0% of remaining “net sales proceeds” after return of capital contributions plus payment to investors of an annual 6.0% cumulative, pre-tax, non-compounded return on the capital contributed by investors. “Net sales proceeds” generally refers to the proceeds of sale transactions less selling expenses incurred by or on our behalf, including legal fees, closing costs or other applicable fees.   Actual amounts depend on the results of our operations and therefore cannot be determined at the present time.
Subordinated Incentive Listing Distribution (payable only if we are listed on an exchange) (9) (11)   PECO-Griffin REIT Advisor, LLC   Upon the listing of our shares on a national securities exchange, our advisor will receive a distribution from our Operating Partnership equal to 15.0% of the amount by which the sum of our market value plus distributions paid prior to such listing exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded return to investors.   Actual amounts depend on the results of our operations and therefore cannot be determined at the present time.

 

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Form of
Compensation
  Recipient   Determination of Amount   Estimated Amount
for
Maximum Primary
Offering(1)
Subordinated Distribution Due Upon Termination of Advisory Agreement (not payable if we are listed on an exchange) (12)   PECO-Griffin REIT Advisor, LLC  

Upon termination or non-renewal of the advisory agreement by the company with or without cause, our advisor will be entitled to receive distributions from our Operating Partnership payable in the form of a non-interest bearing promissory note equal to 15.0% of the amount by which the sum of our market value plus distributions paid through the termination date exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded return to investors. In addition, our advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.

 

Payment of the promissory note will be deferred until we receive net proceeds from the sale of properties after the termination date. If the promissory note has not been paid in full on the earlier of (a) the date our common stock is listed or (b) within three years from the termination date, then our advisor may elect to convert the balance of the fee into units of our Operating Partnership or shares of our common stock. In addition, if we merge or otherwise enter into a reorganization and the promissory note has not been paid in full, the note must be paid in full upon the closing date of such transaction.

  Actual amounts depend on the results of our operations and therefore cannot be determined at the present time.

 

(1)           The estimated maximum dollar amounts are based on the sale of the maximum of $1,500,000,000 of shares to the public in the primary offering, excluding $200,000,000 of shares offered through our distribution reinvestment plan. These amounts also assume that 90% of the amount of common stock sold in this primary offering is Class T common stock and 10% is Class I common stock.

 

(2)           All or a portion of the selling commissions and dealer manager fee will not be charged with regard to Class T shares sold to certain categories of purchasers. See “Plan of Distribution.”

 

(3)           Includes all expenses (other than selling commissions, dealer manager fees, and stockholder servicing fees) to be paid by us in connection with the offering, including (a) legal, tax, accounting and escrow fees, (b) expenses for printing, engraving, amending, supplementing and mailing, (c) distribution costs, (d) compensation to employees while engaged in registering, marketing and wholesaling our common stock or providing administrative services relating thereto, (e) telegraph and telephone costs, (f) all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), (g) charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, (h) fees, expenses and taxes related to the filing, registration and qualification of the sale of our common stock under federal and state laws, including accountants’ and attorneys’ fees and other accountable offering expenses, (i) amounts to reimburse our advisor for all marketing related costs and expenses such as compensation to and direct expenses of our advisor’s employees or employees of the advisor’s affiliates in connection with registering and marketing our common stock, (j) travel and entertainment expenses related to the offering and marketing of our common stock, (k) facilities and technology costs and other costs and expenses associated with the offering and ownership of our common stock and to facilitate the marketing of our common stock, including web site design and management, (l) costs and expenses of conducting training and educational conferences and seminars, (m) costs and expenses of attending broker-dealer sponsored retail seminars or conferences and (n) payment or reimbursement of bona fide due diligence expenses, including compensation to employees while engaged in the provision or support of bona fide due diligence services. These expenses will be paid by our advisor and, to the extent such expenses exceed 1.0% of gross offering proceeds raised in our primary offering, reimbursed by us with proceeds raised from the offering. In no event will our organization and offering expenses (excluding selling commissions, dealer manager fees, and stockholder servicing fees) exceed 3.5% of the gross offering proceeds from our terminated or completed offering. If the organization and offering expenses exceed such limits, within 60 days after the end of the month in which the offering terminates or is completed, our advisor must reimburse us for any excess amounts. In the event we raise the maximum offering, we estimate that our organization and offering expenses will be 1.0% of gross offering proceeds raised in our primary offering.

 

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(4)           A portion of the amounts that we reimburse to our advisor may be allocated to the salaries, benefits and other compensation paid to our executive officers as employees of our sponsors. We will not directly compensate our executive officers.

 

(5)           We will pay our advisor an acquisition fee of 2.0% of the contract purchase price, which is the amount actually paid or allocated in respect to the purchase, development, construction, or improvement of each property or real estate related investment we acquire (exclusive of acquisition fees and acquisition expenses). We will also pay our advisor an additional contingent advisor payment equal to 2.15% of the contract purchase price for each property or real estate investment we acquire (the “Contingent Advisor Payment”). Actual amounts are dependent upon the purchase price we pay for our properties. Our advisor may waive or defer all or a portion of the acquisition fee and Contingent Advisor Payment at any time and from time to time, in our advisor’s sole discretion. In addition, we will reimburse our advisor for direct costs our advisor incurs and amounts it pays to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired. We will also pay acquisition expenses to third parties for customary third-party acquisition expenses including certain legal fees and expenses, costs of appraisals, accounting fees and expenses, title insurance premiums and other closing costs and miscellaneous expenses relating to the acquisition of real estate. Our charter provides that the total of all acquisition fees and acquisition expenses payable with respect to a particular investment (including development fees) shall be reasonable and shall not exceed 6.0% of the contract purchase price, unless such excess fees and expenses are approved by a majority of our directors, including a majority of the members of the Conflicts Committee, not otherwise interested in the transaction, if they determine the transaction is commercially competitive, fair and reasonable to us. Our board of directors is responsible for determining whether our acquisition fees and acquisition expenses are reasonable. These maximum estimates assume all acquisitions are made either (a) only with net offering proceeds from this offering, or (b) assuming a 50% leverage to acquire our properties. Since the acquisition fees we pay our advisor are a percentage of the purchase price of an investment, the acquisition fees will be greater than that shown to the extent we also fund acquisitions through (i) the incurrence of debt, (ii) retained cash flow from operations, (iii) issuances of equity in exchange for properties and (iv) proceeds from the sale of shares under our distribution reinvestment plan to the extent not used to fund stock repurchases under our share repurchase program.

 

(6)           Any construction management fee we pay to an affiliate of one of our sponsors will be included in the total of our acquisition fees, financing fees and acquisition expenses and will be subject to the 6.0% limitation imposed by our charter.

 

(7)           Commencing four full fiscal quarters after the acquisition of our first real estate investment following the commencement of this offering, our advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the Conflicts Committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of our stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of our assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential investments that we do not close), disposition fees on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).

 

(8)           Our charter limits the maximum amount of the disposition fees payable to the advisor and its affiliates to 3.0% of the contract sales price and, when combined with commissions paid to third parties in connection with the sale, may not exceed the lesser of 6% of the contract sales price and a competitive real estate commission. To the extent this disposition fee is paid upon the sale of any assets other than real property or any other liquidity event, it will count against the limit on “total operating expenses” described in note 8 above.

 

(9)           Our advisor cannot earn both the subordinated participation in net sales proceeds and the subordinated incentive listing distribution. The advisor may elect to receive the subordinated incentive listing distribution in cash, units of our Operating Partnership or shares of our common stock (or any combination thereof) in its sole discretion. If shares are used for payment, then we do not anticipate that they will be registered under the Securities Act and, therefore, will be subject to restrictions on transferability. Any subordinated participation in net sales proceeds becoming due and payable to our advisor shall be reduced by the amount of any prior distribution made to our advisor by our Operating Partnership. Any portion of the subordinated participation in net sales proceeds that our advisor receives prior to our listing will offset the amount otherwise due pursuant to the subordinated incentive listing distribution.

 

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(10)           Upon an investment liquidity event, which means a liquidation or the sale of all or substantially all our investments (regardless of the form in which such sale shall occur, including through a merger or sale of stock or other interests in an entity), our advisor will be entitled to receive an amount equal to (a) 15.0% of the amount, if any, by which (i) the sum of (x) the greater of (1) the fair market value of the included assets (as defined below), plus the value of our other assets, minus the value of our liabilities, or (2) the fair market value of all issued and outstanding shares of our common stock, in each case as determined in good faith by us, as the sole member of the general partner of our Operating Partnership, as of the date the investment liquidity event is consummated, plus (y) total distributions paid through the date the investment liquidity event is consummated on shares issued in all offerings through such date (with the exception of distributions paid on shares repurchased or redeemed prior to such date), exceeds (ii) the sum of the gross proceeds raised in all offerings through the date the investment liquidity event is consummated (less amounts paid on or prior to such date to purchase or redeem any shares of our common stock purchased in an offering) and the total amount of cash that, if distributed to those non-redeeming stockholders who purchased shares of our common stock in an offering on or prior to the date the investment liquidity event is consummated, would have provided such stockholders an annual 6.0% cumulative, non-compounded, pre-tax return on the gross proceeds raised in all offerings through the date the investment liquidity event is consummated, measured for the period from inception through the date the investment liquidity event is consummated, less (b) any prior payments to our advisor of the subordinated participation in net sales proceeds, the subordinated incentive listing distribution or the annual subordinated performance fee, as applicable. “Included assets” means the fair market value of the investments owned as of the date of the investment liquidity event or the termination date of the advisory agreement, as applicable.

 

(11)           The market value of our outstanding common stock will be calculated based on the average market value of the shares of common stock issued and outstanding at listing during a period of 30 trading days commencing after the first day of the sixth month, but no later than the last day of the 18th month, following listing. The date on which such 30 trading day period commences will be chosen by our advisor in its sole discretion. If any previous payments of the subordinated participation in net sales proceeds will offset the amounts due pursuant to the subordinated incentive listing distribution, then we will not be required to pay our advisor any further subordinated participation in net sales proceeds.

