UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

2020

OR

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

Commission File Number 001-09240


Transcontinental Realty Investors, Inc.

(Exact name of registrant as specified in its charter)

Nevada

94-6565852

Nevada

94-6565852
(State or other jurisdiction of 


Incorporation or organization)

(IRS Employer

Identification Number)

1603 LBJ Freeway,

Suite 800

 Dallas, Texas

Dallas

TX75234

(Address of principal executive offices)

(Zip Code)

(469) 522-4200

Registrant’s Telephone Number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

TCI

NYSE

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☐    No   ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No   ☒

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒     No   ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒

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.

Large accelerated filer  

Accelerated filer  

Non-accelerated filer 

Smaller reporting company   

Emerging growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

Based on the last sale at the close of business on June 30, 2019, the

The aggregate market value of the registrant’svoting and non-voting common stockequity held by non-affiliates of the registrant was approximately $24,391,302. The basis$37.4 million as of the calculation does not constitute a determination by the Registrant as defined in Rule 405last business day of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.

registrant's most recently completed second fiscal quarter based upon the price at which the common stock was last sold on that day.

As of March 25, 2020,24, 2021, there were 8,717,7678,639,516 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. Commission File No. 001-14784

Consolidated Financial Statements of American Realty Investors, Inc. Commission File No. 001-15663




INDEX TO

ANNUAL REPORT ON FORM 10-K

Page 

Page 

11

17

18

21

22

23

24

25

37

39

78

78

78

79

87

88

89

91

93

95

96

2


2


FORWARD-LOOKING STATEMENTS

Certain Statements in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate”, “plan”, “intend”, “expect”, “anticipate”, “believe”, and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described under Part I, Item 1A. “Risk Factors”.

PART I

ITEM 1.    BUSINESS

General

Transcontinental Realty Investors, Inc. (the “Company”) is a fully integrated externally managed real estate company. We operate high quality multifamily and commercial properties throughout the southern United States. We also invest in mortgage notes receivable and in land that is either held for appreciation and or development. As used herein, the terms “TCI”, “the Company”, “We”, “Our”, or “Us” refer to Transcontinentalthe Company.
Corporate Structure
Substantially all of our assets are held by our wholly-owned subsidiary, Southern Properties Capital Ltd (“SPC”), which was formed to allow us to raise funds by issuing non-convertible bonds that are listed and traded on the Tel-Aviv Stock Exchange.
On November 19, 2018, we formed the Victory Abode Apartments, LLC (“VAA”) joint venture with the Macquarie Group (“Macquarie”). In connection with the formation of VAA, we sold a 50% ownership interest in 52 multifamily properties, (collectively referred to herein as the “VAA Portfolio”). VAA assumed all liabilities of the VAA Portfolios. We account for our investment in VAA under the equity method.
We own approximately 81.1% of Income Opportunity Realty Investors, Inc. a Nevada corporation which was formed in 1984. The Company is headquartered in Dallas, Texas and its(“IOR”), whose common stock is listed and tradestraded on the New York Stock Exchange (“NYSE”)NYSE American under the symbol “TCI”“IOR”.

TCIAccordingly, we include IOR’s financial results in our consolidated financial statements. IOR’s primary business is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with investing in mortgage loans.

Controlling Shareholder
American Realty Investors, Inc. (“ARL”), whose common stock is traded on the NYSE under the symbol “ARL”. Subsidiaries, and its affiliates of ARL own in excess ofmore than 80% of the Company’sour common stock. ARL and one of its subsidiaries own 78.38% and the parent of ARL owns 7.11% of the Company. Accordingly, TCI’sour financial results are included in the consolidated with thosefinancial statements of ARL’s onin their Form 10-K and related Consolidated Financial Statements. ARL’s common stockin their tax filings.
As described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”, our officers and directors also serve as officers and directors of ARL. ARL has business objectives similar to ours. Our officers and directors owe fiduciary duties to both ARL and us under applicable law. In determining whether a particular investment opportunity will be allocated to ARL or us, management considers the respective investment objectives of each company and the appropriateness of a particular investment in light of each company’s existing real estate and mortgage notes receivable portfolio. To the extent that any particular investment opportunity is listed and trades on the New York Stock Exchange under the symbol “ARL”. 

On July 17, 2009, the Company acquired an additional 2,518,934 shares of common stock of Income Opportunity Realty Investors, Inc. (“IOR”), and in doing so, increased its ownership from approximately 25%appropriate to over 80%more than one of the sharesentities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of common stock of IOR outstanding. Upon acquisitiontime, or, if appropriate, the investment may be shared among all three or two of the additional shares in 2009, IOR’s results of operations began to be consolidated with those of the Company for tax and financial reporting purposes. As of December 31, 2019, TCI owned 81.23% of the outstanding IOR common shares. Shares of IOR common stock are listed and traded on the NYSE American under the symbol “IOR”. 

TCI’s Board of Directors are responsible for directing the overall affairs of TCI and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company toentities.

Management
Our business is managed by Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written in accordance with an Advisory Agreement that is reviewed annually by TCI’sour Board of Directors. The directorsPillar is a wholly-owned affiliate of TCI are also directors of ARL and four are also directors of IOR. The Chairman of the Board of Directors of TCI also serves as the Chairman of the Board of Directors of ARL and IOR. The officers of TCI also serve as officers of ARL, IOR and Pillar. 

Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. (“RAI”), a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc.), effective August 7, 2014), a Nevada corporation, the sole shareholdercontrolling stockholder of which is a trust known as the May Trust, became the Company’s external contractual Advisor and Cash Manager.  ARL.

3


Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges for the Company’s benefit,our debt and equity financing with third party lenders and investors. PillarThey also servesserve as the contractual Advisor and Cash Manager to ARL and IOR.ARL. As the contractual advisor, Pillar is compensated by TCIus under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. TCI hasWe have no employees. Employees of Pillar render services to TCIus in accordance with the terms of the Advisory Agreement.

3

In addition, as described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”, we compete with related parties of Pillar having similar investment objectives related to the acquisition, development, disposition, leasing and financing of real estate and real estate-related investments. In resolving any potential conflicts of interest which may arise, Pillar has informed us that it intends to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

Portfolio Composition
At December 31, 2020, our portfolio of income-producing properties consisted of:
Six commercial properties consisting of five office buildings and 1 retail property comprising in aggregate of approximately 1,575,685 square feet;
Ten multifamily properties owned directly by us comprising in 1,636 units, excluding apartments being developed;
Approximately 1,961 acres of developed and undeveloped land; and
Fifty-one multifamily properties totaling 9,888 units owned by VAA.
Recent Activity
The following is a description of the Company’s significant real estate and financing transactions during the year ended December 31, 2020:
Acquisitions and Dispositions
On March 5, 2020, we acquired a 49.2 acres land parcel in Kent, Ohio for $5.4 million that was funded by a $2.0 million cash payment and a $3.4 million note payable that bears interest at 10% and matures on November 13, 2024.
On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort Walton, Florida for $2.4 million, resulting in a gain on sale of $1.0 million.
On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port Arthur, Texas for $13.3 million, resulting in a gain on sale of $2.7 million.
On September 14, 2020, we sold Bridge View Plaza, a 122,205 square foot retail property in La Crosse, Wisconsin for $5.3 million, resulting in a gain on sale of $4.6 million.
During the year ended December 31, 2020, we sold a total of 58.8 acres of land from our holdings in Windmill Farms for a total of $12.9 million, resulting in a total gain on sale of $11.1 million. In addition, we sold a total of 26.8 acres of land from our holdings in Mercer Crossing during the year ended December 31, 2020 for a total of $15.8 million, resulting in a total gain on sale of $10.3 million.
Financing Activities
On November 30, 2020, we issued $19.7 million in additional Series A bonds (See Note 11 in our consolidated financial statements) for $18.8 million in net proceeds.
On December 3, 2020, we extended our $14.7 million HSW Partners loan to June 17, 2021.
On March 2, 2021, we extended our $1.2 million loan on Athens to August 28, 2022.
On March 4, 2021, we received a commitment from our lender to extend the maturity of our $10.4 million loan on Windmill Farms until February 28, 2023 and at the reduced interest rate of 5%.
4


Development Activities
During the year ended December 31, 2020, we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total cost of $17.2 million and $14.2 million, respectively.
At December 31, 2020, our apartment projects in development included (dollars in thousands):
PropertyLocationNo. of UnitsCosts to Date (1)Total Projected Costs (1)
AthensAthens, AL232 270 34,800 
Heritage McKinneyMcKinney, TX170 231 24,650 
Total402 $501 $59,450 
(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.
Business Plan and Investment Policy
Our business strategy is to maximize long-term value for our stockholders by the acquisition, development and ownership of income-producing multifamily properties in the secondary markets of the Southern United States. We generally hold our investments in real estate for the long term. We seek to maximize the current income and the value of our real estate by maintaining high occupancy levels while charging competitive rents and controlling costs. In the past we have opportunistically acquired commercial properties for income and appreciation. In addition, we also opportunistically acquire land for future development. From time to time and when we believe it appropriate to do so, we sell land and income-producing properties. We also invest in mortgage receivables.
Our income producing real estate is managed by external management companies. Our multifamily properties are managed by various third-party companies and our commercial properties are managed by Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”Regis"), managescollectively the "management companies". The management companies conduct all of the administrative functions associated with our commercial propertiesproperty operations (including billing, collections, and provides brokerage services.response to resident inquiries). Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regisagreement and is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Refer to Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. TCI engages third-party companies to lease and manage its apartment
We also invest in notes receivables that are collateralized by investments in land and/or multifamily properties.

Southern Properties Capital Ltd. (“Southern” or “SPC”) is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures (that cannot be converted into any other security) are listed and traded on the Tel-Aviv Stock Exchange (“TASE”). Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is These investments have included in the consolidated financial statements of TCI.

On January 1, 2012, the Company entered into a development agreement withnotes receivables from Unified Housing Foundation, Inc. “UHF” a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years.("UHF") Due to thisour ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, we consider UHF has been determined to be a related party.

On November 19, 2018, we executed an agreement between the Macquarie Group (“Macquarie”) and SPC and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, SPC and TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).

VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of SPC and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie.  Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”).  The remaining 2% of the profit participation interest is held by Daniel J. Moos TCI’s President and Chief Executive Officer (“Class B Member”) who serves also as the Manager of the joint venture. 

Our primary business is the acquisition, development and ownership of income-producing residential and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate revenues from gains on sales of income-producing properties and land.

At December 31, 2019, our portfolio of income-producing properties consisted of:

Seven commercial properties consisting of five office buildings and two retail properties comprising in aggregate of approximately 1.7 million square feet;

Ten residential apartment communities owned directly by us comprising in 1,657 units, excluding apartments being developed;

Approximately 1,951 acres of developed and undeveloped land; and

Fifty-one residential apartment communities totaling 9,888 units owned by our 50% owned investee VAA.

4

The following table sets forth the location of our real estate held for investment (income-producing properties only) by asset type as of December 31, 2019:

 

 

Apartments
(Company owned)

 

 

Apartments
(VAA owned)

 

 

Commercial
(Company owned)

 

Location

 

No.

 

 

Units

 

 

No.

 

 

Units

 

 

No.

