NOTE 6 • COMMITMENTS AND CONTINGENCIES

Litigation. The Company is not a party to any legal proceedings which are expected to have a material effect on the Company’s liquidity, financial position, cash flows or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material effect on the Company’s liquidity, financial position, cash flows or results of operations.

Insurance. IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties and are sufficient to achieve IRET’s risk management objectives.

Purchase Options. The Company has granted options to purchase certain IRET properties to tenants in these properties, under lease agreements. In general, the options grant the tenant the right to purchase the property at the greater of such property’s appraised value or an annual compounded increase of a specified percentage of the initial cost of the property to IRET. As of July 31, 2015, the total property cost of the 15 properties subject to purchase options was $114.9 million, and the total gross rental revenue from these properties was $2.5 million for the three months ended July 31, 2015. The tenant in the Company’s Nebraska Orthopaedic Hospital property has exercised its option to purchase the property. The Company and its tenant are currently engaged in an arbitration proceeding pursuant to the lease agreement to determine the purchase price. The Company currently can give no assurance if or when such sale of the property pursuant to the purchase option will be completed.

Environmental Matters. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around or under the property. While IRET currently has no knowledge of any material violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company’s properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to the Company.

Restrictions on Taxable Dispositions. Approximately 93 of IRET’s properties, consisting of 4.2 million square feet of the Company’s combined commercial segments’ properties and 5,022 apartment units, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties. The real estate investment amount of these properties (net of accumulated depreciation) was $741.9 million at July 31, 2015. The restrictions on taxable dispositions are effective for varying periods. The terms of these agreements generally prevent the Company from selling the properties in taxable transactions. The Company does not believe that the agreements materially affect the conduct of the Company’s business or decisions whether to dispose of restricted properties during the restriction period because the Company generally holds these and the Company's other properties for investment purposes, rather than for sale. Historically, however, where IRET has deemed it to be in the shareholders’ best interests to dispose of restricted properties, it has done so through transactions structured as tax-deferred transactions under Section 1031 of the Internal Revenue Code. Of the 93 restricted properties, 17 are classified as discontinued operations at July 31, 2015, with at least $37.3 million of estimated sale proceeds expected to be exchanged under Section 1031.

Redemption Value of Units. The Units of the Operating Partnership are redeemable at the option of the holder for cash, or, at the Company’s option, for the Company’s common shares on a one-for-one basis, after a minimum one-year holding period. All Units receive the same cash distributions as those paid on common shares. Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of an IRET common share for the ten consecutive trading days immediately preceding the date of valuation of the Unit. As of July 31, 2015 and 2014, the aggregate redemption value of the then-outstanding Units of the Operating Partnership owned by limited partners was approximately $100.3 million and $154.4 million, respectively.

Joint Venture Buy/Sell Options. Several of IRET's joint venture agreements contain buy/sell options in which each party under certain circumstances has the option to acquire the interest of the other party, but do not generally require that the Company buy its partners’ interests. However, from time to time, the Company has entered into joint venture agreements which contain options compelling the Company to acquire the interest of the other parties. The Company currently has one such joint venture, the Company’s Southgate apartment project in Minot, North Dakota, in which the Company’s joint venture partner can, for the four-year period from February 6, 2016 through February 5, 2020, compel the Company to acquire the partner’s interest, for a price to be determined in accordance with the provisions of the joint venture agreement. The joint venture partner’s interest is reflected as a redeemable noncontrolling interest on the Condensed Consolidated Balance Sheets.

Tenant Improvements. In entering into leases with tenants, IRET may commit itself to fund improvements or build-outs of the rented space to suit tenant requirements. These tenant improvements are typically funded at the beginning of the lease term, and IRET is accordingly exposed to some risk of loss if a tenant defaults prior to the expiration of the lease term, and the rental income that was expected to cover the cost of the tenant improvements is not received. As of July 31, 2015, the Company is committed to fund $7.8 million in tenant improvements, within approximately the next 12 months. Of this total, approximately $5.2 million is related to properties classified as held for sale.

Development, Expansion and Renovation Projects. As of July 31, 2015, the Company had several development, expansion and renovation projects underway or placed in service during the quarter, the costs for which have been capitalized, as follows:

			(in thousands)					(in fiscal years)
Project Name and Location	Planned Segment	Rentable Square Feet or Number of Units	Anticipated Total Cost			Costs as of July 31, 2015		Anticipated Construction Completion
Chateau II - Minot, ND	Multi-Family Residential	72 units	$	14,711		$	14,600	In Service
Edina 6565 France SMC III - Edina, MN⁽¹⁾	Healthcare	57,624 sq ft		36,752			28,816	In Service
Renaissance Heights - Williston, ND⁽²⁾	Multi-Family Residential	288 units		62,362			62,339	In Service
Minot Southgate Retail - Minot, ND	Other	7,963 sq ft		2,923			2,550	2Q 2016
PrairieCare Medical - Brooklyn Park, MN	Healthcare	70,756 sq ft		24,251			23,424	2Q 2016
Cardinal Point - Grand Forks, ND	Multi-Family Residential	251 units		40,042			33,704	3Q 2016
Deer Ridge – Jamestown, ND	Multi-Family Residential	163 units		24,519			20,627	3Q 2016
71 France Phase I, II & III - Edina, MN⁽³⁾	Multi-Family Residential	241 units		73,290			50,455	1Q 2017
Monticello Crossings Phase I – Monticello, MN⁽⁴⁾	Multi-Family Residential	136 units		19,097			1,978	2Q 2017
Other	n/a	n/a		n/	a		2,790	n/a
			$	297,947		$	241,283

(1)	Anticipated total cost includes estimated tenant improvement costs that have not been incurred as of July 31, 2015.

(2)	The Company is currently an approximately 70.0% partner in the joint venture entity constructing this project. The anticipated total cost amount given is the total cost to the joint venture entity.

(3)

The project will be constructed in three phases by a joint venture entity in which the Company has an approximately 52.6% interest. The anticipated total cost amount given in the table above is the total cost to the joint venture entity. The anticipated total cost includes approximately 21,772 square feet of retail space.

(4)	This project will be constructed in two phases with approximately 202 units and an anticipated total cost of $31.5 million.

These development projects are subject to various contingencies, and no assurances can be given that they will be completed within the time frames or on the terms currently expected.

Construction interest capitalized for the three month periods ended July 31, 2015 and 2014, respectively, was $2.3 million and $1.0 million for development projects completed and in progress.

Pending Acquisitions. The Company currently has signed purchase agreements for the acquisition of the following properties. These pending acquisitions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:

a 74-unit multi-family residential property in Grand Forks, North Dakota, for a purchase price of $9.3 million, of which approximately $8.9 million is to be paid in cash with the remainder in Units of the Operating Partnership valued at approximately $400,000; and

a 276-unit multi-family residential property in Rochester, Minnesota, for a purchase price of $56.0 million, to be paid in cash.

Pending Dispositions. The Company currently has signed sales agreements for the disposition of the following properties. These pending dispositions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:

a portfolio of 17 retail properties in Minnesota, Nebraska and North Dakota for a sales price of $80.6 million; and

an office property in Eden Prairie, Minnesota, for a sales price of $2.9 million.