 

(12)           The subordinated distribution upon termination, if any, will be payable in the form of a non-interest bearing promissory note equal to (a) 15.0% of the amount, if any, by which (i) the sum of (u) the fair market value (determined by appraisal as of the termination date) of our investments on the termination date, plus (w) the value of our other assets as of the termination date, minus (x) the value of our liabilities as of the termination date, plus (y) total distributions paid through the termination date on shares issued in all offerings through the termination date (with the exception of distributions paid on shares repurchased or redeemed prior to such date), less (z) any amounts distributable as of the termination date to limited partners who received Operating Partnership units in connection with the acquisition of any investments (including cash used to acquire investments) upon the liquidation or sale of such investments (assuming the liquidation or sale of such investments on the termination date), exceeds (ii) the sum of the gross proceeds raised in all offerings through the termination date (less amounts paid on or prior to the termination date to purchase or redeem any shares of our common stock purchased in an offering) and the total amount of cash that, if distributed to those non-redeeming stockholders who purchased shares of our common stock in an offering on or prior to the termination date, would have provided such stockholders an annual 6.0% cumulative, non-compounded, pre-tax return on the gross proceeds raised in all offerings through the termination date, measured for the period from inception through the termination date, less (b) any prior payments to our advisor of the subordinated participation in net sales proceeds or the subordinated incentive listing distribution, as applicable. In addition, at the time of termination, our advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing or another liquidity event occurs, including a liquidation or the sale of all or substantially all our investments (regardless of the form in which such sale shall occur, including through a merger or sale of stock or other interests in an entity).

 

If our advisor elects to defer its right to receive a subordinated distribution upon termination and there is a subsequent listing of the shares of our common stock on a national securities exchange, then our advisor will be entitled to receive a subordinated distribution upon termination, payable in one or more payments solely out of net sales proceeds, in an amount equal to (a) 15.0% of the amount, if any, by which (i) the sum of (u) the fair market value (determined by appraisal as of the date of listing) of the included assets, plus (w) the value of our other assets as of the termination date, minus (x) the value of our liabilities as of the termination date, plus (y) total distributions paid through the date of listing on shares of our common stock issued in offerings through the termination date (with the exception of distributions paid on shares repurchased or redeemed prior to the date of listing), less (z) any amounts distributable as of the date of listing to limited partners who received Operating Partnership units in connection with the acquisition of any included assets (including cash used to acquire the included assets) upon the liquidation or sale of such included assets (assuming the liquidation or sale of such included assets on the date of listing), exceeds (ii) the sum of (y) the gross proceeds raised in all offerings through the termination date (less amounts paid on or prior to the date of listing to purchase or redeem any shares of our common stock purchased in an offering on or prior to the termination date), plus (z) the total amount of cash that, if distributed to those non-redeeming stockholders who purchased shares of our common stock in an offering on or prior to the termination date, would have provided such stockholders an annual 6.0% cumulative, non- compounded, pre-tax return on the gross proceeds raised in all offerings through the termination date, measured for the period from inception through the date of listing, less (b) any prior payments to our advisor of the subordinated participation in net sales proceeds or the subordinated incentive listing distribution, as applicable.

 

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If our advisor elects to defer its right to receive a subordinated distribution upon termination and there is a subsequent investment liquidity event, then our advisor will be entitled to receive a subordinated distribution upon termination, payable in one or more payments solely out of net sales proceeds, in an amount equal to (a) 15.0% of the amount, if any, by which (i) the sum of (u) the fair market value (determined by appraisal as of the date of such other liquidity event) of the included assets, plus (w) the value of our other assets as of the termination date, minus (x) the value of our liabilities as of the termination date, plus (y) total distributions paid through the date of the other liquidity event on shares of our common stock issued in offerings through the termination date (with the exception of distributions paid on shares repurchased or redeemed prior to the date of the other liquidity event), less (z) any amounts distributable as of the date of the other liquidity event to limited partners who received Operating Partnership units in connection with the acquisition of any included assets (including cash used to acquire included assets) upon the liquidation or sale of such included assets (assuming the liquidation or sale of such included assets on the date of the other liquidity event), exceeds (ii) the sum of (y) the gross proceeds raised in all offerings through the termination date (less amounts paid on or prior to the date of the other liquidity event to purchase or redeem any shares of our common stock purchased in an offering on or prior to the termination date), plus (z) the total amount of cash that, if distributed to those non-redeeming stockholders who purchased shares of our common stock in an offering on or prior to the termination date, would have provided such stockholders an annual 6.0% cumulative, non-compounded, pre-tax return on the gross proceeds raised in all offerings through the termination date, measured for the period from inception through the date of the other liquidity event, less (b) any prior payments our advisor of the subordinated participation in net sales proceeds or the subordinated incentive listing distribution, as applicable. If our advisor receives the subordinated distribution upon termination, neither it nor any of its affiliates would be entitled to receive any more of the subordinated participation in net sales proceeds or the subordinated incentive listing distribution.

 

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Stock Ownership

 

The following table sets forth the beneficial ownership of our common stock as of September 1, 2017 for each person or group that holds more than 5% of our common stock, for each director and executive officer and for our directors and executive officers as a group, based on the total outstanding shares on such date of approximately 2,364,041. To our knowledge, each person that beneficially owns our shares has sole voting and dispositive power with regard to such shares.

 

Name of Beneficial Owner   Number of Shares
Beneficially Owned
  Percent of
All Shares
 
Jeffrey S. Edison, Chairman of the Board and Chief Executive Officer(1)   215,604 Class A shares(3)     9.1 %
R. Mark Addy, Chief Operating Officer and President(1)     32,874 Class A shares     1.4 %
Devin I. Murphy, Chief Financial Officer, Secretary and Treasurer(1)     12,695 Class A shares     0.5 %
Jennifer L. Robison, Chief Accounting Officer(1)     1,904 Class A shares     0.1 %
David C. Rupert, Vice President(2)          
David W. Garrison, Director(1)        
Richard J. Smith, Director(1)        
Griffin Capital Vertical Partners(2)     66,500 Class A shares     2.8 %
Phillips Edison Limited Partnership(1)   63,262 Class A shares     2.7 %
PECO-Griffin REIT Advisor, LLC(1)   25,390 Class A shares     1.1 %
All directors and officers as a group   263,077.25 Class A shares     11.1 %

 

_______________________

(1)       The address for this beneficial owner is 11501 Northlake Drive, Cincinnati, Ohio 45249.

(2)       The address for this beneficial owner is 1520 E. Grand Avenue, El Segundo, California 90245

(3)       As of September 1, 2017, Phillips Edison Limited Partnership and PECO-Griffin REIT Advisor, LLC owned approximately 63,262 shares and 25,390 shares, respectively, of our outstanding Class A common stock, all of which are deemed to be beneficially owned by Jeffrey S. Edison, who controls our Phillips Edison sponsor and our advisor. Our advisor is jointly owned by our Phillips Edison sponsor and our Griffin sponsor.

 

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Conflicts of Interest

 

We are subject to various conflicts of interest arising out of our relationship with our advisor and its affiliates, some of whom serve as our executive officers and directors. We discuss these conflicts below and conclude this section with a discussion of the corporate governance measures we have adopted to ameliorate some of the risks posed by these conflicts.

 

Our Affiliates’ Interests in Other Real Estate Programs

 

General

 

All of our executive officers, some of our directors, and other key professionals engaged by our advisor to provide services on our behalf are also officers, directors, managers, key professionals or holders of a direct or indirect controlling interest, as applicable, in our advisor, our dealer manager and affiliates that are the sponsors of other real estate programs. These individuals have legal and financial obligations with respect to those programs, entities and investors that are similar to their obligations to us. In the future, these individuals and other affiliates of our sponsors may organize other real estate programs, serve as the investment advisor to other investors and acquire for their own account real estate properties that may be suitable for us.

 

Our Phillips Edison Sponsor

 

Our Phillips Edison sponsor is currently the sponsor of PECO II. These relationships are described further in the “Management—Our Phillips Edison Sponsor” section of this prospectus.

 

Our Griffin Sponsor

 

Our Griffin sponsor is currently the sponsor for GCEAR, GCEAR II, GIA Real Estate Fund, and GIA Credit Fund and the co-sponsor for GAHR III and GAHR IV. These relationships are described in the “Management—Our Griffin Sponsor” section of this prospectus.

 

Competition in Acquiring, Leasing and Operating Properties

 

Conflicts of interest will exist to the extent that we may acquire properties in the same geographic areas where properties owned by other programs sponsored by our sponsors are located. In such a case, a conflict could arise in the leasing of properties in the event that we and another program sponsored by our sponsors were to compete for the same tenants, or a conflict could arise in connection with the resale of properties in the event that we and another program sponsored by our sponsors were to attempt to sell similar properties at the same time. Conflicts of interest may also exist at such time as we or our affiliates managing a property on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances. Our advisor will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making prospective employees aware of all such properties seeking to employ such persons. In addition, our advisor will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties. However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.

 

Allocation of Investment Opportunities

 

Our advisor is required to use commercially reasonable best efforts to present a continuing and suitable investment program to us that is consistent with our investment policies and objectives. Investment opportunities that are suitable for us may also be suitable for our Phillips Edison Sponsor and other programs sponsored or managed by our Phillips Edison sponsor and/or Griffin sponsor, in particular PECO II, which generally seeks to acquire properties that meet our target investment criteria.

 

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Our primary target investments are grocery-anchored neighborhood and community shopping centers having 250,000 or less square feet of gross leasable area, that are at least 80% occupied with a tenant mix of national, regional and local tenants selling necessity-based goods and services and located throughout the United States (for purposes of the following right of first offer, such shopping centers being the “Target Investments”). Subject to the qualifications and limitations set forth below, our advisor and our Phillips Edison and Griffin sponsors have undertaken not to pursue any opportunity to acquire any Target Investments nor act as a finder’s agent or source such opportunities to third parties unless and until such Target Investment is first presented to us. If we do not elect to pursue such investment opportunity, then our sponsors are free to pursue such opportunity on their own, through their affiliates or sponsored or managed funds, with other investors or to present such opportunities to third-party investors. The foregoing right of first offer does not apply and/or is expressly limited as follows, and opportunities meeting one or more of the following criteria shall not be deemed to be Target Investments subject to this right of first offer:

 

·shopping centers having a projected internal rate of return of (a) 7% or less on an unlevered basis assuming a seven-year hold period or (b) 16% or more on a levered basis assuming a seven-year hold period and leverage of not less than 60%;

 

·portfolio transactions (including acquisitions, mergers, consolidations or similar extraordinary transactions) with a purchase price of $100 million or more;

 

·with respect to properties managed or owned (directly or indirectly) by our Phillips Edison sponsor, exchanges for tax planning purposes under Section 1031 of the Internal Revenue Code; and

 

·the allocation policy between us, PECO I and PECO II set forth in the next paragraph.