 

 

SF

 

Alabama

 

 

1

 

 

 

200

 

 

 

1

 

 

 

168

 

 

 

 

 

 

 

Arkansas

 

 

 

 

 

 

 

 

5

 

 

 

1,122

 

 

 

 

 

 

 

Colorado

 

 

 

 

 

 

 

 

2

 

 

 

260

 

 

 

 

 

 

 

Florida

 

 

1

 

 

 

33

 

 

 

2

 

 

 

388

 

 

 

1

 

 

 

6,722

 

Georgia

 

 

 

 

 

 

 

 

1

 

 

 

222

 

 

 

 

 

 

 

Louisiana

 

 

2

 

 

 

384

 

 

 

3

 

 

 

464

 

 

 

 

 

 

 

Mississippi

 

 

2

 

 

 

400

 

 

 

1

 

 

 

196

 

 

 

 

 

 

 

North Carolina

 

 

 

 

 

 

 

 

1

 

 

 

201

 

 

 

 

 

 

 

Nevada

 

 

 

 

 

 

 

 

1

 

 

 

308

 

 

 

 

 

 

 

Tennessee

 

 

1

 

 

 

144

 

 

 

4

 

 

 

708

 

 

 

 

 

 

 

Texas-Greater Dallas-Ft Worth

 

 

 

 

 

 

 

 

19

 

 

 

3,709

 

 

 

4

 

 

 

1,473,634

 

Texas-Greater Houston

 

 

 

 

 

 

 

 

2

 

 

 

416

 

 

 

1

 

 

 

95,329

 

Texas-Other

 

 

3

 

 

 

496

 

 

 

9

 

 

 

1,726

 

 

 

 

 

 

 

Wisconsin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

122,205

 

 Total

 

 

10

 

 

 

1,657

 

 

 

51

 

 

 

9,888

 

 

 

7

 

 

 

1,697,890

 

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties, and debt financing primarily in the form of property-specific, first-lien mortgage loans from commercial banks and institutional lenders. We financeMost of the mortgage notes payable on our development projects principallymultifamily properties are insured with short-term, variable-rate construction loans thatDepartment of Housing and Urban Development ("HUD"). HUD back mortgage notes payable generally provides for lower interest rates and longer term than conventional debt. However, HUD insured mortgage notes payable are refinanced withsubject to extensive regulations over the proceedsorigination and transfers of long-term, fixed-rate amortizing mortgages whenmortgage notes payable and restrictions on the development has been completedamount and occupancy has been stabilized.timing of distribution of cash flows from the underlying real estate. When we sell properties, we may carry a portion of the sales price, generally in the form of a short-term interest bearing seller-financed note receivable, secured by the property being sold. We may also from time to time enter into partnerships or joint ventures with various investors to acquire land or income-producing properties, or to sell interests in some of our properties.

We joinhave increased our portfolio of multifamily properties through ground up development. Since we don’t have a fully developed in-house development, we have traditionally partnered with third-party development companiesdevelopers (“Developers”) to construct residential apartment communities. At December 31, 2019, TCImultifamily properties on our behalf. We work with the Developer on the location, design, construction budget and VAA had fiveinitial lease plan for a potential development project (“Development Project”). The construction plan includes a development fee to be paid to the Developer. To ensure that the Development Project is constructed on plan, on time and one apartment projects in development. The third-party developer typically holds a general partner, as well as a limited partner interest in a limited partnership formed for the purpose of building a single property, whileon budget, we generally takeenter into a limited partnerconvertible loan arrangement with the Developer, whereby we advance the out-of-pocket capital to the developer at nominal rate of interest with an option to convert the loan into a 100% ownership interest in the limited partnership. We may contributeentity that holds the Development Project for a price equal to development cost.
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For our land to the partnershipdevelopment projects, including Windmill Farms, we have acted as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all required equity contributions while the third-party developer is responsible for obtaining construction financing, hiring aown general contractor and for the overall management, successful completion, initial lease-up and delivery of the project.construction manager. We generally bear all the economic risks and rewards of ownershipbelieve direct involvement in these partnerships and therefore include these partnerships in our consolidated financial statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer fees.

5

At December 31, 2019, our apartment projects in development included (dollars in thousands):

Property

 

Location

 

 

No. of Units

 

 

Costs to Date (1)

 

 

Total Projected Costs (1)

 

Sugar Mill III

 

 

Addis, LA

 

 

 

72

 

 

$

            7,417,244

 

 

$

10,014,582

 

Parc at Denham Springs Phase II

 

 

Denham Springs, LA

 

 

 

144

 

 

 

17,791,765

 

 

 

18,767,871

 

Forest Pines II (Forest Grove)

 

 

Bryan, TX

 

 

 

84

 

 

 

4,843,342

 

 

 

11,258,990

 

LD Athens

 

 

Athens, Al

 

 

 

232

 

 

 

81,372

 

 

 

30,519,021

 

McKinney Heritage

 

 

McKinney, TX

 

 

 

176

 

 

 

88,931

 

 

 

24,767,176

 

Total

 

 

 

 

 

 

708

 

 

$

30,222,654

 

 

$

95,327,640

 

(1)Costs include construction hard costs, construction soft costs and loan borrowing costs.

We have made investments in a number of large tracts of undeveloped and partially developed land and intend to continue to improve these tracts of land for our own development purposes or make the improvements necessary to ready the land for sale to other developers.

At December 31, 2019, our investments in undeveloped and partially developed land consisted of the following (dollars in thousands):

Location

 

Acquired

 

 

Acres

 

 

Cost

 

 

Intended Use

 

Dallas, TX

 

 

1996-2013

 

 

 

11.57

 

 

 

3,057

 

 

 

Mixed use

 

Farmers Branch, TX

 

 

2008

 

 

 

60.62

 

 

 

10,966

 

 

 

Mixed use

 

Kaufman County, TX

 

 

2011

 

 

 

1,781.83

 

 

 

49,238

 

 

 

Mixed use

 

Various

 

 

1990-2008

 

 

 

96.97

 

 

 

6,742

 

 

 

Various

 

Total Land Holdings

 

 

 

 

 

 

1,950.99

 

 

$

  70,003

 

 

 

 

 

6

Significant Real Estate Acquisitions/Dispositions and Financings

The following is a description of the Company’s significant real estate and financing transactions during the year ended December 31 2019:

Sold 35.9 acres of land located in Farmers Branch, Texas for an aggregate sales price of $18.9 million and recognized a gain on the sale of $9.0 million.

Sold 29.4 acres of land located in Forney, Texas for a total sales price of $5.0 million and recognized a gain on the sale of approximately $4.1 million.

Sold 10.33 acres of land located in Dallas, Texas for a total sales price of $2.1 million and recognized a gain on the sale of approximately $0.4 million.

Sold 6.25 acres of land located in Nashville, Tennessee for a total sales price of $2.3 million and recognized a gain on the sale of approximately $0.9 million.

Sold 23.24 acres of land located in Fort Worth, Texas for a total sales price of $1.8 million and recognized a gain on the sale of approximately $0.5 million.

Sold a multifamily residential property, located in Mary Ester, Florida for a total sales price of $3.1 million out of which $1.8 million represents land received with a total acreage of 1.27 acres located in Riverside, California in exchange for a note receivable of the same value. The Company recognized a loss from this sale of approximately $0.08 million.

Purchased 33.05 acres of land in Athens, Alabama for a total purchase price of $2.1 million, out of which $0.9 million was paid in cash and the remaining balance of $1.2 million was issued as a note payable. The note payable matures in eighteen months and bears an annual interest rate of 5.91%.

Purchased from a third party 8.94 acres of land located in Collin County, Texas for a total purchase price of $2.5 million.

Purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from a third party land developer.

Sold fresh water district receivables related to infrastructure development work, located in Kaufman County, Texas for $12.0 million. No gain or loss was recognized from the sale of these receivables.

Purchased notes receivables from related parties for an aggregate purchase price of $29.0 million. No gain or loss was recognized from the purchase of the notes receivables (refer to Note 5).

Issued Series C bonds on the TASE in the amount of NIS 275 million (or approximately $78.1 million), bearing an annual interest of 4.65%. The interest will be paid on January 31 and July 31 of each of the years 2020 through 2023, with the bond principal payment due in 2023.  From the proceeds from the sale of the Series C bonds the Company paid off the mortgage debt of $41.5 million related to one of its commercial buildings used as collateral for this issuance.

The Company continues to invest in the development of apartment projects. During the year ended December 31, 2019, TCI has invested $28.5 million related to the construction or predevelopment of various apartment complexes and capitalized $0.8 million of interest costs.

7

Business Plan and Investment Policy

Our business objective is to maximize long-term value for our stockholders by investing in residential and commercial real estate through the acquisition, development and ownership of apartments, commercial properties and land. We intendenables us to achieve this objective through acquiringhigher construction quality, greater control over construction schedules and developing properties in multiple markets and operating as an industry-leading landlord.cost savings. We believe this objective will provide the benefits of enhanced investment opportunities, economies of scale and risk diversification, both in terms of geographic market and real estate product type. We believe our objective will also result in continuing accessactively monitor construction progress to favorably priced debt and equity capital. In pursuing our business objective, we seekensure quality workmanship to achieve a combination of internal and external growth while maintaining a strong balance sheet and employing a strategy of financial flexibility. We maximize the value of our apartments and commercial properties by maintaining high occupancy levels while charging competitive rental rates, controlling costs and focusing on tenant retention. We also pursue attractive development opportunities either directly or in partnership with other investors.

For our portfolio of commercial properties, we generate increased operating cash flow through annual contractual increases in rental rates under existing leases. We also seek to identify best practices within our industry and across our business units in order to enhance cost savings and gain operating efficiencies. We employ capital improvement and preventive maintenance programs specifically designed to reduce operating costs and increase the long-term value of our real estate investments.

We seek to acquire properties consistent with our business objectives and strategies. We execute our acquisition strategy by purchasing properties which management believes will create stockholder value over the long-term. We will also sell properties when management believes value has been maximized or when a property is no longer considered an investment to be held long-term.

We are continuously in various stages of discussions and negotiations with respect to development, acquisition, and disposition of projects. The consummation of any current or future development, acquisition, or disposition, if any, and the pace at which any may be completed cannot be assured or predicted.

Substantially all of our properties are owned by subsidiary companies, many of which are single-asset entities. This ownership structure permits greater access to financing for individual properties and permits flexibility in negotiating aenable sale of either the asset or the equity interests in the entity owning the asset. From time-to-time, our subsidiaries have invested in joint ventures with other investors, creating the possibility of risks that do not exist with properties solely owned by a TCI subsidiary. In those instances where other investors are involved, those other investors may have business, economic, or other objectives that are inconsistent with our objectives, which may in turn, require usdeveloped lots to make investment decisions different from those if we were the sole owner.

Real estate generally cannot be sold quickly. We may not be able to promptly dispose of properties in response to economic or other conditions. To offset this challenge, selective dispositions have been a part of our strategy to maintain an efficient investment portfolio and to provide additional sources of capital. We finance acquisitions through mortgages, internally generated funds, and, to a lesser extent, property sales. Those sources provide the bulk of funds for future acquisitions. We may purchase properties by assuming existing loans secured by the acquired property. When properties are acquired in such a manner, we customarily seek to refinance the asset in order to properly leverage the asset in a manner consistent with our investment objectives.

Our businesses are not generally seasonal with regard to real estate investments. Our investment strategy seeks both current income and capital appreciation. Our plan of operation is to continue, to the extent our liquidity permits, to make equity investments in income-producing real estate such as apartments and commercial properties. We may also invest in the debt or equity securities of real estate-related entities. We intend to pursue higher risk, higher reward investments, such as improved and unimproved land where we can obtain reasonably-priced financing for substantially all of a property’s purchase price. We intend to continue the development of apartment properties in selected markets in Texas and in other locations where we believe adequate levels of demand exist. We intend to pursue sales opportunities for properties in stabilized real estate markets where we believe our properties’ value has been maximized. We also intend to be an opportunistic seller of properties in markets where demand exceeds current supply. Although we no longer actively seek to fund or purchase mortgage loans, we may, in selected instances, originate mortgage loans or we may provide purchase money financing in conjunction with a property sale. 

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third-party home builders.

Competition

Our Board of Directors has broad authority under our governing documents to make all types of investments, and we may devote available resources to particular investments or types of investments without restriction on the amount or percentage of assets that may be allocated to a single investment or to any particular type of investment, and without limit on the percentage of securities of any one issuer that may be acquired. Investment objectives and policies may be changed at any time by the Board without stockholder approval.

The specific composition from time-to-time of our real estate portfolio owned by TCI directly and through our subsidiaries depends largely on the judgment of management to changing investment opportunities and the level of risk associated with specific investments or types of investments. We intend to maintain a real estate portfolio that is diversified by both location and type of property.

Competition

The real estate business is highly competitive and TCI competeswe compete with numerous companies engaged in real estate activities (including certain entities described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”), some of which have greater financial resources than TCI.us. We believe that success against such competition is dependent upon the geographic location of a property, the performance of property-level managers in areas such as leasing and marketing, collection of rents and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors include ease of access to a property, the adequacy of related facilities such as parking and other amenities, and sensitivity to market conditions in determining rent levels. With respect to apartments,multifamily properties, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the residents. We believe that beyond general economic circumstances and trends, the degree to which properties are renovated or new properties are developed in the competing submarket are also competitive factors. Refer to Part I, Item1A. “Risk Factors”.

To the extent that TCI seekswe seek to sell any properties, the sales prices for the properties may be affected by competition from other real estate owners and financial institutions also attempting to sell properties in areas where TCI’sour properties are located, as well as aggressive buyers attempting to dominate or penetrate a particular market.

As described above

Government Regulations
Our properties are subject to various covenants, laws, ordinances and in Part III, Item 13. “Certain Relationshipsregulations, including regulations relating to common areas, fire and Related Transactions,safety requirements, various environmental laws, HUD, the ADA and Director Independence”, the officers and directors of TCI serve as officers and directors of ARL and IOR. Both ARL and IOR haverent control laws.
Segments
We operate two business objectives similar to those of TCI. TCI’s officers and directors owe fiduciary duties to both IOR and ARL as well as to TCI under applicable law. In determining whether a particular investment opportunity will be allocated to TCI, IOR, or ARL, management considers the respective investment objectives of each Company and the appropriateness of a particular investment in light of each Company’s existing real estate and mortgage notes receivable portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all three or two of the entities.

In addition, as described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”, TCI competes with related parties of Pillar having similar investment objectives related tosegments: the acquisition, development, disposition, leasingownership and financingmanagement of real estatemultifamily properties, and real estate-related investments. In resolving any potential conflictsthe acquisition, development, ownership and management of interestcommercial properties; which may arise,are primarily office properties. The services for our office segment include primarily rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include primarily rental of apartments and other tenant services, including parking and storage space rental. See Note 15 to our consolidated financial statements in Item 8 of this Report for more information regarding our segments.

Human Capital
We have no employees. Employees of Pillar has informed TCI that it intendsrender services to exercise its best judgment as to what is fair and reasonable under the circumstancesus in accordance with applicable law.

We have historically engaged in and will continue to engage in certain business transactions with related parties, including but not limited to asset acquisitions and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms conditions and agreements that are not necessarily beneficial to or in the best interests of the Company.

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Advisory Agreement.

Available Information

TCI maintains

We maintain an internet site at http://www.transconrealty-invest.com.www.transconrealty-invest.com. We make available through our website free of charge Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, we have posted the charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, as well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence and other information on the website. These charters and principles are not incorporated in this Report by reference. We will also provide a copy of these documents free of charge to stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common shareholders.

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ITEM 1A.    RISK FACTORS

An investment in our securities involves various risks. All investors should carefully consider the following risk factors, applicable to TCI and its subsidiaries in conjunction with the other information in this report before trading our securities.

Risk Factors Related

FACTORS AFFECTING OUR ASSETS
The current COVID – 19 pandemic or the future outbreak of other highly infectious or contagious diseases and the timing and effectiveness of vaccine distribution or other effective medicines could materially and adversely affect our business, financial condition and results of operations.
The outbreak of COVID – 19, which is present in nearly all regions of the world, including the United States and the specific regions in which our residential apartment communities are located, has created considerable instability and disruption in the U. S. and world economies. Considerable uncertainty still surrounds COVID – 19, including when the pandemic will conclude, how quickly vaccines will be safely and widely distributed, the effectiveness of such vaccines, the potential short-term and long-term effects, including but not limited to shifts in consumer housing demand based on geography, affordability, housing type (e.g., multifamily versus single family), and unit type (e.g., studio in the office versus multi-bedroom), mainly resulting from the paradigm shift of work culture, the decentralization of corporate headquarters and the success of “work from home” models. Moreover, local, state and national measures taken to limit the spread of COVID – 19, including “social distancing” and other restrictions on travel, congregation and business operations, have already resulted in significant negative economic impacts. The prolonged impact of COVID – 19 on the U. S. and world economies remains uncertain but has resulted in increased health issues and mortality rates, increased unemployment, and a worldwide economic downturn, the duration and scope of which cannot currently be predicted. The extent to which our Business

financial condition or operating results will continue to be affected by the COVID – 19 pandemic will largely depend on future demand and developments, which are highly uncertain and cannot be accurately predicted.

Our businessoperating results depend, in large part, on revenues derived from leasing space in our residential multifamily communities to residential tenants and the ability of tenants to generate sufficient income to pay their rents in a timely manner. The market and economic challenges created by the COVID – 19 pandemic and measures implemented to prevent its spread have and may continue to adversely affect our returns and profitability. As a result, our ability to make distributions may be impactedcompromised, and we could experience volatility with respect to the market value of our properties and common stock. The spread of COVID – 19 has resulted in increases in unemployment and mass layoffs, and some tenants have experienced deteriorating financial conditions and are unwilling or unable to pay all or part of their rent on a timely basis, or at all, and the continued spread of COVID – 19 as well as a sustained economic downturn may result in further increases or sustainment of these situations. In some cases, we may be legally required or otherwise agree to restructure tenants’ rent obligations and may not be able to do so in terms favorable to us as those currently in place. Further, various city, county and state laws restricting rent increases in times of emergency may come into effect in connection with the COVID – 19 pandemic, and numerous state, local, federal and industry-initiated efforts have and may continue to affect our ability to collect rent or enforce remedies for the failure to pay rent, including, among others, limitations or prohibitions on evicting tenants unwilling or unable to pay rent and prohibitions on the ability to collect unpaid rent during certain time frames. Additionally, eviction moratoriums have passed at various formats at every level of government, and while we strive to comply, given some of the conflicting standards and unclear requirements, strict compliance may be difficult. Some residents’ views about their obligations to pay rent, even when financially capable of meeting the rent obligation, have shifted away from viewing rent as a primary and necessary financial obligation, and this shift may continue or worsen as a result of the pandemic impacteviction moratoriums and the coronavirus (“COVID 19”)various laws affecting our abilities to collect rent. In the event of tenant nonpayment, default or bankruptcy, we may incur costs in protecting our investment and re-leasing our property and have inlimited ability to renew existing leases or sign new leases at projected rents. Additionally, market fluctuations as a result of the U.S. and global economy.

During 2020, a strain of coronavirus (“COVID – 19”) was reported worldwide, resulting in decreased economic activity and concerns about the pandemic, which would adversely affect the broader global economy. The Company is taking all necessary steps to keep our business premises, tenants, vendors and employees in a safe environment and are constantly monitoring the impact of COVID – 19.  At this point, the extent to which COVID – 19 pandemic may affect our ability to obtain necessary funds for our operations from current lenders or new borrowings. We may be unable to obtain financing for the acquisition of investments or refinancing for existing assets on satisfactory terms, or at all. In addition, moratoriums on construction and macroeconomic factors have caused some construction delays and may cause construction contractors to be unable to perform and governmental inspections and approvals to be delayed or postponed, which may cause a delivery date of certain development projects or investments in third-party development projects to be materially extended. Market fluctuations and construction delays experienced by our vendors may also negatively impact their ability to provide services to us. Further, while we carry general liability, pollution and property insurance, along with other insurance policies, and may provide some coverage for any losses or costs incurred in connection with the COVID – 19 pandemic, given the novelty of the issue and scale of losses incurred throughout the world, there is no guarantee that we will be able to recover all or any portion of our losses and costs under these policies.

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The global economyimpact of the COVID – 19 pandemic continues to evolve rapidly, and our business is uncertain, but pandemics or other significant public health events could have a material adversethe extent of its effect on our businessoperational and resultsfinancial performance will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope and severity of operations.

the pandemic, the actions taken to contain or mitigate its impact, the timing of distribution and effectiveness of vaccines and the willingness and ability of the public to get vaccinated in a timely manner, and the direct and indirect economic effects of the pandemic and related containment measures, among others. Also, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in this Report.

Adverse events concerning our existing tenants or negative market conditions affecting our existing tenants could have an adverse impact on our ability to attract new tenants, release space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit growth.

Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. We could be adversely affected by various facts and events over which the Company haswe have limited or no control, such as:

lack of demand for space in areas where the properties are located;

inability to retain existing tenants and attract new tenants;

oversupply of or reduced demand for space and changes in market rental rates;

defaults by tenants or failure to pay rent on a timely basis;

the need to periodically renovate and repair marketable space;

physical damage to properties;

economic or physical decline of the areas where properties are located; and

potential risk of functional obsolescence of properties over time.

lack of demand for space in areas where the properties are located;
inability to retain existing tenants and attract new tenants;
oversupply of or reduced demand for space and changes in market rental rates;
defaults by tenants or failure to pay rent on a timely basis;
the need to periodically renovate and repair marketable space;
physical damage to properties;
economic or physical decline of the areas where properties are located; and
potential risk of functional obsolescence of properties over time.
At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to the Company.

us.

If tenants do not renew their leases as they expire, we may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is re-let, may have terms that are less economically favorable than expiring lease terms, or may require us to incur significant costs, such as renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect cash flow from operations and our ability to make distributions to shareholders and service indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance, and debt service payments, are not necessarily reduced when circumstances cause a decrease in rental income from the properties.

We may not be able to compete successfully with other entities that operate in our industry.

We experience a great deal of competition in attracting tenants for the properties and in locating land to develop and properties to acquire.

In our effort to lease properties, we compete for tenants with a broad spectrum of other landlords in each of the markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than we are able to offer.

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If the availability of land or high quality properties in our markets diminishes, operating results could be adversely affected.