 

Our Phillips Edison sponsor is also the sponsor and manager of PECO II. Both our Phillips Edison sponsor and PECO II also invest in and acquire, from time to time, Target Investments. If, at any time during the term of this right of first offer, either our Phillips Edison or PECO II or both are actively seeking to acquire Target Investments, then this right of first offer shall not apply and instead the acquisition of any Target Investment will be subject to a rotation among our Phillips Edison sponsor, PECO II and us. Such rotation shall be made by our Phillips Edison sponsor after giving consideration to whether each company has sufficient capital to acquire all or some of the Target Investments, which companies were most recently allocated opportunities to acquire a Target Investment, and any concerns regarding the over-concentration of any company’s portfolio by geographic location, grocery-anchor tenant or the type of financing associated with a particular Target Investment. If the board of directors of the company receiving priority in the rotation chooses to not pursue the opportunity to acquire such Target Investment, then the opportunity may be presented to the boards of the directors of the other companies in accordance with the rotation considerations described above. If the boards of directors of all three companies choose to not pursue the opportunity to acquire such Target Investment, then our Phillips Edison sponsor will be free to pursue such opportunity, through its affiliates or sponsored funds, or with other investors, or to present such opportunities to another third-party investor. Our advisor may make exceptions to this allocation policy when other circumstances make application of this policy inequitable, impracticable or uneconomic.

 

The right of first offer shall terminate and be of no further force and effect upon the earliest to occur of (i) the termination of this primary offering and (ii) a material change to the terms of this offering (including, without limitation, any change in the price per share or classes of shares to be offered) that may occur after the commencement of this offering and that is not currently contemplated in this prospectus. For the avoidance of doubt, this right of first offer does not apply to any dispositions, transfers or sales of properties by our Phillips Edison sponsor or Griffin sponsor, their respective affiliates, or any of their sponsored or managed programs.

 

Affiliated Dealer Manager

 

Since Griffin Capital Securities, LLC, our dealer manager, is an affiliate of our Griffin sponsor, we will not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the offering of securities. See the “Plan of Distribution” section of this prospectus. Our dealer manager is also serving as the dealer manager for GAHR IV, and as exclusive wholesale marketing agent for GIA Real Estate Fund and GIA Credit Fund, which will result in competing demands for our dealer manager’s time and efforts relating to the distribution of our shares and shares of GAHR IV, GIA Real Estate Fund and GIA Credit Fund.

 

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Joint Ventures with Affiliates

 

We may enter into joint ventures with other programs sponsored by our sponsors (as well as other parties) for the acquisition, development or improvement of properties. See the “Investment Objectives and Related Policies —Joint Venture Investments” section of this prospectus. Our advisor and its affiliates may have conflicts of interest in determining which program sponsored by our sponsors should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or that may become inconsistent with our business interests or goals. In addition, should any such joint venture be consummated, our sponsors may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Since our advisor and its affiliates will control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.

 

A subsidiary of our Phillips Edison sponsor is the managing member of a joint venture in which PECO II is also a member. This joint venture is expected to concentrate on investment opportunities that are outside of our primary target investments, as it targets investments and properties that are more opportunistic and value-add in nature. Potential investment opportunities that meet this joint venture’s target investment criteria will be subject to a right of first offer in favor of the joint venture until the earlier of either March 22, 2019 or the investment of all of the joint venture’s capital. Whether an investment opportunity is subject to this right of first offer will be based on a variety of factors, including the estimated risk and return characteristics of the opportunity, which are based initially on the managing member’s diligence and underwriting and which are more typical of the opportunistic and value-add properties that are to be the focus of that joint venture.

 

Allocation of Our Officers’ Time

 

As a result of their interests in other programs, their obligations to other investors and the fact that they engage in, and they will continue to engage in, other business activities on behalf of themselves and others, our executive officers and our Phillips Edison sponsor face conflicts of interest in allocating their time among us and other programs sponsored by our Phillips Edison sponsor and other business activities in which our executive officers and our Phillips Edison sponsor are involved. In addition, many of the same key professionals associated with our Phillips Edison sponsor have existing obligations to other Phillips Edison programs. Our executive officers and the key professionals associated with our Phillips Edison sponsor who provide services to us are not obligated to devote a fixed amount of their time to us, but our sponsors believe that our executive officers and the other key professionals have sufficient time to fully discharge their responsibilities to us and to the other businesses in which our executive officers and the other key professionals are involved.

 

We believe that our executive officers will devote the time required to manage our business and expect that the amount of time a particular executive officer devotes to us will vary during the course of the year and depend on our business activities at a given time. For example, our executive officers may spend significantly more time focused on our activities when we are reviewing potential property acquisitions or negotiating a financing arrangement than during times when we are not. We believe that our President, Mr. Addy, will devote a substantial portion of his time to us and that each of our Chief Executive Officer, Mr. Edison, our Chief Financial Officer, Mr. Murphy, and our Chief Accounting Officer, Ms. Robison, may devote significantly less time to us. There is no assurance that our expectations are correct and our executive officers may devote more or less time to us than described above.

 

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Receipt of Fees and Other Compensation by Our Advisor and its Affiliates

 

Our advisor and its affiliates will receive substantial fees from us, which fees will not be negotiated at arm’s length. These fees could influence our advisor’s advice to us, as well as the judgment of affiliates of our advisor, some of whom also serve as our executive officers and directors and the key real estate professionals at our sponsors. Among other matters, these compensation arrangements could affect their judgment with respect to:

 

·the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement, the dealer manager agreement and the management agreement;

 

·offerings of equity by us, which entitle our dealer manager to dealer manager fees and stockholder servicing fees and will likely entitle our advisor to increased acquisition and asset management fees;

 

·sales of properties and other investments, which entitle our advisor to disposition fees and a possible subordinated participation in net sales proceeds;

 

·acquisitions of properties and other investments, which entitle our advisor to acquisition, asset management fees and possibly property management fees and, in the case of acquisitions of investments from other Phillips Edison- or Griffin-sponsored programs, might entitle affiliates of our advisor to disposition fees in connection with its services for the seller, which fees are based on the cost of the investment and are not based on the quality of the investment or the quality of the services rendered to us, which may influence our advisor to accept a higher purchase price for those assets, recommend riskier transactions to us or purchase assets that may not be in the best interest of our stockholders;

 

·borrowings to acquire properties and other investments, which borrowings will increase the acquisition and asset management fees payable to our advisor;

 

·whether we internalize our management, which may entail acquiring assets (such as office space, furnishings and technology costs) and negotiating compensation for key real estate professionals at our sponsors that may result in these individuals receiving more compensation from us than they currently receive from our sponsors and their affiliates, could result in diluting your interest in us, could reduce the net income per share and funds from operations per share attributable to your investment and may provide incentives to our advisor to pursue an internalization transaction rather than an alternative strategy;

 

·whether and when we seek to list our common stock on a national securities exchange, which listing could entitle our advisor to the subordinated incentive listing distribution;

 

·whether and when we seek to commence a follow-on offering as a “NAV REIT,” which offering could entitle our advisor to additional fees; and

 

·whether and when we seek to sell the company or its assets, which sale could entitle our advisor to a possible subordinated participation in net sales proceeds.

 

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Fiduciary Duties Owed by Some of Our Affiliates to Our Advisor and Our Advisor’s Affiliates

 

Our executive officers, some of our directors and the key real estate professionals at our sponsors are also officers, directors, managers or key professionals for:

 

·PECO-Griffin REIT Advisor, LLC, our advisor;

 

·Phillips Edison & Company Ltd., our property manager;

 

·other Phillips Edison-sponsored programs; and

 

·other Griffin-sponsored programs.

 

As a result, their loyalties to each of these programs, their stockholders, members and limited partners may from time to time conflict with the fiduciary duties that they each owe us.

 

Certain Conflict Resolution Measures

 

Conflicts Committee

 

In order to reduce or eliminate certain potential conflicts of interest, our charter creates a Conflicts Committee of our board of directors composed of all of our independent directors. An “independent director” is a person who is not one of our officers or employees or an officer or employee of our advisor, the sponsors or their affiliates and has not been so for the previous two years and meets the other requirements set forth in our charter. Our charter authorizes the Conflicts Committee to act on any matter permitted under Maryland law. Both the board of directors and the Conflicts Committee must act upon those conflict-of-interest matters that cannot be delegated to a committee under Maryland law. Our charter also empowers the Conflicts Committee to retain its own legal and financial advisors. Among the matters we expect the Conflicts Committee to act upon are:

 

·the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and the dealer manager agreement;

 

·public offerings of securities;

 

·investments in properties and other assets;

 

·sales of properties and other investments;

 

·originations of loans;

 

·borrowings;

 

·transactions with affiliates;

 

·compensation of our officers and directors who are affiliated with our advisor;

 

·whether and when we seek to list our shares of common stock on a national securities exchange;

 

·whether and when we seek to become self-managed, which decision could lead to our acquisition of entities affiliated with our advisor; and

 

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·whether and when we seek to sell the company or substantially all of its assets.

 

A majority of our board of directors and a majority of the Conflicts Committee will approve all proposed real estate property investments and real estate-related investments.

 

Other Charter Provisions Relating to Conflicts of Interest

 

In addition to the creation of the Conflicts Committee, our charter contains many other restrictions relating to conflicts of interest including the following:

 

Advisor Compensation. The Conflicts Committee will evaluate at least annually whether the compensation that we contract to pay to our advisor and its affiliates is reasonable in relation to the nature and quality of services performed and whether such compensation is within the limits prescribed by the charter. The Conflicts Committee will supervise the performance of our advisor and its affiliates and the compensation we pay to them to determine whether the provisions of our compensation arrangements are being carried out. This evaluation will be based on the following factors as well as any other factors deemed relevant by the Conflicts Committee:

 

·the amount of the fees paid to our advisor in relation to the size, composition and performance of our investments;

 

·whether the expenses incurred by us are reasonable in light of our investment performance, net assets, net income and the fees and expenses of other comparable unaffiliated REITs;

 

·the success of our advisor in generating appropriate investment opportunities;

 

·the rates charged to other companies, including other REITs, by advisors performing similar services;

 

·additional revenues realized by our advisor and its affiliates through their relationship with us, including whether we pay them or they are paid by others with whom we do business;

 

·the quality and extent of service and advice furnished by our advisor and its affiliates;

 

·the performance of our investment portfolio; and

 

·the quality of our portfolio relative to the investments generated by our advisor for its own account and for their other clients.