We may experience increased operating costs which could adversely affect our financial results and the value of our properties.

properties.

Our properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs, and maintenance of the properties. While some current tenants are obligated by their leases to reimburse us for a portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these
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markets to offset the increased expenses, without at the same time decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service indebtedness could be adversely affected.

Our ability to achieve growth in operating income depends in part on ourits ability to develop additional properties.

or acquire and redevelop or renovate existing properties.

We intend to continue to develop properties where warranted by market conditions. We have a number of ongoing development and land projects being readied for commencement.

Additionally, general construction and development activities include the following risks:

construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property;

construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less profitable because of inability to increase rents to compensate for the increase in construction costs;

some developments may fail to achieve expectations, possibly making them less profitable;

we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;

we may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If we determine to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and we may determine the investment is impaired resulting in a loss;

we may expend funds on and devote management’s time to projects which will not be completed; and

occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected rental rates and reduced income from operations.

construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property;
construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less profitable because of inability to increase rents to compensate for the increase in construction costs;
some developments may fail to achieve expectations, possibly making them less profitable;
we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;
we may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If we determine to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and we may determine the investment is impaired resulting in a loss;
we may expend funds on and devote management’s time to projects which will not be completed; and
occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected rental rates and reduced income from operations.
We face risks associated with property acquisitions.

We acquire individual properties and various portfolios of properties and intend to continue to do so. Acquisition activities are subject to the following risks:

when we are able to locate a desired property, competition from other real estate investors may significantly increase the seller’s offering price;

acquired properties may fail to perform as expected;

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when we are able to locate a desired property, competition from other real estate investors may significantly increase the seller’s offering price;

the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;

acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.

acquired properties may fail to perform as expected;
the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;
acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.
We may acquire properties subject to liabilities and without any recourse, or with limited recourse, with respect to unknown liabilities. However, if an unknown liability was later asserted against the acquired properties, we might be required to pay substantial sums to settle it, which could adversely affect cash flow.

Many of our properties are concentrated in our primary markets and the Companywe may suffer economic harm as a result of adverse conditions in those markets.

Our properties are located principally in specific geographic areas in the southwestern, southeastern, and mid-western United States. The Company’sOur overall performance is largely dependent on economic conditions in those regions.

Our investments in joint ventures may decrease our ability to manage risk.

We conduct some of our operations through a joint venture in which we share control over certain economic and business interests with our joint venture partner. Our joint

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venture partner may have economic, business or legal interests or goals that are inconsistent with our goals and interests or may be unable to meet their obligations. Failure by us, or an entity in which we have a joint-venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and adversely affect our business, financial condition, results of operations and cash flows.

We are leveraged and may not be able to meet our debt service obligations.

We had total indebtedness, including bonds and notes payable, at December 31, 20192020 of approximately $493.3$474.0 million. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and most require fixed payments regardless of profitability. Our leveraged position makes us vulnerable to declines in the general economy and may limit the Company’sour ability to pursue other business opportunities in the future.

We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.

We rely on proceeds from property dispositions and third party capital sources for a portion of our capital needs, including capital for acquisitions and development. The public debt and equity markets are also among the sources upon which the Company relies.we rely. There is no guarantee that we will be able to access these markets or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:

general economic conditions affecting these markets;

our own financial structure and performance;

the market’s opinion of real estate companies in general; and

the market’s opinion of real estate companies that own similar properties;

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general economic conditions affecting these markets;

our own financial structure and performance;
the market’s opinion of real estate companies in general; and
the market’s opinion of real estate companies that own similar properties.
We may suffer adverse effects as a result of terms and covenants relating to the Company’sour indebtedness.

Required payments on our indebtedness generally are not reduced if the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders may be reduced. If payments on debt cannot be made, we could sustain a loss or suffer judgments, or in the case of mortgages, suffer foreclosures by mortgagees. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.

We anticipate only a small portion of the principal of itsour debt will be repaid prior to maturity. Therefore, we are likely to refinance a portion of itsour outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the maturing debt. If principal balances due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity capital, cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

Our credit facilities and unsecured debt contain customary restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, and minimum ratios of unencumbered assets to unsecured debt. Our continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on unattractive terms.

terms that are detrimental to us.

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock.

The degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. The degree of leverage could also make us more vulnerable to a downturn in business or the general economy.

An increase in interest rates would increase interest costs on variable rate debt and could adversely impact the ability to refinance existing debt.

We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which could adversely affect cash flow and the ability to pay principal and interest on our
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debt and the ability to make distributions to shareholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.

Unbudgeted capital expenditures or cost overruns could adversely affect business operations and cash flow.

If capital expenditures for ongoing or planned development projects or renovations exceed expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, we might not have access to funds on a timely basis to pay for the unexpected expenditures.

Construction costs are funded in large part through construction financing, which the Companywe may guarantee. The Company’sOur obligation to pay interest on this financing continues until the rental project is completed, leased upleased-up and permanent financing is obtained, or the project is sold, or the construction loan is otherwise paid. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.

We may need to sell properties from time to time for cash flow purposes.

Because of the lack of liquidity of real estate investments generally, our ability to respond to changing circumstances may be limited and generally reallimited. Real estate investments generally cannot be sold quickly. In the event that we must sell assets to generate cash flow, we cannot predict whether there will be a market for those assets in the time period desired, or whether we will be able to sell the assets at a price that will allow the Companyus to fully recoup its investment. We may not be able to realize the full potential value of the assets and may incur costs related to the early pay-offextinguishment of the debt secured by such assets.

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We intend to devote resources to the development of new projects.

We plan to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:

we may abandon a project after spending time and money determining its feasibility;

construction costs may materially exceed original estimates;

the revenue from a new project may not be enough to make it profitable or generate a positive cash flow;

we may not be able to obtain financing on favorable terms for development of a property, if at all;

we may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs; and

we may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.

we may abandon a project after spending time and money determining its feasibility;
construction costs may materially exceed original estimates;
the revenue from a new project may not be enough to make it profitable or generate a positive cash flow;
we may not be able to obtain financing on favorable terms for development of a property, if at all;
we may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs; and
we may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.
FACTORS AFFECTING THE INDUSTRY
The overall business is subject to all of the risks associated with the real estate industry.

industry.

We are subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:

our real estate assets are concentrated primarily in the southwest and any deterioration in the general economic conditions of this region could have an adverse effect;

changes in interest rates may make the ability to satisfy debt service requirements more burdensome;

lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;

changes in real estate and zoning laws;

increases in real estate taxes and insurance costs;

federal or local economic or rent control;

acts of terrorism; and

hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.

our real estate assets are concentrated primarily in the southwest and any deterioration in the general economic conditions of this region could have an adverse effect;
changes in interest rates may make the ability to satisfy overall debt service requirements more burdensome;
lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;
changes in real estate and zoning laws;
increases in real estate taxes and insurance costs;
federal or local regulations or rent controls;
acts of terrorism, and
hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.

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Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.

Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow will be adversely affected. The following factors, among others, may adversely affect the income generated by our properties:

downturns in the national, regional and local economic conditions (particularly increases in unemployment);

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competition from other office and commercial buildings;

local real estate market conditions, such as oversupply or reduction in demand for office or other commercial space;

changes in interest rates and availability of financing;

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

increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;

civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property;

declines in the financial condition of our tenants and our ability to collect rents from our tenants; and

decreases in the underlying value of our real estate.

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downturns in the national, regional and local economic conditions (particularly increases in unemployment);

competition from other office, apartment and commercial buildings;

local real estate market conditions, such as oversupply or reduction in demand for office, apartments or other commercial space;
changes in interest rates and availability of financing;
vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;
increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;
civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;
significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property;
declines in the financial condition of our tenants and our ability to collect rents from our tenants; and
decreases in the underlying value of our real estate.
Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our results of operations, and financial condition.

Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the current dislocations in the credit markets and general global economic recession. These current conditions, or similar conditions existing in the future, may adversely affect our results of operations, and financial condition as a result of the following, among other potential consequences:

the financial condition of our tenants may be adversely affected which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

significant job losses within our tenants may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;

our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;

reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and

one or more lenders could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.

the financial condition of our tenants may be adversely affected which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;
significant job losses within our tenants may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;
our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and
one or more lenders could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.
Real estate investments are illiquid, and we may not be able to sell properties if and when it is appropriate to do so.

Real estate generally cannot be sold quickly. We may not be able to dispose of properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code may limit our ability to sell properties (without incurring significant tax costs) in some situations when it may be otherwise economically advantageous to do so, thereby adversely affecting returns to stockholders and adversely impacting our ability to meet our obligations.

ITEM 1B.    

UNRESOLVED STAFF COMMENTS

None.

17


ITEM 2.PROPERTIES

On

12


General real estate investment risks may adversely affect property income and values.
Real estate investments are subject to a variety of risks. If the communities and other real estate investments do not generate sufficient income to meet operating expenses, including debt service and Expenditures, cash flow, and the ability to make distributions, the operating income will be adversely affected. Income from the communities may be further adversely affected by, among other things, the following factors:
changes in the general or local economic climate, including layoffs, plant closings, industry slowdowns, relocations of significant local employers, and other events negatively impacting local employment rates and wages and the local economy;
local economic conditions in which the communities are located, such as oversupply of housing or a reduction in demand for rental housing;
adverse economic or market conditions due to COVID – 19 pandemic leading to a temporary or permanent move by tenants and/or prospective tenants from locations in which our communities are located;
the attractiveness and desirability of our communities to tenants, including, without limitation, the size and amenity offerings of our units, our technology offerings and our ability to identify and cost effectively implement new, relevant technologies and to keep up with constantly changing consumer demand for the latest innovations, including any increased requirements due to the significant increase in the number of people who continue to “work from home”;
inflationary environments in which the cost to operate and maintain communities increases at a rate greater than our ability to increase rents or deflationary environments where we may be exposed to declining rents more quickly under our short-term leases;
competition from other available housing alternatives;
changes in rent control or stabilization laws or other laws regulating housing and other increasing regulation on people and business in locations where our communities are located;
our ability to provide for adequate maintenance and insurance;
declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
any decline in or tenants’ perceptions of the safety, convenience and attractiveness of our communities and the neighborhoods where they are located; and
changes in interest rates and availability of financing.
As leases at the communities expire, tenants may enter into new leases on terms that are less favorable to us. Income and real estate values may also be adversely affected by such factors as applicable laws, including, without limitation, the Americans with Disabilities Act of 1990, Fair Housing Amendment Act of 1988, permanent and temporary rent controls, rent stabilization laws, other laws regulating housing that may prevent us from raising rents to offset increased operating expenses, and tax laws.
National and regional economic environments can negatively impact our liquidity and operating results.
Our forecast for the national economy assumes growth of the gross domestic product of the national economy and the economies of the southeastern and southwestern states. In the event of a recession or other negative economic effects, including as a result of the COVID – 19 pandemic, we could incur reductions in rental rates, occupancy levels, property valuations and increases in operating costs, such as advertising and turnover expenses. Any such recession or similar event may affect consumer confidence and spending and negatively impact the volume and pricing of real estate transactions, which could negatively affect our liquidity and its ability to vary its portfolio promptly in responses to changes to the economy. Further, if residents do not experience increases in their income, they may be unable or unwilling to pay rent increases, and delinquency in rent payments and rent defaults may increase as well as vacancy rates.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

13


ITEM 2.    PROPERTIES
Multifamily Properties
CountPropertyLocationYear ConstructedUnitsOccupancy
Consolidated Properties
1ChelseaBeaumont, TX1999144 91.7 %
2Forest GroveBryan, TX202084 100.0 %
3Landing BayouHouma, LA2005240 92.2 %
4Legacy at Pleasant GroveTexarkana, TX2006208 93.3 %
5Overlook at Allenville Phase IISevierville, TN2012144 94.1 %
6Parc at Denham Springs Phase IIDenham Springs, LA2010144 83.3 %
7Sugar Mill Phase IIIBaton Rouge, LA201572 41.7 %
8ToulonGautier, MS2011240 97.2 %
9Villas at Bon SecourGulf Shores, AL2007200 96.4 %
10Vista RidgeTupelo, MS2009160 98.2 %
1,636 
Joint Venture Properties
1Abode Red RockLas Vegas, NV2018308 90.2 %
2Apalachee Point VillasTallahassee, FL2018200 91.4 %
3Blue Lake VillasWaxahachie, TX2002186 94.9 %
4Blue Lake Villas Phase IIWaxahachie, TX200470 94.0 %
5Breakwater BayBeaumont, TX2003176 92.3 %
6Bridgewood RanchKaufman, TX2007106 96.0 %
7Capitol HillLittle Rock, TX2003156 91.8 %
8Centennial VillageOak Ridge, TN2011252 97.8 %
9Crossing as OpelikaOpelika, AL2011168 96.2 %
10Dakota ArmsLubbock, TX2005208 94.7 %
11Desoto ranchDeSoto, TX2003248 95.1 %
12Eagle CrossingDallas, TX2017150 96.5 %
13Falcon LakeArlington, TX2002248 96.0 %
14Heather CreekMesquite, TX2003200 96.7 %
15Lake ForestHumble, TX2004240 92.5 %
16Lakeside LoftsFarmers Branch, TX2020245 89.7 %
17Lodge at Pecan CreekDenton, TX2011192 93.3 %
18Lofts at ReynoldsAsheville, NC2012201 96.9 %
19Mansions of MansfieldMansfield, TX2008208 95.0 %
20McKinney PointMcKinney, TX2017198 93.6 %
21MetropolitanLittle rock, AR2008260 91.4 %
22Mission OaksSan Antonio, TX2006228 94.6 %
23Northside on TravisSherman, TX2008200 93.2 %
24Oak HollowSequin, TX2011160 92.5 %
25Oak Hollow Phase IISequin, TX201896 90.7 %
26OceanaireBiloxi, MS2009196 95.8 %
27Overlook at Allensville SquareSevierville, TX2012144 95.5 %
28Parc at BentonvilleBentonville, AR2017216 94.5 %
29Parc at ClarksvilleClarksville, TN2018168 96.3 %
30Parc at Denham SpringsDenham Spring, LA2007224 90.0 %
31Parc at GarlandGarland, TX2010198 94.7 %
32Parc at MansfieldMansfield, TX201799 93.5 %
33Parc at MaumelleLittle Rock, AR2015240 96.5 %
34Parc at Metro CenterNashville, TN2005144 85.9 %
35Parc at RogersRogers, AR2006250 93.3 %
14


CountPropertyLocationYear ConstructedUnitsOccupancy
36Parc at WylieWylie, TX2007198 93.5 %
37Preserve at Pecan CreekDenton, TX2008192 90.2 %
38Preserve at Prairie PointeLubbock, TX2005184 96.5 %
39Residences at Holland LakeWeatherford, TX2004208 92.2 %
40Sawgrass CreekNew Port Richey, FL2018188 95.9 %
41Sonoma CourtRockwall, TX2011124 94.9 %
42Sugar Mill Phase IBaton Rouge, LA2009160 68.8 %
43Sugar Mill Phase IIBaton Rouge, LA201680 71.0 %
44Tattersall VillageHinesville, GA2010222 90.0 %
45Terra LagoRowlett, TX2018451 87.4 %
46TradewindsMidland, TX2015214 85.4 %
47Villas of Park West IPueblo, CO2005148 95.4 %
48Villas of Park West IIPueblo, CO2010112 94.6 %
49Vistas of Vance JacksonSan Antonio, TX2005240 93.5 %
50Waterford At Summer ParkRosenberg, TX2013196 95.2 %
51WindsongFort Worth, TX2003188 94.1 %
9,888 
61Total Mutltifamily Properties11,524 

Multifamily Portfolio Composition
The following table sets forth the location and number of units as of December 31, 2019, our portfolio consisted of seventeen income-producing properties consisting of ten apartment communities totaling 1,657 units, seven commercial properties consisting of five office buildings and two retail centers. In addition, we own or control 1,951 acres of improved and unimproved land held for future development or sale.

The average annual rental and other property revenue per square foot is $13.36 for the Company’s residential apartment portfolio and $25.61 for the commercial portfolio. Through our joint venture VAA we have a 50 percent ownership interest to a portfolio of fifty-one income-producing properties with a total of 9,888 units, which generated an average annual rental revenue of $14.74 per square foot.

The table below shows information relating to those properties in which we own or have an ownership interest through subsidiaries, all of which are suitable and adequate for the purpose for which each is utilized: 

Residential ApartmentsLocationUnitsOccupancy
ChelseaBeaumont, TX                 14490.97%
Farnham ParkPort Arthur, TX                 14495.83%
Landing BayouHouma, LA                 24089.58%
Legacy at Pleasant GroveTexarkana, TX                 20888.94%
Toulon Gautier, MS                 24098.33%
Villager Fort Walton, FL                   3390.91%
Villas at Bon Secour AptsGulf Shores, AL                 20092.00%
Vista Ridge Tupelo, MS                 16093.13%
Overlook at Allensville Phase IISevierville, TN                 14489.58%
Parc at Denham Springs Phase IIDenham Springs, LA                 1445.56%
10Total Apartment Units            1,657 

Office BuildingsLocationSqFtOccupancy
600 Las ColinasIrving, TX          512,17379.43%
770 South Post OakHouston, TX            95,43883.85%
Browning Place (Park West I)Farmers Branch, TX          625,29787.03%
Senlac (VHP)Farmers Branch, TX              2,821100.00%
Stanford CenterDallas, TX          333,23490.91%
5Total Office Buildings    1,568,963 

Retail CentersLocationSqFtOccupancy
Bridgeview PlazaLaCrosse, WI          122,20537.25%
Fruitland ParkFruitland Park, FL              6,722100.00%
2Total Retail Centers        128,927 
 Total Commercial    1,697,890 
2020:

Company ownedVAA ownedTotal
LocationNo.UnitsNo.UnitsNo.Units
Alabama200 168 368 
Arkansas— — 966 966 
Colorado— — 260 260 
Florida— — 388 388 
Georgia— — 222 222 
Louisiana456 464 920 
Mississippi400 196 596 
North Carolina— — 201 201 
Nevada— — 308 308 
Tennessee144 564 708 
Texas436 32 6,151 35 6,587 
10 1,636 51 9,888 61 11,524 

Our joint venture investee VAA, owns the following residential properties:

Residential Apartments Location Units Occupancy
Abode Red Rock Apartments Las Vegas, NV 308 83.04%
Apalachee Point Villas Apartments Tallahassee, FL 200 91.88%
Blue Lake Villas Apartments Waxahachie, TX 186 90.78%
Blue Lake Villas Apartments Phase II Waxahachie, TX 70 89.02%
Breakwater Bay Apartments. Beaumont, TX 176 97.53%
Bridgewood Ranch Apartments Kaufman, TX 106 94.39%
Capitol Hill Apartments Little Rock, AR 156 91.17%
Centennial Village Apartments Oak Ridge,TN 252 94.83%
Crossings at Opelika Apartments Opelika, AL 168 97.29%
Dakota Arms Apartments Lubbock, TX 208 96.17%
Desoto Ranch Apartments DeSoto, TX 248 92.61%
Eagle Crossing Apartments Dallas, TX 150 97.63%
Falcon Lake Apartments Arlington, TX 248 95.30%
Heather Creek Apartments Mesquite, TX 200 96.64%
Lake Forest Apartments Humble, TX 240 90.67%
Lakeside Lofts Farmers Branch, TX 245 0.00%
Lodge at Pecan Creek Apartments Denton, TX 192 95.04%
Lofts at Reynolds Apartments Asheville, NC 201 93.87%
Mansions Of Mansfield Apartments Mansfield, TX 208 96.38%
McKinney Point Apartments McKinney, TX 198 91.96%
Metropolitan Apartments Little Rock, AR 260 92.40%
Mission Oaks Apartments San Antonio, TX 228 92.17%
Northside on Travis Apartments Sherman, TX 200 90.03%
Oak Hollow Phase I Apartments Seguin, TX 160 88.08%
Oak Hollow Phase II Apartments Seguin, TX 96 86.61%
Oceanaire Apartments Biloxi, MS 196 94.76%
Overlook At Allensville Square Apartments Phase I Sevierville, TN 144 92.66%
Parc at Wylie Apartments Wylie, TX 198 92.09%
Parc at Bentonville Apartments Bentonville, AR 216 92.60%
Parc at Clarksville Apartments Clarksville, TN 168 91.45%
Parc at Denham Springs Apartments Phase I Denham Spring, LA 224 95.86%
Parc at Garland Apartments Garland, TX 198 94.68%
Parc at Mansfield Apartments Mansfield, TX 99 94.87%
Parc at Maumelle Apartments Little Rock, AR 240 94.51%
Parc at Metro Center Apartments Nashville, TN 144 97.48%
Parc at Rogers Apartments Rogers, AR 250 92.99%
Preserve at Pecan Creek Apartments Denton, TX 192 89.65%
Preserve at Prairie Pointe Apartments Lubbock, TX 184 95.94%
Residences at Holland Lake Apartments Weatherford, TX 208 94.45%
Sawgrass Creek Apartments  New Port Richey, FL 188 92.73%
Sonoma Court Apartments Rockwall, TX 124 89.98%
Sugar Mill Apartments, Phase I Baton Rouge, LA 160 76.24%
Sugar Mill Apartments, Phase II Addis, LA 80 76.59%
Tattersall Village Apartments Hinesville, GA 222 93.76%
Terra Lago Apartments Rowlett, TX 451 69.45%
Tradewinds Apartments Midland, TX 214 94.36%
Villas of Park West Apartments Phase I Pueblo, CO 148 95.27%
Villas of Park West Apartments Phase II Pueblo, CO 112 93.77%
Vistas Of Vance Jackson Apartments San Antonio, TX 240 94.50%
Waterford at Summer Park Apartments Rosenberg, TX 196 93.49%
Windsong Apartments Fort Worth, TX 188 93.15%
51 Total Apartment Units                    9,888  
       
Development Project      
       
Lakeside Lofts Apartments Farmers Branch, TX 249  
       
Grand total                     10,137  




15


Commercial Properties
CountPropertyLocationYear ConstructedSquare FeetOccupancy
Office Buildings
1600 Las ColinasIrving, TX1984512,173 79.4 %
2770 South Post OakHouston, TX198095,438 83.9 %
3Browning PlaceFarmers Branch, TX1982625,297 87.0 %
4SenlacFarmers Branch, TX20252,821 100.0 %
5Stanford CenterDallas, TX1982333,234 90.9 %
1,568,963 
Retail Centers
1Fruitland ParkFruitland Park, FL20256,722 100.0 %
61,575,685 