 

Under our charter, we can only pay our advisor or its affiliates a disposition fee in connection with the sale of assets if (i) our advisor or its affiliates provide a substantial amount of the services in the effort to sell the asset and (ii) the commission does not exceed 3% of the sales price of the assets. Although our charter limits the disposition fee we may pay to our advisor to 3% of the sales price, our advisory agreement provides for a 2% disposition fee. Any increase in this fee would require the approval of a majority of the directors (including a majority Conflicts Committee) not otherwise interested in the transaction. Moreover, our charter also provides that the commission paid to our advisor and its affiliates, when added to all other disposition fees paid to unaffiliated parties in connection with the sale, may not exceed the lesser of a competitive real estate commission or 6.0% of the sales price of the property or other asset. To the extent this disposition fee is paid upon the sale of any assets other than real property, it will count against the limit on “total operating expenses” described below. We do not intend to sell properties or other assets to affiliates. If we do sell an asset to an affiliate, however, neither our charter nor our advisory agreement prohibit us from paying our advisor a disposition fee. Before we sold assets to an affiliate, our charter requires that a majority of our directors (including a majority of the Conflicts Committee) not otherwise interested in the transaction conclude that the transaction is fair and reasonable to us.

 

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Our charter also requires that any gain from the sale of assets that we may pay our advisor or an entity affiliated with our advisor be reasonable. Such an interest in gain from the sale of assets is presumed reasonable if it does not exceed 15.0% of the balance of the net sale proceeds remaining after payment to common stockholders, in the aggregate, of an amount equal to 100% of the original issue price of the common stock, plus an amount equal to 6.0% of the original issue price of the common stock per year cumulative.

 

If we ever decided to become self-managed by acquiring entities affiliated with our advisor, then our charter would require that the Conflicts Committee conclude, by a majority vote, that such internalization transaction is fair and reasonable to us and on terms and conditions no less favorable to us than those available from third parties.

 

Our charter also limits the amount of acquisition fees and acquisition expenses we can incur to a total of 6.0% of the contract purchase price for the property or, in the case of a loan, 6.0% of the funds advanced. This limit may only be exceeded if a majority of the directors (including a majority of the members of the Conflicts Committee) not otherwise interested in the transaction approves the fees and expenses and finds the transaction to be commercially competitive, fair and reasonable to us. Although our charter permits combined acquisition fees and expenses to equal 6.0% of the purchase price, our advisory agreement limits the acquisition fee to a maximum of 4.15% of the purchase price (excluding any acquisition expenses but including the 2.15% Contingent Advisor Payment). The acquisition fee is based on the purchase of each acquisition, including debt attributable to each purchase. Any increase in the acquisition fee stipulated in the advisory agreement would require the approval of a majority of the directors (including a majority of the Conflicts Committee) not otherwise interested in the transaction.

 

Term of Advisory Agreement. Each contract for the services of our advisor may not exceed one year, although there is no limit on the number of times that we may retain a particular advisor. The Conflicts Committee or our advisor may terminate our advisory agreement with our advisor without cause or penalty on 60 days’ written notice. The advisory agreement may also be terminated immediately by the advisor in the event of a material breach by us or our Operating Partnership that is not cured within 30 days after written notice thereof, or immediately by us or our Operating Partnership upon events relating to a material breach or insolvency by the advisor.

 

Our Acquisitions. We will not purchase or lease properties in which our advisor, any of our directors or officers or any of their affiliates has an interest without a determination by the Conflicts Committee that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the property to the affiliated seller or lessor, unless there is substantial justification for the excess amount. Generally, the purchase price that we will pay for any property will be based on the fair market value of the property as determined by a majority of our directors.  In the cases where a majority of our Conflicts Committee require and in all cases in which the transaction is an acquisition or transfer by or from any of our directors or affiliates, we will obtain an appraisal of fair market value by an independent expert selected by our Conflicts Committee.  We may obtain an appraisal in other cases; however, we intend to rely on our own independent analysis and not on appraisals in determining whether to invest in a particular property.  Appraisals are estimates of value and may not always be reliable as measures of true worth or realizable value.

 

Mortgage Loans Involving Affiliates. Our charter prohibits us from investing in or making mortgage loans in which the transaction is with our advisor, our directors or officers or any of their affiliates, unless an independent expert appraises the underlying property. We must keep the appraisal for at least five years and make it available for inspection and duplication by any of our stockholders. In addition, we must obtain a mortgagee’s or owner’s title insurance policy or commitment as to the priority of the mortgage or the condition of the title. Our charter prohibits us from making or investing in any mortgage loans that are subordinate to any mortgage or equity interest of our advisor, our directors or officers or any of their affiliates.

 

Other Transactions Involving Affiliates. A majority of the board of directors (including a majority of the Conflicts Committee) not otherwise interested in the transaction must conclude that all other transactions, including joint ventures, between us and our sponsors, advisor, any of our officers or directors or any of their affiliates are fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties and, with respect to joint ventures, on substantially the same terms and conditions as those received by other joint venturers.

 

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Limitation on Operating Expenses. Commencing four full fiscal quarters after the acquisition of our first real estate investment following the commencement of this offering, our advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the Conflicts Committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of our assets during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of our stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain from the sale of our assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential investments that we do not close), disposition fees on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, loans or other property (other than disposition fees on the sale of assets other than real property), including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property.

 

Issuance of Options and Warrants to Certain Affiliates. Until our shares of common stock are listed on a national securities exchange, we will not issue options or warrants to purchase our capital stock to our advisor, our directors, our sponsors or any of their affiliates, except on the same terms as such options or warrants are sold to the general public. We may issue options or warrants to persons other than our advisor, our directors, our sponsors and their affiliates prior to listing our common stock on a national securities exchange, but not at exercise prices less than the fair market value of the underlying securities on the date of grant and not for consideration (which may include services) that in the judgment of the Conflicts Committee has a market value less than the value of such option or warrant on the date of grant. Options or warrants issuable to the advisor, a director, our sponsors or any affiliate thereof shall not exceed an amount equal to 10% of the outstanding shares of common stock on the date of grant.

 

Repurchase of Our Shares. Our charter prohibits us from paying a fee to our sponsors, advisor or our directors or officers or any of their affiliates in connection with our repurchase of our common stock.

 

Loans. We will not make any loans to our sponsors, our advisor or to our directors or officers or any of their affiliates (other than mortgage loans complying with the limitations described above). In addition, we will not borrow from these affiliates unless a majority of the board of directors (including a majority of the Conflicts Committee) not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties. These restrictions on loans will only apply to advances of cash that are commonly viewed as loans, as determined by the board of directors. By way of example only, the prohibition on loans would not restrict advances of cash for legal expenses or other costs incurred as a result of any legal action for which indemnification is being sought nor would the prohibition limit our ability to advance reimbursable expenses incurred by directors or officers or our advisor or its affiliates.

 

Reports to Stockholders. Our charter requires that we prepare an annual report and deliver it to our common stockholders within 120 days after the end of each fiscal year. Our directors are required to take reasonable steps to ensure that the annual report complies with our charter provisions. Among the matters that must be included in the annual report or included in a proxy statement delivered with the annual report are:

 

·financial statements prepared in accordance with GAAP that are audited and reported on by independent certified public accountants;

 

·the ratio of the costs of raising capital during the year to the capital raised;

 

·the aggregate amount of advisory fees and the aggregate amount of other fees paid to our advisor and any affiliates of our advisor by us or third parties doing business with us during the year;

 

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·our total operating expenses for the year stated as a percentage of our average invested assets and as a percentage of our net income;

 

·a report from the Conflicts Committee that our policies are in the best interests of our common stockholders and the basis for such determination; and

 

·a separately stated, full disclosure of all material terms, factors and circumstances surrounding any and all transactions involving us and our advisor, a director or any affiliate thereof during the year, which disclosure has been examined and commented upon in the report by the Conflicts Committee with regard to the fairness of such transactions.

 

Voting of Shares Owned by Affiliates. Our charter provides that none of our advisor, our directors or any affiliate may vote their shares regarding (i) the removal of any of these affiliates or (ii) any transaction between them and us.

 

Ratification of Charter Provisions. Our board of directors and the Conflicts Committee will review and ratify our charter and bylaws by the vote of a majority of their respective members at the first joint meeting of the board of directors and the Conflicts Committee, as required by our charter.

 

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Investment Objectives and POLICIES

 

General

 

We seek to acquire and manage grocery-anchored neighborhood and community shopping centers that are typically over 80% occupied, have a mix of national, regional and local tenants selling necessity-based goods and services, and are anchored by a leading grocery provider in the region, with the specific grocery store anchoring the property demonstrating solid sales performance. We intend to build a high-quality portfolio utilizing the following acquisition strategy:

 

·Grocery-Anchored Retail – We are focused on primarily acquiring well-occupied grocery-anchored neighborhood and community shopping centers serving the day-to-day shopping needs of the community in the surrounding trade area.

 

·National and Regional Tenants – We intend to acquire shopping centers primarily leased to national and regional retail tenants selling necessity-based goods and services to customers living in the local trade area.

 

·Diversification – We intend to own and operate a diversified grocery-anchored portfolio based on geography, industry, tenant mix and lease expirations, thereby mitigating risk.

 

·Infill Locations/Solid Markets – We intend to target properties in established or growing markets based on trends in population density, population growth, employment, household income, employment diversification, and other key demographic factors having higher barriers to entry, which we believe limit additional competition.

 

·Triple-Net Leases – We intend to negotiate leases we enter into to provide for, or acquire properties with leases that provide for, tenant reimbursements of operating expenses, real estate taxes and insurance, providing a level of protection against rising expenses.

 

Our strategy is to acquire, own and manage a high-quality, diverse, grocery-anchored shopping center portfolio, while maintaining a property-focused approach to maximize total returns to stockholders. We believe these goals will be supported by the following attributes of our company:

 

·Stable Income to Provide Consistent Distributions – We intend to acquire a portfolio with sustainable income, and expect that approximately 70% to 80% of such income will come from national and regional tenants. We expect that such sustainable income will fund monthly distributions to our stockholders at a rate consistent with our operating performance.

 

·Upside Potential – We seek to create value from a combination of the strategic leasing of portfolio vacancies, rental growth, creation of new revenue streams and strategic expense reduction, all leading to increased cash flow.

 

·Low Leverage – We intend to utilize a prudent leverage strategy with an approximate 45% to 50% targeted loan-to-value ratio on our portfolio once we have invested substantially all of the net proceeds of this offering.

 

·Tenured Management with a National Platform – Our Phillips Edison sponsor's seasoned team of professional managers has extensive retail industry expertise and established tenant relationships. Accordingly, we expect that team to provide reliable execution of our acquisition and operating strategies through its national operating and leasing platform.

 

·Property Focus – We intend to utilize a property-specific operational focus that combines intensive leasing and merchandising plans with cost containment measures to deliver a more solid and stable income stream from each property.