Commercial Lease Expirations

The following table summarizes our commercial lease expirations as of December 31, 2019:

Year of Lease
Expiration
  Rentable Square Feet
Subject to Expiring Leases
  Current
Annualized (1)
Contractual Rent Under
Expiring Leases
  Current
Annualized (1)
Contractual
Rent Under Expiring
Leases (P.S.F.)
  Percentage of Total
Square Feet
  Percentage of Gross Rentals 
                 
 2020   139,905  $3,082,003  $22.03   8.2%  10.9%
 2021   123,629   2,344,184   18.96   7.3%  8.3%
 2022   267,882   5,981,809   22.33   15.8%  21.1%
 2023   362,224   6,035,138   16.66   21.3%  21.3%
 2024   271,071   6,010,250   22.17   16.0%  21.2%
 2025   125,667   2,909,360   23.15   7.4%  10.3%
 2026   30,505   793,130   26.00   1.8%  2.8%
 Thereafter   56,926   1,152,892   20.25   3.4%  4.1%
 Total   1,377,809  $28,308,766       81.2%  100%

(1)2020:
Year of Lease
Expiration
Rentable Square Feet
Subject to Expiring Leases
Current
Annualized
Contractual Rent Under
Expiring Leases (1,000s)
Current
Annualized
Contractual
Rent Under Expiring
Leases (P.S.F.)
Percentage of Total
Square Feet
Percentage of Gross
Rentals
2021134,027 $2,923 $21.81 8.5 %10.9 %
2022295,412 6,737 22.81 18.7 %25.0 %
2023296,233 4,815 16.26 18.8 %17.9 %
2024129,926 3,039 23.39 8.2 %11.3 %
2025149,448 3,569 23.88 9.5 %13.3 %
Thereafter287,491 5,821 20.25 18.2 %21.6 %
1,292,537 $26,904 81.9 %100.0 %
(1)Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, 2019, multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.

The table below shows information related to the land parcels we own as of December 31, 2019:

2020, multiplied by twelve. This amount reflects total rent before any rent abatement and includes expense reimbursements, which may be estimates as of such date.


16


Land Investments

LandLocationAcres
DedeauxProjectGulfport, MSLocation                     9.90Acres
Dominion Held for Development
EQK PortageKent, OH49 
McKinney 36Collin County, TX18 
Ocean EstatesGulfport, MS12 
WillowickPensacola, FL40 
Mercer Phase IICrossing CommercialFarmers Branch, TX                     5.2919 
GautierWindmills FarmGautier, MSKaufman County, TX                     3.461,555 
Lacy LonghornOtherVarious40 
1,733 
Held subject to sales contract
Mercer CrossingFarmers Branch, TX                     4.8615 
Lake Shore VillasWindmill FarmsHumble, TX                     1.35
Lubbock Lubbock, TX                     2.87
McKinney 36Collin County, TX                   17.89
MinivestDallas, TX                     0.23
Nicholson CroslinDallas, TX                     0.80
Nicholson MendozaDallas, TX                     0.35
Ocean EstatesGulfport, MS                   11.79
T Palm DesertRiverside, California                      1.27
Travis Ranch Kaufman County, TX                     8.66213 
Union Pacific Railroad Dallas, TX                     0.04228 
Willowick Pensacola, FL                   39.78
Mercer Crossing1,961Farmers Branch, TX                   19.00
Windmills Farm Kaufman County, TX              1,701.05
Total Land/Development              1,828.59

Land Subject to Sales ContractLocationAcres
Mercer Crossing Farmers Branch, TX                   41.62
Windmill FarmsKaufman County, TX                   80.78
Total Land Subject to Sales Contract                 122.40
Total Land             1,950.99

ITEM 3.LEGAL PROCEEDINGS

ART and ART Midwest, Inc.

While

ITEM 3.    LEGAL PROCEEDINGS
We were the Company and all entities in which the Company has a direct or indirect equity interest are not parties to or obligated in any way for the outcome, a formerly owned entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have been engaged since 1999 in litigation with Mr. David Clapper and entities related to Mr. Clapper (collectively, the “Clapper Parties”). The matter originally involved a transaction in 1998 in which ART Midwest, Inc. was to acquire eight residential apartment complexes from the Clapper Parties. Through the years, a number of rulings, both for and against American Realty Trust, Inc. “ART” and ART Midwest, Inc., were issued. In October 2011, a ruling was issued under which the Clapper Parties received a judgment for approximately $74 million, including $26 million in actual damages and $48 million interest. The ruling was against ART and ART Midwest, Inc., but no other entity. During February 2014, the Court of Appeals affirmed a portion of the judgment in favor of the Clapper Parties, but also ruled that a double counting of a significant portion of the damages had occurred and remanded the case back to the trial court to recalculate the damage award, as well as pre- and post-judgment interest thereon. Subsequently, the trial court recalculated the damage award, reducing it to approximately $59 million, inclusive of actual damages and then current interest. ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.

The Clapper Parties subsequently filed a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. “EQK”, and ART. The Clapper Parties seek damages from ARL for payment by ART to ARL of ART’s stock in EQK in exchange for a release of the Antecedent Debt owed by ART to ARI. In February 2018 the court determined that this legal matter should not have been filed in federal court and therefore granted motions to dismiss on jurisdictional grounds. In June 2018, the court overruled its own grant of motions to dismiss and reinstated the case. We continue to vigorously defend the case and management believes it has defenses to the claims. The case has not been set for trial.

 In 2005, ART filed suit against a major national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties was pending, but the abatement was recently lifted. The trial court subsequently dismissed the case on procedural grounds, but ART has filed a notice of appeal. The appeal was heard in February 2018 and the case was subsequently appealed to the Texas Supreme Court. The application for Review is still pending with the Texas Supreme Court. In January 2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount of $10 million. At December 31, 2012, the Company fully reserved and valued such note at zero.

Dynex Capital, Inc.

On July 20, 2015, the 68th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).

An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resultedplaintiff in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgmentlawsuit against Dynex Commercial, Inc. on July 20, 2015.


The Final Judgment entered against Dynex Commercial, Inc. on July 20,(“Dynex”) for failure to fulfill certain loan commitments. In January 2015, the court awarded Basic was $0.256 million in damages, plus pre-judgment interestus with a judgment of $0.192 million for a total amount$49.0 million. We are pursuing all legal means to collect this award. However, due to the uncertainty of $0.448 million. The Judgment awarded ART was $14.2 million in damages, plus pre-judgment interestthe collectability of $10.6 million for a total amount of $24.8 million. The Judgment awarded TCI was $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 untilaward, the date their respective damages were paid. Lastly, the Judgement awarded Basic, ART, and TCI was $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.

TCI is working with counsel to identify assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as pursue additional claims, if any, against Dynex Capital, Inc. Post judgment interest continues to accrue.

receivable has been fully reserved.

In February 2019, Paul Berger Litigation

On February 4, 2019, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”Berger”) filed a Complaint inlawsuit against the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certainCompany, its directors, its officers and directors of the Companies (“Additional Parties”) and two other individuals. The Complaint filedothers that alleges that the salewe completed improper sales and/or exchangetransfers of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one or more of Companies, the Additional Defendants and/or the directors ofwith IOR. The case alleges otherBerger requests that we pay off various related claims. The Plaintiff seeks certification as a representative ofparty loans to IOR and all of its shareholders, unspecified damages, a returnthat IOR then distribute the funds to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named DefendantsIOR's stockholders. We intend to vigorously defend against the action, deny allallegations.

In connection with the formation of VAA, ten of the allegationsproperties that we contributed to the joint venture are subject to an earn-out provision that provides for a remeasurement of the Complaint, andvalue of those properties after a two-year period following the completion of construction. As of December 31, 2020, we have recorded a liability of $10.0 million, which we believe is the allegationsamount that will be required to be wholly without any merit. The Defendantssettle our obligation. We have been unable to reach agreement with our joint venture partner on the remeasured value. As a result, the parties have filed motions to dismissfor arbitration in accordance with the case in its entirety in June 2019. On February 26, 2020, the Court denied IOR’s demand futility motion. The remainder of the motions to dismiss are pending.

LitigationThe ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.

ITEM 4.MINE SAFETY DISCLOSURES

joint venture agreement.

ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.



17


PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

TCI’s Common

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed and traded on the NYSE American under the symbol “TCI”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE American for the quarters ended:

  2019  2018 
  High  Low  High  Low 
First Quarter $38.34  $27.60  $46.00  $25.14 
Second Quarter $34.01  $22.85  $52.00  $23.90 
Third Quarter $33.15  $23.00  $38.25  $28.36 
Fourth Quarter $41.50  $27.00  $37.42  $26.73 

20202019
HighLowHighLow
First Quarter$39.86 $16.00 $38.34 $27.60 
Second Quarter$40.42 $16.50 $34.01 $22.85 
Third Quarter$30.43 $29.99 $33.15 $23.00 
Fourth Quarter$32.26 $21.75 $41.50 $27.00 
On March 25, 2020,22, 2021, the closing price of TCI’sour common stock as reported on the NYSE American was $22.00$21.50 per share, and was held by approximately 2,2902,149 holders of record.

TCI’s

Our Board of Directors established a policy that dividend declarations on common stock would be determined on an annual basis following the end of each year. In accordance with that policy, the board determined not to pay any dividends on common stock in December 31, 2020, 2019 2018 or 2017.2018. Future distributions to common stockholders will be determined by the Board of Directors in light of conditions then existing, including the Company’sour financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.

In December 1989, the Board of Directors approved

We have a share repurchase program authorizingthat allows for the repurchase of a total of 687,000 shares of TCI’s Common stock. In June 2000, the Board increased this authorization to 1,387,000 shares. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of common stock which resulted in a total authorization under the repurchase program for up to 1,637,000 shares of our common stock. This repurchase program has no termination date. There were no shares repurchased for the year ended December 31, 2019.

In November 2006, TCI issued 100,000 shares of Series D Preferred Stock with a liquidation preference of $100 per share. The preferred stock is not convertible into any other security, requires dividends payable at2020 and the initial rate of 7% annually. The dividend rate increases ratably from 7% to 9% in future periods andprogram has 650,250 share remaining that can be redeemed at any point after September 30, 2011. 

During the fourth quarterrepurchased as of 2018, all 100,000 shares of Series D Preferred Stock were redeemed for $17.2 million, of which $7.2 million was accrued unpaid dividends. At December 31, 20192020.

ITEM 6.    SELECTED FINANCIAL DATA
Optional and 2018, there were no preferred shares outstanding.

not included.

ITEM 6.SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data derived from our audited financial statements for each of the five years in the period ended December 31, 2019. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Part II, Item 7 of this Annual Report and the consolidated financial statements and the accompanying notes set forth in Part II, Item 8 of this Annual Report.