 

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·Liquidity Strategy – We anticipate listing our shares on a national securities exchange, merging, reorganizing or otherwise transferring our company or its assets to another entity that has listed securities, commencing the sale our properties and liquidation of our company, conducting an “NAV” offering and providing increased capacity to repurchase shares through our share repurchase program or otherwise creating a liquidity event for our stockholders subject to then-existing market conditions and the sole discretion of our board of directors after the completion of our primary offering.

 

Our principal investment objectives are to:

 

·preserve and protect your capital contribution;

 

·provide you with stable cash distributions;

 

·realize growth in the value of our assets upon the sale of such assets; and

 

·provide you with the potential for future liquidity through the sale of our assets, a sale or merger of our company, a listing of our common stock on a national securities exchange, increasing our capacity to repurchase shares in connection with an “NAV” offering or other similar transactions. See “—Liquidity Strategy” below.

 

Grocery-Anchored Retail Properties Focus

 

We invest primarily in grocery-anchored neighborhood and community shopping centers having 250,000 or less square feet of gross leasable area, that are at least 80% occupied with a tenant mix of national, regional and local tenants selling necessity-based goods and services, located throughout the United States. We believe grocery-anchored retail is one of the most stable asset classes in real estate. Grocery-oriented retail caters to consistent consumer demand for goods and services typically located within neighborhood and community shopping centers in all economic cycles. Neighborhood shopping centers typically are between 30,000 and 150,000 square feet and provide consumers with convenience goods such as food and drugs and services for the daily living needs of residents in the immediate neighborhood. Community shopping centers generally are between 100,000 and 350,000 square feet and typically contain multiple anchors and provide facilities for the sale of necessity goods and services, including apparel, accessories, home fashion, hardware or appliances, in addition to the convenience goods provided by a grocery-anchored neighborhood retail shopping center. We define “well-located” as retail properties situated in more densely populated locations with higher barriers to entry, which limits additional competition. We define “well-occupied” as retail properties with typically 80% or greater occupancy at the time of purchase. However, there can be no assurance the historical stability of necessity-based retail real estate will continue in the future. See the “Risk Factors—Risks Related to Investments in Real Estate” section of this prospectus.

 

Other Real Estate and Real Estate-Related Loans and Securities

 

Although not our primary focus, we may, from time to time, make investments in other real estate properties and real estate-related loans and securities. We do not expect these types of assets to exceed 10% of our asset base. With respect to our investments in real estate-related assets, including mortgages, mezzanine, bridge and other loans, debt and derivative securities related to real estate, mortgage-backed securities and any non-controlling equity investments in other public REITs or real estate companies, we intend to primarily focus on investments in first mortgages secured by retail properties. Our criteria for investing in loans are substantially the same as those involved in our investment in properties; however, we intend to also evaluate such investments based on the current income opportunities presented.

 

We may pursue opportunities to acquire or develop lifestyle and power shopping centers, which we believe provide higher average sales per square foot and lower common area maintenance costs compared to a traditional shopping mall. Lifestyle shopping centers typically provide open-air retail space that combine mixed-use commercial development with boutique stores geared to shoppers with higher disposable incomes. Power shopping centers also usually feature open-air retail space and contain three or more “big box” retailers and various smaller retailers. A “big box” retailer is a single-use store, typically between 25,000 and 100,000 square feet or more, such as a pet store, electronics store, sporting goods store, or discount department store.

 

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We may invest in enhanced-return properties, which are higher-yield and higher-risk investments that may not be as well located or well occupied as the substantial majority of our neighborhood and community shopping center investments. Examples of enhanced-return properties that we may acquire and reposition include: properties with moderate vacancies or near-term lease rollovers; poorly managed and positioned properties; properties owned by distressed sellers; and build-to-suit properties.

 

While we expect to focus on shopping center properties and related assets, our charter does not limit our investments to only those assets, and if we believe it to be in the best interests of our stockholders, we may also acquire additional real estate assets, such as office, multi-family, mixed-use, hospital, hospitality and industrial properties. The purchase of any property type will be based upon the best interests of our company and our stockholders as determined by our board of directors and taking into consideration the same factors discussed above. Additionally, we may acquire properties that are under development or construction and undeveloped land, on which we may develop new grocery-anchored shopping centers or other types of properties. We may also acquire options to purchase properties and other real estate assets. In fact, we may invest in whatever types of interests in real estate that we believe are in our best interests.

 

Although we can purchase any type of interest in real estate, our charter does limit certain types of investments, which we discuss below in this section under “— Charter Imposed Investment Limitations” and “Investment Limitations Under the Investment Company Act of 1940.” We do not expect to invest in single-purpose properties, such as golf courses or specialized manufacturing buildings. We also do not intend to make loans to other persons (other than the loans described above), to underwrite securities of other issuers or to engage in the purchase and sale of any types of investments other than interests in real estate properties and real estate-related loans and securities.

 

Investments in Equity Securities

 

We may make equity investments in other REITs and other real estate companies that operate assets meeting our investment objectives. We may purchase the common or preferred stock of these entities or options to acquire their stock. We may target a public company that owns commercial real estate or real estate-related assets when we believe its stock is trading at a discount to that company’s net asset value. We may eventually seek to acquire or gain a controlling interest in the companies that we target. We do not expect our non-controlling equity investments in other public companies to exceed 5% of the proceeds of this offering, assuming we sell the maximum offering amount, or to represent a substantial portion of our assets at any one time.

 

Acquisition Policies

 

We intend to diversify our portfolio by anchor tenant, geographic region, tenant mix, investment size and investment risk so that event risk is minimized to achieve a portfolio of income-producing assets that provide a stable return for investors and preserve stockholders’ capital. We may make investments by acquiring single assets, portfolios of assets, other REITs or real estate companies.

 

Geography. As of December 31, 2016, our Phillips Edison sponsor and its affiliates own, operate, manage and/or sponsor a portfolio consisting of over 39 million square feet comprised of over 300 assets across 33 states. We intend to initially focus on markets where our Phillips Edison sponsor and its affiliates have an established market presence, or market knowledge and access to potential investments, as well as an ability to efficiently direct property management and leasing operations.

 

Our initial target markets have the following attributes:

 

·Infill locations with a stable demographic or with barriers-of-entry, such as zoning and land use restrictions, that are higher than in many other markets; and

 

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·Growth markets with strong demographic growth, such as employment, household income, and/or economic diversity.

 

Additionally, our advisor may pursue properties in other markets demonstrating strong fundamentals, leased to national, regional and local tenants, as described below, and attractive pricing. Economic and real estate market conditions vary widely within each region and submarket, and we intend to spread our portfolio investments across the United States.

 

Tenant Mix. We expect that approximately 70% to 80% of the rents from our portfolio will be generated by tenants that are national or regional companies, or their operating subsidiaries or franchisees, each with an operating history and a financial profile that satisfies our underwriting standards. We do not expect our exposure to any one tenant in our portfolio to be more than 15% of revenues, assuming revenues generated from a portfolio assembled using the maximum offering proceeds. By diversifying our tenant portfolio, we believe that we will minimize our exposure to any single tenant default or bankruptcy, which we refer to as “event risk,” and the negative impact any such event would have on our overall revenues. In addition, we believe that our national and regional relationships will serve a mutual benefit to retailers and our assets through both tenant retention and expansion, and efficient management of properties in our portfolio.

 

Investment Term. We expect to hold real property investments for four to seven years, which we believe is likely to be the optimal period to enable us to capitalize on the potential for increased income and capital appreciation. However, economic and market conditions may influence us to hold our investments for different periods of time.

 

Real Property Investment Considerations. Our advisor performs an in-depth review of each property acquired in the portfolio by leveraging a proprietary algorithm-based scorecard that ranks over 40 property criteria, including, but not limited to:

 

·geographic location and property type;

 

·condition and use of the property;

 

·market growth demographics;

 

·leasing and merchandising plans;

 

·historical performance;

 

·current and projected cash flow;

 

·potential for capital appreciation;

 

·presence of existing and potential competition;

 

·prospects for liquidity through sale, financing or refinancing of the assets; and

 

·tax considerations.

 

Conditions to Closing Real Property Investments.  Our advisor performs a due diligence review on each property that we purchase. As part of this review, our advisor generally obtains an environmental site assessment for each proposed acquisition (which at a minimum will include a Phase I assessment). However, in certain circumstances, we may purchase a property without obtaining such assessment if our advisor determines it is not warranted, specifically in circumstances where the advisor determines that it is in our best interest not to seek a new Phase I environmental assessment and rely upon one certified by, sought and secured by the seller of the property. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns. In addition, a visual survey of neighboring properties is conducted to assess surface conditions or activities that may have an adverse environmental impact on the property. Furthermore, local governmental agency personnel are contacted who perform a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, ground water or building materials from the property, and may not reveal all environmental hazards on a property. We will not close the purchase of any property unless we are satisfied with the environmental status of the property. We also generally seek to condition our obligation to close the purchase of any investment on the delivery of certain documents from the seller or developer. Such documents may include, where available:

 

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·evidence of marketable title, subject to such liens and encumbrances as are acceptable to our advisor;

 

·title and liability insurance policies;

 

·surveys;

 

·financial statements covering recent operations of properties having operating histories; and

 

·plans and specifications.

 

Tenant Improvements. We anticipate that tenant improvements required at the time we acquire a property will be funded from our offering proceeds. However, when a tenant of one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract new tenants, we may be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. We would expect to fund those improvements with offering proceeds, through third-party financings or working capital.

 

Terms of Leases. We expect that the vast majority of the leases we enter into or acquire will provide for tenant reimbursement of operating expenses, which provides a level of protection against rising expenses. Operating expenses typically include real estate taxes, special assessments, insurance, utilities, common area maintenance and some building repairs. We also intend to include provisions in our leases that increase the amount of base rent payable at various points during the lease term or provide for the payment of additional rent calculated as a percentage of a tenant’s gross sales above predetermined thresholds. However, the terms and conditions of any leases we enter into may vary substantially from those described. To the extent material to our operations, we will describe the terms of the leases on properties we acquire by means of a supplement to this prospectus.

 

Tenant Creditworthiness. We intend to execute new tenant leases and tenant lease renewals, expansions and extensions with terms dictated by the current submarket conditions and the creditworthiness of each particular tenant. We intend to use a number of industry credit rating services to determine the creditworthiness of potential tenants and personal guarantors or corporate guarantors of potential tenants. We intend to compare the reports produced by these services to the relevant financial data collected from the tenants before consummating a lease transaction. Relevant financial data from potential tenants and guarantors may include income statements and balance sheets for the current year and for prior periods, net worth or cash flow statements of guarantors and other information we deem relevant.

 

Real Estate-Related Loans and Securities Considerations. Although not our primary focus, we may, from time to time, make or invest in mortgage, bridge or mezzanine loans, and other loans relating to real property, including loans in connection with the acquisition of investments in entities that own real property. Our criteria for investing in loans are substantially the same as those involved in our investment in properties; however, we also intend to evaluate such investments based on the current income opportunities presented. When determining whether to make investments in mortgage and other loans and securities, we intend to consider such factors as: positioning the overall portfolio to achieve an optimal mix of real estate properties and real estate-related loans and securities; the diversification benefits of the loans relative to the rest of the portfolio; the potential for the investment to deliver high current income and attractive risk-adjusted total returns; and other factors considered important to meeting our investment objectives.

 

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We may acquire or retain loan-servicing rights in connection with investments in real estate-related loans that we acquire or originate. If we retain the loan servicing rights, our advisor or one of its affiliates will service the loan or select a third-party provider to do so. We may structure, underwrite and originate some of the debt products in which we invest. Our underwriting process will involve comprehensive financial, structural, operational and legal due diligence to assess the risks of investments so that we can optimize pricing and structuring.

 

Our loan investments may be subject to regulation by federal, state and local authorities and subject to laws and judicial and administrative decisions imposing various requirements and restrictions, including, among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosure to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders, and these requirements may affect our ability to effect our proposed investments in loans.

 

We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including our borrowings, would exceed an amount equal to 85% of the appraised value of the property, unless we find substantial justification due to the presence of other underwriting criteria. We may find such justification in connection with the purchase of mortgage loans in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and in which the cost of the mortgage loan investment does not exceed the appraised value of the underlying property. Such mortgages may or may not be insured or guaranteed by a governmental agency or another third party.

 

Borrowing Policies

 

We may use borrowing proceeds to finance acquisitions of new properties or other real estate-related loans and securities; to originate new loans; to pay for capital improvements, repairs or tenant build-outs to properties; to pay distributions; or to provide working capital. Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. Our investment strategy is to utilize primarily unsecured and possibly secured debt to finance our investment portfolio; however, we may elect to forego the use of debt on some of our future real estate acquisitions. We may elect to secure financing subsequent to the acquisition date on future real estate properties and initially acquire investments without debt financing. To the extent that we do not finance our properties and other investments, our ability to acquire additional properties and real estate-related investments will be restricted.

 

We expect that once we have fully invested the proceeds of this offering, assuming we sell the maximum amount, our debt financing will be approximately 45% to 50% of the total value of our real estate investments (calculated after the close of this offering) and our other assets. Under our charter, the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (as defined in our charter in accordance with the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if such excess is approved by a majority of the members of the Conflicts Committee and disclosed to stockholders in our next quarterly report following that borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.

 

We do not intend to exceed the leverage limit in our charter except in the early stages of our development when the costs of our investments are most likely to exceed our net offering proceeds. Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. However, high levels of debt could cause us to incur higher interest charges and higher debt service payments, which would decrease the amount of cash available for distribution to our investors.

 

The form of our indebtedness may be long-term or short-term, secured or unsecured, fixed or floating rate or in the form of a revolving credit facility or repurchase agreements or warehouse lines of credit. Our advisor will seek to obtain financing on our behalf on the most favorable terms available. For a discussion of the risks associated with the use of debt, see the “Risk Factors—Risks Associated with Debt Financing” section of this prospectus.

 

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Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our debt policy in the future without a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: the then-current economic conditions, the relative cost and availability of debt and equity capital, any investment opportunities, the ability of our properties and other investments to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to book value in connection with any change of our borrowing policies.

 

We will not borrow from our advisor or its affiliates to purchase properties or make other investments unless a majority of our directors, including a majority of the Conflicts Committee members, not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.

 

Certain Risk Management Policies

 

Credit Risk Management. We may be exposed to various levels of credit and special hazard risk depending on the nature of our underlying assets and the nature and level of credit enhancements supporting our assets. Our advisor reviews and monitors credit risk and other risks of loss associated with each investment. In addition, we seek to diversify our portfolio of assets to avoid undue geographic and other types of concentrations to the extent consistent with our investment objectives, focus and policies. Our board of directors monitors the overall portfolio risk and levels of provision for loss.

 

Hedging Activities. Consistent with our intention to qualify as a REIT, we may engage in hedging transactions to protect our investment portfolio from interest rate fluctuations and other changes in market conditions. These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage derivatives and other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as we determine is in the best interest of our stockholders, given the cost of such hedges and the need to maintain our qualification as a REIT. We may elect to bear a level of interest rate risk that could otherwise be hedged when we believe, based on all relevant facts, that bearing such risk is advisable.

 

Equity Capital Policies

 

Our board of directors may amend our charter from time to time to increase or decrease the number of authorized shares of capital stock or the number of shares of stock of any class or series that we have authority to issue without stockholder approval. After you purchase shares in this offering, our board may elect to (i) sell additional equity securities in future public or private offerings, (ii) issue equity interests in private offerings, (iii) issue share-based awards to our independent directors or to our officers or employees or to the officers or employees of our sponsors or any of their affiliates, (iv) issue shares to our advisor or its successors or assigns, in payment of an outstanding fee obligation or (v) issue shares of our common stock to sellers of properties or assets we acquire in connection with an exchange of limited partnership interests of our Operating Partnership. To the extent we issue additional equity interests after your purchase in this offering, your percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, you may also experience dilution in the book value and fair value of your shares.

 

Disposition Policies

 

We expect to hold real property investments for four to seven years, which we believe is likely to be the optimal period to enable us to capitalize on the potential for increased income and capital appreciation. The period that we intend to hold our investments in real estate-related assets will vary depending on the type of asset, interest rates and other factors. Our advisor will develop a well-defined exit strategy for each investment we make, initially at the time of acquisition as part of the original business plan for the asset, and thereafter by periodically reviewing each asset to determine the optimal time to sell the asset and generate a strong return. The determination of when a particular investment should be sold or otherwise disposed of will be made after considering relevant factors, including prevailing and projected economic conditions, whether the value of the asset is anticipated to decline substantially, whether we could apply the proceeds from the sale of the asset to make other investments consistent with our investment objectives, whether disposition of the asset would allow us to increase cash flow, and whether the sale of the asset would constitute a prohibited transaction under the Internal Revenue Code or otherwise impact our status as a REIT.

 

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Liquidity Strategy

 

Subject to then-existing market conditions and the sole discretion of our board of directors, we may consider the following to provide increased liquidity to our stockholders:

 

·list our shares on a national securities exchange;

 

·merge, reorganize or otherwise transfer our company or its assets to another entity that has listed securities;

 

·commence selling our properties and liquidate our company;

 

·provide increased capacity to repurchase shares through our share repurchase program in connection with an offering as an “NAV REIT,” which is a term used to describe a REIT that values its shares as often as daily but at least quarterly on a NAV basis; or

 

·otherwise create a liquidity event for our stockholders.

 

We cannot, however, assure you that we will pursue one or more of these alternatives following the completion of this offering. Our charter does not require us to pursue a liquidity transaction at any time. If we determine that market conditions are not favorable for one of the above-described liquidity events, then we also reserve the right to engage in a follow-on offering of stock. Our board of directors has the sole discretion to continue operations after completion of the offering, including engaging in a follow-on offering, if it deems such continuation is in the best interests of our stockholders.

 

Even if we do accomplish one or more of these alternatives, we cannot guarantee that such an alternative will provide sufficient liquidity for our stockholders. At the time it becomes necessary for our board of directors to determine which alternative, if any, is in the best interests of us and our stockholders, we expect that the board will take all relevant factors at that time into consideration when making such a decision. We expect that the board will consider various factors including, but not limited to, costs and expenses related to each possible alternative and the potential subordinated distributions payable to our advisor listed in the “Management Compensation” section of this prospectus.

 

Charter-Imposed Investment Limitations

 

Our charter places numerous limitations on us with respect to the manner in which we may invest our funds or issue securities. Pursuant to our charter, we will not:

 

·borrow if such debt causes our total indebtedness to exceed 300% of our “net assets” (as defined in our charter in accordance with the NASAA REIT Guidelines), unless approved by a majority of the Conflicts Committee;

 

·invest more than 10% of our total assets in unimproved property or mortgage loans on unimproved property, which we define as property not acquired for the purpose of producing rental or other operating income or on which there is no development or construction in progress or planned to commence within one year;

 

·make or invest in mortgage loans unless an appraisal is available concerning the underlying property, except for those mortgage loans insured or guaranteed by a government or government agency;

 

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·make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property as determined by appraisal, unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria;

 

·make an investment if the related acquisition fees and expenses are not reasonable or exceed 6.0% of the contract purchase price for the asset, provided that the investment may be made if a majority of the directors (including a majority of the members of the Conflicts Committee) not otherwise interested in the transaction determines that the transaction is commercially competitive, fair and reasonable to us;

 

·acquire equity securities unless a majority of our directors (including a majority of the members of our Conflicts Committee) not otherwise interested in the transaction approve such investment as being fair, competitive and commercially reasonable, provided that investments in equity securities in “publicly traded entities” that are otherwise approved by a majority of our directors (including a majority of the members of our Conflicts Committee) shall be deemed fair, competitive and commercially reasonable if we acquire the equity securities through a trade that is effected in a recognized securities market (a “publicly traded entity” shall mean any entity having securities listed on a national securities exchange or included for quotation on an inter-dealer quotation system) and provided further that this limitation does not apply to (i) acquisitions effected through the purchase of all of the equity securities of an existing entity, (ii) the investment in wholly owned subsidiaries of ours or (iii) investments in asset-backed securities;

 

·invest in real estate contracts of sale, otherwise known as land sale contracts, unless the contract is in recordable form and is appropriately recorded in the chain of title;

 

·invest in commodities or commodity futures contracts, except for futures contracts when used solely for the purpose of hedging in connection with our ordinary business of investing in real estate assets and mortgages;

 

·issue equity securities on a deferred payment basis or other similar arrangement;

 

·issue debt securities in the absence of adequate cash flow to cover debt service unless the historical debt service coverage (in the most recently completed fiscal year), as adjusted for known changes, is sufficient to service that higher level of debt as determined by the board of directors or a duly authorized executive officer;

 

·issue equity securities that are assessable after we have received the consideration for which our board of directors authorized their issuance; or

 

·issue redeemable equity securities (as defined in the Investment Company Act), which restriction has no effect on our share repurchase program or the ability of our Operating Partnership to issue redeemable partnership interests.

 

In addition, our charter includes many other investment limitations in connection with conflict-of-interest transactions, which limitations are described above under the “Conflicts of Interest” section of this prospectus. Our charter also includes restrictions on roll-up transactions, which are described under the “Description of Shares” section of this prospectus.