  For the Years Ended December 31, 
  2019  2018  2017  2016  2015 
  (dollars in thousands, except share and per share amounts) 
EARNINGS DATA                    
Rental and other property revenues $47,970  $120,955  $125,233  $118,471  $102,220 
Total operating expenses  55,706   104,834   105,128   100,824   92,919 
Operating (loss) income  (7,736)  16,121   20,105   17,647   9,301 
Other expenses  (35,210)  (1,401)  (49,967)  (36,628)  (36,095)
(Loss) income before gain on formation of joint venture, gain on land sales, non-controlling interest, and taxes  (42,946)  14,720   (29,862)  (18,981)  (26,794)
Gain on disposition of 50% interest in VAA     154,126          
(Loss) gain on income producing properties  (80)     9,842   16,207   18,911 
Gain on land sales  14,889   17,404   4,884   3,121    
Income tax benefit (expense)  2,000   (3,210)  (180)  (24)  (517)
Net (loss) income from continuing operations  (26,137)  183,040   (15,316)  323   (8,400)
Net (loss) income from discontinuing operations           (1)  896 
Net (loss) income  (26,137)  183,040   (15,316)  322   (7,504)
Net income attributable to non-controlling interest  (783)  (1,590)  (499)  (285)  (132)
Net (loss) income attributable to Transcontinental Realty Investors, Inc.  (26,920)  181,450   (15,815)  37   (7,636)
Preferred dividend requirement     (900)  (900)  (900)  (900)
Net (loss) income applicable to common shares $(26,920) $180,550  $(16,715) $(863) $(8,536)
                     
PER SHARE DATA                    
Earnings per share - basic                    
(Loss) income from continuing operations $(3.00) $20.89  $(1.86) $(0.07 $(1.08)
Income (loss) from discontinued operations              0.10 
Net (loss) income applicable to common shares $(3.09) $20.71  $(1.92) $(0.10) $(0.98)
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767   8,717,767 
                     
Earnings per share - diluted                    
(Loss) income from continuing operations $(3.00) $20.89  $(1.86) $(0.07 $(1.08)
Income (loss) from discontinued operations              0.10 
Net (loss) income applicable to common shares $(3.09) $20.71  $(1.92) $(0.10) $(0.98)
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767   8,717,767 
                     
BALANCE SHEET DATA                    
Real estate, net $387,790  $384,504  $979,870  $891,173  $844,019 
Notes and interest receivable, net  120,986   83,541   70,166   79,308   69,551 
Investment in VAA  59,148   68,399          
Total assets  865,918   862,380   1,313,422   1,185,914   1,110,204 
Notes and interest payable  246,546   277,237 �� 894,482   841,516   779,434 
Bonds and interest payable  229,722   158,574   113,047       
Shareholders’ equity  354,067   380,401   208,261   224,477   225,055 
Book value per share  40.61   43.64   23.89   25.75   25.82 

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with theour consolidated financial statements and related notes thereto appearing elsewhere in Part II, Item 8 of this report.

The Annual Report on Form 10-K contains forward-looking statements withinReport. Our results of operations for the meaning of the federal securities laws, principally, but not only, under the captions “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will”, “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may beyear ended December 31, 2020 were affected by knownthe acquisitions and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whetherdisposition, refinancing activity, development activity as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments;

failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;

potential liability for uninsured losses and environmental contamination;

risks associated with our dependence on key personnel whose continued service is not guaranteed; and

the other risk factors identified in this Form 10-K, including those described under the caption “Risk Factors.”

The risks included here are not exhaustive. Other sections of this report, including Part I Item 1A. “Risk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

discussed below.

Management's Overview

We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development. The Company’sdevelopment throughout the Southern United States. Our portfolio of income-producing properties includes residential apartment communities, office buildings and other commercial properties. Our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project.

Our operations are managed by Pillar Income Asset Management, Inc. (“Pillar”) in accordance with an Advisory Agreement. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges our debt and equity financing with third party lenders and investors. We acquire land primarilyhave no employees. Employees of Pillar render services to us in urban in-fill locations or high-growth suburban markets.accordance with the terms of the Advisory Agreement. Pillar is considered to be a related party due to its common ownership with American Realty Investors, Inc. (“ARL”), who is our controlling shareholder.

18


The following is a summary of our recent acquisition, disposition, financing and development activities:
Acquisitions and Dispositions
On November 19, 2018, we formed the Victory Abode Apartments, LLC ("VAA") joint venture with the Macquarie Group (“Macquarie”). In connection with the formation of VAA, we sold a 50% ownership interest in certain multifamily apartment projects to Macquarie for a $236.8 million cash payment, resulting in a gain on sale of assets of $154.1 million. We are an active buyerthen immediately transferred our respective ownership interests in the multifamily apartments ("VAA Portfolio") to VAA in exchange for a 50% voting interest / 49% profit participation interest ("Class A interest") in VAA and note payable (“Mezzanine Loan”) in accordance with the terms of a contribution agreement (the “Contribution”). Upon completion of the Contribution, VAA owned and sellercontrolled 52 multifamily apartments. VAA assumed all liabilities of real estate.

those properties, including mortgage debt insured by the Department of Housing and Urban Development (“HUD”).

On May 31, 2019, we sold Westwood, a 120 unit multifamily property in Mary Ester, Florida for $3.1 million, resulting in a loss on the sale of $0.1 million.
During the year ended December 31, 2019, the Companywe sold 105.1 acres of land for an aggregate sales price of $30.0 million and purchased 41.9 acres for an aggregate purchase price of approximately $4.6 million. In addition,
On March 5, 2020, we acquired a 49.2 acres land parcel in Kent, Ohio for $5.4 million that was funded by a $2.0 million cash payment and a $3.4 million note payable that bears interest at 10% and matures on November 13, 2024.
On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort Walton, Florida for $2.4 million, resulting in a gain on sale of $1.0 million.
On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port Arthur, Texas for $13.3 million, resulting in a gain on sale of $2.7 million.
On September 14, 2020, we sold Bridge View Plaza, a retail property in La Crosse, Wisconsin for $5.3 million, resulting in a gain on sale of $4.6 million.
During the Company acquired 1.27year ended December 31, 2020, we sold a total of 58.8 acres of land from our holdings in exchangeWindmill Farms for $12.9 million, in aggregate, resulting in gains on sale of $11.1 million. In addition, we sold 26.8 acres of land from our holdings in Mercer Crossing during the year ended December 31, 2020 for $15.8 million, resulting in a gain on sale of $10.3 million.
Financing Activities
On February 15, 2018, we issued $39.2 million in Series B bonds (See Note 11 in our consolidated financial statements) that bear interest at 6.80% and mature on July 31, 2025. The proceeds were used to fund development activity, pay down debt and other general corporate purposes.
On July 19, 2018, we issued an additional $19.8 million of Series B bonds (See Note 11 in our consolidated financial statements) in a private placement. We used the proceeds from the issuance to fund our development activities.
On July 28, 2019, we paid off the $41.5 million mortgage note receivablepayable on Browning Place, which resulted in a loss on early extinguishment of debt of $5.2 million. Concurrent with the repayment of the mortgage note payable, we issued $78.1 million of Series C bonds (See Note 11 in our consolidated financial statements), which are collateralized by Browning Place, bear interest at 4.65% and mature on January 31, 2023.
On November 30, 2020, issued $19.7 million in additional Series A bonds (See Note 11 in our consolidated financial statements) for $18.8 million in net proceeds. We used the proceeds to fund in part our bond payments that were due on January 30, 2021.
On December 3, 2020, we extended our $14.7 million loan from HSW Partners to June 17, 2021.
On March 2, 2021, we extended our $1.2 million loan on Athens to August 28, 2022.
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On March 4, 2021, we received a face valuecommitment from our lender to extend the maturity of $1.8 million.

We soldour $10.4 million loan on Windmill Farms until February 28, 2023 at a multifamily residential property, located in Mary Ester, Floridareduced interest rate of 5%.

Development Activities
During the year ended December 31, 2020, we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total sales pricecost of $3.1$17.2 million and recognized a loss on the sale of $0.08 million.

The Company purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0$14.2 million, from a third party land developer.

We advanced $21.4 million to several developers with the option to purchase the residential properties under constructionrespectively.

Our current developments projects at a future date, and sold fresh water district receivables related to infrastructure development work at Windmill Farms, located in Kaufman County, Texas for $12.0 million.

As of December 31, 2019, we owned 1,657 units2020, are as follow: (dollars in ten residential apartment communities,thousands)

PropertyLocationNo. of UnitsCosts to Date (1)Total Projected Costs (1)
AthensAthens, AL232 270 34,800 
Heritage McKinneyMcKinney, TX170 231 24,650 
Total402 $501 $59,450 
(1) Costs include construction hard costs, construction soft costs and seven commercial properties comprising of approximately 1.7 million rentable square feet. In addition, we own approximately 1,951 acres of land held for development. The Company currently owns income-producing properties and land in eight states.

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. The Company will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in some of its wholly-owned properties. When the Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The Company generates operating revenues primarily by leasing apartment units to residents and leasing office, retail and industrial space to commercial tenants.

The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

loan borrowing costs.

Since April 30, 2011, Pillar is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for TCI’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to ARL and IOR. As the contractual Advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. TCI has no employees. Employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement.

Effective since January 1, 2011, Regis manages our commercial properties and provides brokerage services.  Regis is entitled to receive a fee for its property management and brokerage services. Refer to Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage.”  The Company contracts with third-party companies to lease and manage our apartment communities. 

Critical Accounting Policies

We present

The preparation of our consolidated financial statements in accordanceconformity with United States generally accepted accounting principles in(“GAAP”) requires management to make estimates and assumptions that affect the United States (“GAAP”).

The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally allreported amounts of which are wholly-owned,assets and all entities in which we have a controlling interest.

For entities in which we have less than a controlling financial interest or entities where we are not deemed to beliabilities and disclosure of contingent assets and liabilities at the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our sharedate of the net earnings or lossesfinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Some of these entities are included in consolidated net income. TCI’s investment in ARL is accountedestimates and assumptions include judgments on revenue recognition, estimates for under the equity method.  

In accordance with the VIE guidance in ASC 810 “Consolidations,” the Company consolidated ten multifamily residential properties at December 31, 2019common area maintenance and nine at December 31, 2018, located throughout the United States ranging from 1,657 units to 1,489 units.  Assets totaling approximately $478 million and approximately $464 million at December 31, 2019 and 2018, respectively, are consolidated and included in “Real estate, at cost” on the balance sheet and are all collateral for their respective mortgage notes payable, none of which are recourse to the partnership in which they are in or to the Company. 

Real Estate

Upon acquisitions of real estate we assesstax accruals, provisions for uncollectible accounts, impairment of long-lived assets, the fair valueallocation of acquiredpurchase price between tangible and intangible assets, including land, buildings, tenant improvements, “above-”capitalization of costs and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilitiesfair value measurements. Our significant accounting policies are described in accordance with ASC Topic 805 “Business Combinations”, and allocate the purchase pricemore detail in Note 2—Summary of Significant Accounting Policies in our notes to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.

We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flowsconsolidated financial statements. However, the following policies are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

We record acquired “above-” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amountsdeemed to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.

critical.

Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

Transfers to or from our parent, ARL, or other related parties reflect a basis equal to the cost basis in the asset at the time of the sale. 

Depreciation and Impairment

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, property taxes, insurance, and other direct project costs incurred during the period of development.