 

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Disclosure Policies with Respect to Future Probable Acquisitions

 

During this offering our advisor is continually evaluating various potential investments and engaging in discussions and negotiations with sellers, developers and potential tenants regarding the acquisition and development of properties and other investments for us. If we believe that a reasonable probability exists that we will acquire a specific significant property or other asset, whether directly or through a joint venture or otherwise, then we will supplement this prospectus to disclose the pending acquisition of such property. We expect that this will normally occur after the signing of a purchase agreement for the acquisition of a specific significant asset or upon the satisfaction or expiration of major contingencies in any such purchase agreement, depending on the particular circumstances surrounding each potential investment. A supplement to this prospectus will describe any improvements proposed to be constructed thereon and other information that we consider appropriate for an understanding of the transaction. Further data will be made available after any pending acquisition is consummated, also by means of a supplement to this prospectus, if appropriate. YOU SHOULD UNDERSTAND THAT THE DISCLOSURE OF ANY PROPOSED ACQUISITION CANNOT BE RELIED UPON AS AN ASSURANCE THAT WE WILL ULTIMATELY CONSUMMATE SUCH TRANSACTION OR THAT THE INFORMATION PROVIDED CONCERNING THE PROPOSED TRANSACTION WILL NOT CHANGE BETWEEN THE DATE OF THE SUPPLEMENT AND ANY ACTUAL ACQUISITION.

 

Investment Limitations Under the Investment Company Act of 1940

 

We intend to conduct our operations so that neither we nor any of our subsidiaries will be required to register as an investment company under the Investment Company Act. Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:

 

·pursuant to Section 3(a)(1)(A), is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities (the “primarily engaged test”); or
·pursuant to Section 3(a)(1)(C), is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of such issuer’s total assets (exclusive of United States government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities” excludes United States government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).

 

We believe that we and our Operating Partnership will not be required to register as an investment company. With respect to the 40% test, most of the entities through which we and our Operating Partnership will own our assets will be majority-owned subsidiaries that will not themselves be investment companies and will not be relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).

 

With respect to the primarily engaged test, we and our Operating Partnership will be holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our Operating Partnership, we and our Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.

 

If any of the subsidiaries of our Operating Partnership fail to meet the 40% test, then we believe they will usually, if not always, be able to rely on Section 3(c)(5)(C) of the Investment Company Act for an exception from the definition of an investment company. Otherwise, they should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate,” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that any of the subsidiaries of our Operating Partnership relying on Section 3(c)(5)(C) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. If any subsidiary relies on Section 3(c)(5)(C), then we expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

 

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Changes in Investment Objectives and Policies

 

You will have no voting rights with respect to the establishment, implementation or alteration of the investment objectives and our policies, all of which are the responsibility of our board of directors and advisor. However, we will not make any changes in the investment objectives and policies that would constitute a fundamental change without filing a post-effective amendment with the SEC describing such change in investment objectives and policies.

 

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Plan of Operation

 

General

 

We are a Maryland corporation incorporated on April 15, 2016 that intends to qualify as a REIT commencing with our taxable year ending December 31, 2017. We were formed to leverage the expertise of our sponsors, Phillips Edison Limited Partnership and Griffin Capital Company, LLC, and capitalize on the market opportunity to acquire and manage grocery-anchored neighborhood and community shopping centers located in strong demographic markets throughout the United States. We seek to acquire and manage grocery-anchored neighborhood and community shopping centers that are typically over 80% occupied, have a mix of national, regional and local tenants selling necessity-based goods and services, and are anchored by a leading grocery provider in the region, with the specific grocery store demonstrating solid sales performance.

 

We intend to acquire and manage a diverse asset base of real estate properties and real estate-related loans and securities. We plan to diversify our real estate portfolio by geographic region, anchor tenants, tenant mix, investment size and investment risk with the goal of attaining an asset base of income-producing real estate properties and real estate-related assets that provide stable returns to our investors and the potential for growth in the value of our assets. We intend to allocate at least 90% of our asset base to investments in grocery-anchored neighborhood and community shopping centers throughout the United States with a focus on well-located shopping centers that are well occupied at the time of purchase. We also may allocate up to 10% of our asset base to other real estate properties, real estate-related loans and securities and the equity securities of other REITs and real estate companies.

 

PECO-Griffin REIT Advisor, LLC is our advisor and manages our day-to-day operations and our portfolio of real estate investments and makes recommendations on all investments to our board of directors. Our advisor will also provide asset management, marketing, investor relations and other administrative services on our behalf. We have no paid employees.

 

We intend to make an election to be taxed as a REIT under the Internal Revenue Code, beginning with the taxable year ending December 31, 2017. If we meet the REIT qualification requirements, then we generally will not be subject to federal income tax on the income that we distribute to our stockholders each year. If we fail to qualify for taxation as a REIT in any year after electing REIT status, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Such an event could materially and adversely affect our net income and cash available for distribution to our stockholders. However, we believe that we will be organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes beginning with our taxable year ending December 31, 2017, and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes thereafter.

 

Results of Operations

 

We were incorporated on April 15, 2016. On December 19, 2016, we commenced investment operations in connection with the acquisition of our first shopping center. We expect to use substantially all of the net proceeds from our offering to acquire and manage a diverse portfolio of real estate investments, consisting primarily of grocery-anchored neighborhood and community shopping centers throughout the United States with a focus on well-located shopping centers that are well occupied at the time of purchase. We also may allocate up to 10% of our asset base to other real estate properties, real estate-related loans and securities and the equity securities of other REITs and real estate companies. Although this is our current target portfolio, we may adjust our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition.

 

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Liquidity and Capital Resources

 

We are dependent upon the net proceeds from our offering to conduct our proposed operations. We will obtain the capital required to make real estate investments and conduct our operations from the proceeds of our private offering, this offering and any future offerings we may conduct, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. Through October 11, 2017, we had raised approximately $25.6 million in gross offering proceeds from the sale of shares of our Class A common stock in our private offering and separate private transactions. For information regarding the anticipated use of proceeds from this offering, see “Estimated Use of Proceeds.”

 

Our principal demands for cash will be for acquisition costs, including the purchase price of any properties, loans and securities we acquire, capital improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to our stockholders. As of August 31, 2017, our advisor has incurred approximately $1.5 million of organization and offering expenses on our behalf in connection with this public offering. As described in the notes to the financial statements contained within this prospectus, our advisor will pay other organization and offering expenses of this public offering on our behalf (exclusive of selling commissions and dealer manager fees) to the extent that such expenses do not exceed 1.0% of gross offering proceeds from our primary offering. In no event will total organization and offering expenses exceed (i) 3.5% of the gross offering proceeds raised by us in the terminated or completed offering (excluding selling commissions, dealer manager fees, and stockholder servicing fees), or (ii) 15% of the gross offering proceeds raised by us in the terminated or completed offering (including selling commissions, dealer manager fees, and stockholder servicing fees). As of August 31, 2017, our advisor has also incurred approximately $2.2 million of organization and offering expenses on our behalf in connection with our private offering. There is no limit on the amount of organization and other offering expenses we may reimburse to our advisor in connection with the private offering. Generally, we will fund our acquisitions from the net proceeds of this offering. We intend to acquire our assets with cash and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness.

 

We expect to use debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (as defined in our charter in accordance with the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if such excess is approved by a majority of the members of the Conflicts Committee and disclosed to stockholders in our next quarterly report following that borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, we expect that once we have fully invested the proceeds of this offering, assuming we sell the maximum amount, our aggregate borrowings will be limited to 45% to 50% of the total value of our assets (calculated after the close of the primary offering). At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under the NASAA REIT Guidelines. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. See the section entitled “Investment Objectives and Policies— Borrowing Policies” in this prospectus for a more detailed discussion of our borrowing policies. We anticipate that adequate cash will be generated from operations to fund our operating and administrative expenses, continuing debt service obligations and the payment of distributions. However, our ability to finance our operations is subject to some uncertainties. Our ability to generate working capital is dependent on our ability to attract and retain tenants and the economic and business environments of the various markets in which our properties will be located. Our ability to sell assets is partially dependent upon the state of real estate markets and the ability of purchasers to obtain financing at reasonable commercial rates. In general, our policy will be to pay distributions from cash flow from operations. However, if we have not generated sufficient cash flow from our operations and other sources, such as from borrowings; advances from our advisor or sponsors; or our advisor or sponsors’ deferral, suspension and/or waiver of fees and expense reimbursements to fund distributions, we may use the offering proceeds. Moreover, our board of directors may change this policy, in its sole discretion, at any time.

 

Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit, proceeds from the sale of properties and undistributed cash flow. Note that, currently, we have not identified any additional sources of financing and there is no assurance that such sources of financings will be available on favorable terms or at all.

 

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Distributions

 

Our board of directors has declared cash distributions on the outstanding shares of our Class A common stock based on daily record dates for the periods from December 1, 2016 through November 30, 2017, which distributions we paid or expect to pay on a monthly basis. Distributions are calculated based on stockholders of record each day during these periods at a rate of $0.0016438356 per share per day.

 

We intend to continue to accrue and pay distributions on a monthly basis during the course of our private and public offerings. We generally intend to fund such distributions from cash flow from operations, however, if we are unable to do so, which likely will be the case in the early stages of our offering and from time to time during our operational stage, we will look to other sources as described above in “— Liquidity and Capital Resources.” While we generally intend to pay distributions from cash flows from operations, we also intend to pay distributions consistently once we declare our first distribution. Should we be unable to fully fund our distributions from cash flows from operations or earnings, we expect to pay distributions from borrowings, offering proceeds or other alternative sources, if necessary, which could reduce the funds available to conduct our operations. As we intend to continue paying distributions to our Class A stockholders after commencement of this offering, a portion of such distributions may be funded by proceeds from this offering to the extent that we are unable to fully fund such distributions from cash flows from operations or earnings. Our board of directors will determine the amount of the distributions to our stockholders. The determination by our board of directors will be based on a number of factors, including funds available from operations, our capital expenditure requirements, Maryland law requirements and the annual distribution requirements necessary to maintain our REIT status under the Internal Revenue Code. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT, we must annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain.

 

Additionally, our board of directors has declared stock dividends in the amount of 0.0004901961 shares per day per share issuable to Class A stockholders of record at the close of business on each day during the period beginning December 1, 2016 and ending on (and including) November 30, 2017. Such stock dividends were or will be issued on a monthly basis. During the course of our private offering, we currently expect our board of directors to continue to issue stock dividends to Class A stockholders on a monthly basis based on daily record dates. We do not expect our board of directors to issue stock dividends to our Class A, Class T or Class I stockholders after the commencement of this initial public offering.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Market Risk

 

The commercial real estate debt markets have experienced volatility as a result of certain factors, including the tightening of underwriting standards by lenders and credit rating agencies. The volatility in the credit markets has materially impacted the cost and availability of debt to finance real estate acquisitions, which is a key component of our acquisition strategy.

 

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Critical Accounting Policies and Estimates

 

Below is a discussion of our critical accounting policies and estimates. Our accounting policies have been established to conform to GAAP. We consider these policies critical because they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain, and are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

 

Real Estate Assets

 

Real Estate Acquisition Accounting—We record real estate, consisting of land, buildings, and improvements, at fair value. We allocate the cost of an acquisition, which includes the contract price as well as certain acquisition-related costs, to the acquired tangible assets, identifiable intangibles, and assumed liabilities based on their estimated acquisition date fair values.

 

We assess the acquisition-date fair values of all tangible assets, identifiable intangibles, and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis and replacement cost) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

 

We generally determine the value of construction in progress based upon the replacement cost. However, for certain acquired properties that are part of a ground-up development, we determine fair value by using the same valuation approach as for all other properties and deducting the estimated cost to complete the development. During the remaining construction period, we capitalize interest expense until the development has reached substantial completion. Construction in progress, including capitalized interest, is not depreciated until the development has reached substantial completion.

 

We record above-market and below-market lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease. We also include fixed-rate renewal options in our calculation of the fair value of below-market leases and the periods over which such leases are amortized. If a tenant has a unilateral option to renew a below-market lease, we include such an option in the calculation of the fair value of such lease and the period over which the lease is amortized if we determine that the tenant has a financial incentive and wherewithal to exercise such option.

 

Intangible assets also include the value of in-place leases, which represents the estimated value of the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. Acquired in-place lease value is amortized to depreciation and amortization expense over the average remaining non-cancelable terms of the respective in-place leases.

 

We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease-up periods, considering current market conditions. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rentals at market rates during the expected lease-up periods.

 

Estimates of the fair values of the tangible assets, identifiable intangibles, and assumed liabilities require us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate estimates would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income.

 

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We calculate the fair value of assumed long-term debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which we approximate based on the rate at which we would expect to incur a replacement instrument on the date of acquisition, and recognize any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.

 

Impairment of Real Estate and Related Intangible Assets—We monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may be impaired. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may be greater than fair value, we will assess the recoverability, considering recent operating results, expected net operating cash flow, and plans for future operations. If, based on this analysis of undiscounted cash flows, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets as defined by Accounting Standards Codification (“ASC”) 360, Property, Plant, and Equipment. Particular examples of events and changes in circumstances that could indicate potential impairments are significant decreases in occupancy, rental income, operating income, and market values.

 

Revenue Recognition

 

We recognize minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the terms of the related leases, and we include amounts expected to be received in later years in deferred rents receivable. Our policy for percentage rental income is to defer recognition of contingent rental income until the specified target (i.e., breakpoint) that triggers the contingent rental income is achieved.

 

We record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred. We make certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. We do not expect the actual results to differ materially from the estimated reimbursement.

 

We make estimates of the collectability of our tenant receivables related to base rents, expense reimbursements, and other revenue or income. We specifically analyze accounts receivable and historical bad debts, customer creditworthiness, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, we will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. These estimates have a direct impact on our net income because a higher bad debt reserve results in less net income.

 

We record lease termination income if there is a signed termination letter agreement, all of the conditions of the agreement have been met, collectability is reasonably assured, and the tenant is no longer occupying the property. Upon early lease termination, we provide for losses related to unrecovered intangibles and other assets.

 

We recognize gains on sales of real estate pursuant to the provisions of ASC 605-976, Accounting for Sales of Real Estate. The specific timing of a sale will be measured against various criteria in ASC 605-976 related to the terms of the transaction and any continuing involvement associated with the property. If the criteria for profit recognition under the full-accrual method are not met, we will defer gain recognition and account for the continued operations of the property by applying the percentage-of-completion, reduced profit, deposit, installment, or cost recovery methods, as appropriate, until the appropriate criteria are met.

 

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Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation—The accompanying consolidated financial statements include our accounts and the accounts of our Operating Partnership and its wholly-owned subsidiaries (over which we exercise financial and operating control). The financial statements of our Operating Partnership are prepared using accounting policies consistent with our accounting policies. All intercompany balances and transactions are eliminated upon consolidation.

 

Use of Estimates—The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions have been made with respect to the useful lives of assets; recoverable amounts of receivables; initial valuations of tangible and intangible assets and liabilities and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions, the valuation and nature of derivatives and their effectiveness as hedges; and other fair value measurement assessments required for the preparation of the consolidated financial statements. Actual results could differ from those estimates.

 

Cash and Cash Equivalents—We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value and may consist of investments in money market accounts. The cash and cash equivalent balances at one or more of our financial institutions exceeds the Federal Depository Insurance Corporation (“FDIC”) insurance coverage.

 

Organization and Offering Expenses—Our advisor has paid and will pay organization and offering expenses on our behalf. Pursuant to the terms of our current advisory agreement with our advisor, we will reimburse our advisor on a monthly basis for these costs and future offering costs it or any of its affiliates may incur on our behalf in connection with the private placement of our Class A shares. Organization and offering expenses consist of all expenses (other than selling commissions and dealer manager fees) to be paid by us in connection with the offering, including our legal, accounting, printing, mailing, filing and registration fees, and other accountable offering expenses including (a) legal, tax, accounting and escrow fees, (b) expenses for printing, engraving, amending, supplementing and mailing, (c) distribution costs, (d) compensation to employees while engaged in registering, marketing and wholesaling our common stock or providing administrative services relating thereto, (e) telegraph and telephone costs, (f) all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), (g) charges of transfer agents, registrars, trustees, escrow holders, depositories, and experts, (h) fees, expenses and taxes related to the filing, registration and qualification of the sale of our common stock under federal and state laws, including accountants’ and attorneys’ fees and other accountable offering expenses, (i) amounts to reimburse our advisor for all marketing related costs and expenses such as compensation to and direct expenses of our advisor’s employees or employees of the advisor’s affiliates in connection with registering and marketing our common stock, (j) travel and entertainment expenses related to the offering and marketing of our common stock, (k) facilities and technology costs and other costs and expenses associated with the offering and ownership of our common stock and to facilitate the marketing of our common stock, including web site design and management, (l) costs and expenses of conducting training and educational conferences and seminars, (m) costs and expenses of attending broker-dealer sponsored retail seminars or conferences, and (n) payment or reimbursement of bona fide due diligence expenses, including compensation to employees while engaged in the provision or support of bona fide due diligence services. There is no limit on the amount of organization and other offering expenses we may incur in the private placement of our Class A shares. Our advisor will pay organization and offering expenses up to 1.0% of gross offering proceeds from the primary portion of this initial public offering, and we will reimburse our advisor for any amounts in excess of 1.0% up to a maximum of 3.5% of gross offering proceeds from the primary portion of this initial public offering.

 

Stockholder Servicing Fee—We will pay our dealer manager a stockholder servicing fee with respect to our Class T shares sold as additional compensation to the dealer manager and participating broker-dealers. No stockholder servicing fee shall be paid with respect to Class I shares or shares sold pursuant to our distribution reinvestment plan. The stockholder servicing fee will accrue daily equal to 1/365th of 1.0% of the purchase price per share of our Class T shares sold and will be paid quarterly. We will cease paying the stockholder servicing fee with respect to our Class T shares sold in our offering upon the occurrence of certain defined events. Our dealer manager may reallow to participating broker-dealers all or a portion of the stockholder servicing fee for services that such participating broker-dealers perform in connection with the shares of our Class T common stock. The accrual in connection with the stockholder servicing fee will be recorded as a payable in full at the time of the sale, with a corresponding offset to stockholders’ equity in our accompanying consolidated balance sheets. As of the date of this prospectus, we have not issued any shares of our Class T common stock and, therefore, we have not accrued any liabilities for the payment of stockholder servicing fees.

 

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Income Taxes—We intend to make an election to be taxed as a REIT under the Internal Revenue Code beginning with the taxable year ending December 31, 2017. Our qualification and taxation as a REIT depends on our ability, on a continuing basis, to meet certain organizational and operational qualification requirements imposed upon REITs by the Internal Revenue Code. If we fail to qualify as a REIT for any reason in a taxable year, we will be subject to tax on our taxable income at regular corporate rates. We would not be able to deduct distributions paid to stockholders in any year in which we fail to qualify as a REIT. We will also be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Additionally, GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the consolidated financial statements if it is more likely than not that the tax position will be sustained upon examination.

 

Repurchase of Common Stock—We offer a share repurchase program which may allow certain stockholders to have their shares repurchased subject to approval and certain limitations and restrictions. We account for requests to repurchase shares as liabilities to be reported at settlement value. When shares are approved for repurchase, we will record a liability based upon their respective settlement values.

 

Partially-Owned Entities—If we determine that we are an owner in a variable-interest entity (“VIE”), and we hold a controlling financial interest, then we will consolidate the entity as the primary beneficiary. For a partially-owned entity determined not to be a VIE, we analyze rights held by each partner to determine which would be the consolidating party. We will generally consolidate entities (in the absence of other factors when determining control) when we have over a 50% ownership interest in the entity. We will assess our interests in VIEs on an ongoing basis to determine whether or not we are the primary beneficiary. However, we will also evaluate who controls the entity even in circumstances in which we have greater than a 50% ownership interest. If we do not control the entity due to the lack of decision-making abilities, we will not consolidate the entity. We have determined that the Operating Partnership is considered a VIE. We are the primary beneficiary of the VIE, and our partnership interest is considered a majority voting interest. As such, we have consolidated the Operating Partnership and its wholly-owned subsidiaries.

 

Investment in Property and Lease Intangibles—Real estate assets are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method. The estimated useful lives for computing depreciation are generally 5-7 years for furniture, fixtures and equipment, 15 years for land improvements and 30 years for buildings and building improvements. Tenant improvements are amortized over the shorter of the respective lease term or the expected useful life of the asset. Major replacements that extend the useful lives of the assets are capitalized, and maintenance and repair costs are expensed as incurred.

 

Other Assets—Other assets consists primarily of prepaid expenses, accounts receivable, and deferred rent receivable. Prepaid expenses and deferred rent receivable are amortized using the straight-line method over the terms of the respective agreements.

 

Fair Value Measurement—ASC 820, Fair Value Measurement (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement. Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:

 

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Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2—Inputs include quoted