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest - Capitalization of Interest” and ASC Topic 970 “Real Estate—General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. Fair value is determined by a recent appraisal, comparable based upon prices for similar assets, executed sales contract, a present value and/or a valuation technique based upon a multiple of earnings or revenue. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. If we determine that impairment has occurred, the affected assets must be reduced to their fair value. We did not record any impairment charges for the years ended December 31, 2019 and 2018.

Real Estate Assets Held for Sale

We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 2019 or 2018.

Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in Item 1 “Significant Real Estate Acquisitions/Dispositions and Financing.” Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt, if appropriate, and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets.”


Investment in Unconsolidated Real Estate Ventures

Except for ownership interests in variable interest entities, we account for our investments in unconsolidated real estate ventures under the equity method of accounting because the Company exercises significant influence over, but does not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on the Company’s balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, the Company consolidates those in which we are the primary beneficiary.

Recognition of Rental Income

Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with ASC Topic 805, we recognize rental revenue of acquired in-place “above-“and “below-market” leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments received pursuant to the terms of the individual commercial lease agreements.

Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.

Rental revenue for multi-family real estate property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are normally for periods of one year or less. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

Other revenue primarily consists of garage, parking, and utility-related fees; termination and late charge fees; non-refundable fees; and various other revenue amounts related to rental activities. Those revenue amounts are recognized when the service is provided.

Leases

The Company is party to leases as a lessor of residential apartment communities and commercial buildings. The Company adopted ASU 2016-02, Leases, as of January 1, 2019 using the prospective adoption approach, applying the provisions of the new standard to existing leases as of the date of adoption.

Lessor Considerations

The Company evaluated leases in which it is the lessor, which are comprised of residential apartment community leases. The accounting model for lessors did not significantly change as a result of ASU 2016-02, with the impacts primarily related to the accounting for sales-type and direct financing leases. The Company evaluated its residential leases determining that they continue to be operating leases. For lease agreements that provide for rent concessions and/or scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the non - cancelable term of the lease. The Company’s residential lease term is generally one year.

Additionally, for the Company’s residential leases, which are comprised of the lease component and common area maintenance as a non-lease component, the Company determined that (1) the leases are operating leases, (2) the lease component is the predominant component, and (3) that all components of its operating leases share the same timing and pattern of transfer.


Implementation Considerations and Impact

As discussed above, the Company elected to apply certain lessor practical expedients allowed under the standard including:

by class of underlying asset for residential leases, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component;

to exclude costs paid by lessees directly to third parties on behalf of the Company; and

to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from the lessee.

Revenue Recognition on the Sale of Real Estate

Sales and the associated gains or losses of real estate assets are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment—Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Non-performing Notes Receivable

We consider a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

Interest Recognition on Notes Receivable

We record interest income as earned in accordance with the terms of the related loan agreements.

Allowance for Estimated Losses

We assess the collectability of notes receivable on a periodic basis, the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. Refer to Note 5 “Notes and Interest Receivable” for details on our notes receivable.

Fair Value of Financial Instruments

We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.


The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:

Level 1 — Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2 — Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3     — Unobservable inputs that are significant to the fair value measurement.

Level 1—Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2—Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Unobservable inputs that are significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.


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Related parties

Parties

We apply ASC Topic 805, “Business Combination”Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing itsour own separate interests, or affiliates of the entity.

Results of Operations

The discussion of our results of operations is based on management’s review of operations, which is based on our segments. Our segments consist of apartments, commercial buildings, land and other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, acquired properties, and developed properties in the lease-up phase. The same property portfolio consists of properties that were held by us for the entire period for both years being compared. The acquired property portfolio consists of properties that we acquired but have not held for the entire period for both periods being compared. Developed properties in the lease-up phase consist of completed projects that are being leased-up. As we complete each phase of the project, we lease-up that phase and include those revenues in our continued operations. Once a developed property becomes leased-up (80% or more) and is held the entire period for both years under comparison, it is considered to be included in the same property portfolio. Income- producing properties that we have sold during the year are reclassified to discontinued operations for all periods presented. The other segment consists of revenue and operating expenses related to the notes receivable and corporate entities.

The following discussion is based on our Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 as included in Item 8. “Consolidated Financial Statements and Supplementary Data”. Continuing operations relates to income-producing properties that were held during those years as adjusted for sales in the subsequent years.

The following table shows the total number of income-producing properties, and other key financial measures as of December 31, 2019, 2018 and 2017:

  2019  2018  2017 
Residential properties (Company owned)  10   9   51 
Residential properties (total apartment units)  1,657   1,489   8,606 
Residential - average annual rental revenue per sqf $13.36  $6.53  $11.83 
VAA joint venture - residential properties  51   49    
VAA residential properties (total apartment units)  9,888   9,192    
VAA residential - average annual rental revenue per sqf $14.74  $12.83  $ 
Commercial properties (Company owned)  7   7   7 
Commercial properties - total sqf  1,697,890   1,697,890   1,697,890 
Commercial - average annual rental revenue per sqf $25.61  $19.80  $18.55 

Comparison of the year ended December 31, 2019 to the year ended December 31, 2018:

For the year ended December 31, 2019, we reported net loss applicable to common shares of $26.9 million or $3.09 per share compared to a net income applicable to common shares of $180.6 million or $20.71 per share for the year ended December 31, 2018.

Revenues

Rental and other property revenues were $47.9 million for the year ended December 31, 2019, compared to $121.0 million for the same period in 2018. The $73.1 million decrease is primarily due to a decrease in the amount of multifamily residential apartment buildings currently in our portfolio of ten as compared to forty-eight multifamily residential apartment buildings for the period January 1 through November 19, 2018 as a result of the deconsolidation of forty-nine residential apartment properties that were sold into the VAA Joint Venture on November 19, 2018. As the assets are now treated as unconsolidated investments, our share of rental revenues is part of income from unconsolidated investments in the current period and are no longer treated as rental income (Refer to Note 2). 

Expenses

Property operating expenses decreased by $34.2 million to $25.2 million for the year ended December 31, 2019 as compared to $59.4 million for the same period in 2018. The decrease in property operating expenses is primarily due to the deconsolidation of forty-nine residential apartment properties that were sold into the VAA Joint Venture during the fourth quarter of 2018 which resulted in a decrease in salary and related payroll expenses of $6.7 million, real estate taxes of $11.6 million, management fees paid to third parties of $2.6 million and other general property operating and maintenance expenses of $13.3 million.

Depreciation and amortization decreased by $9.4 million to $13.4 million during the year ended December 31, 2019 as compared to $22.8 million for the same period in 2018. This decrease is primarily due to the deconsolidation of the residential apartments in connection with our previous sale and contribution of our interests to the VAA Joint Venture.

General and administrative expense was $10.9 million for the year ended December 31, 2019, compared to $11.4 million for the same period in 2018. The decrease of $0.5 million in general and administrative expenses is the result of a decrease in fees paid to our Advisors of $0.4 million and other general and administrative expenses of $0.1 million.

Net income fee was $0.4 million for the year ended December 31, 2019. This represents a decrease of $0.2 million compared to the prior year net income fee of $0.6 million. The net income fee paid to Pillar is calculated at 7.5% of net income.

Advisory fees were $5.8 million for the year ended December 31, 2019. This represents a decrease of $4.9 million compared to the prior year advisory fees of $10.7 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

Other income (expense)

Interest income was $19.6 million for the year ending December 31, 2019, compared to $15.8 million for the same period in 2018. The increase of $3.8 was primarily due to an increase of $2.4 million in interest on receivable owed from our Advisors, and $1.4 in interest on notes receivable from other related parties.

Other income was $0.084 million for the year ending December 31, 2019, compared to $28.2 million for the same period in 2018. For the year ending December 31, 2019, we recognized a gain of approximately $8.1 million as a result of deferred income associated with the sale of property in previous years, received cash proceeds of $0.2 million from the collection of tax increment incentives from the city of Farmers Branch, Texas related to infrastructure development work at Mercer Crossing, and recognized miscellaneous income of approximately $1.1 million, offset by general expenses of approximately $9.3 million. For the same period a year ago, we received insurance proceeds of $7.6 million on Mahogany Run Golf Course, recognized a gain of $17.6 million as a result of deferred income related to the sale of land, and recognized miscellaneous income of approximately $2.2 million.


Mortgage and loan interest expense was $31.8 million for the year ending December 31, 2019, compared to $58.9 million for the same period in 2018. The decrease of $27.1 million is due to the deconsolidation of residential apartment properties into the VAA Joint Venture which were encumbered by mortgage debt.

Foreign currency transaction was a loss of $15.1 million for the year ending December 31, 2019, as compared to a gain of $12.4 million for the same period in 2018. The loss is due to the unfavorable exchange rate between the Israel Shekels and the U.S. Dollar related to our Israel Shekels denominated bonds and the increase in our bonds obligations during the year ended December 31, 2019 as compared to the same period a year ago.

Loss on debt extinguishment was $5.2 million in 2019 with no comparable amount in 2018. The loss is the result of debt borrowing costs write-off of $1.4 million and prepayment penalty of approximately $3.9 million associated with the payment of $41.5 million of mortgage debt related to one of our commercial building.

Loss from unconsolidated investments was a net of $2.8 million for the year ending December 31, 2019 as compared to net earnings of $1.1 million for the year ended December 31, 2018. The loss from unconsolidated investments in 2019, was driven primarily from our share in the losses reported by our joint venture VAA of $2.8 million (Refer to Note 2).

Loss from the sale of income-producing property increased for the year ending December 31, 2019 as compared to the same period a year ago. During the year ended December 31, 2019, we sold a multifamily residential property for a sales price of $3.1 million and recorded a loss of $0.08 million. During year ended December 31, 2018, we sold six multifamily residential properties at an aggregate sales price of $8.5 million and recorded no gain or loss from the sale.

Gain on land sales decreased by $2.5 million for the year ending December 31, 2019, to $14.9 million as compared to $17.4 million for the same period a year ago. During the year ending December 31, 2019, we sold 105.1 acres of land for an aggregate sales price of $30.0 million and recorded a gain of $14.9 million.  For the same period a year ago, we sold approximately 112.2 acres of land for an aggregate sales price of $43.3 million and recorded a gain of $17.4 million.

Comparison of the year ended December 31, 2018 to the year ended December 31, 2017:

For the year ended December 31, 2018, we reported net income applicable to common shares of $180.6 million or $20.71 per share compared to a net loss applicable to common shares of $16.7 million or ($1.92) per share for the year ended December 31, 2017. The current year net income applicable to common shares includes a gain on the formation of the joint venture VAA of $154.1 million. Current year net income also includes gain on sales of land of $17.4 million and no gain on sales of income-producing properties, compared to the prior year net loss which included gain on sales of income producing properties of $9.8 million and gain on land sales of $4.9 million.

Revenues

Rental and other property revenues were $121.0 million for the year ended December 31, 2018. This represents a decrease of $4.2 million, as compared to the prior year revenues of $125.2 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

Expenses

Property operating expenses were $59.4 million for the year ended December 31, 2018. This represents a decrease of $3.7 million, compared to the prior year operating expenses of $63.1 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 


Depreciation and amortization expenses were $22.8 million for the year ended December 31, 2018. This represents a decrease of $2.8 million compared to prior year depreciation of $25.6 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

General and administrative expenses were $11.4 million for the year ended December 31, 2018. This represents an increase of $5.1 million compared to the prior year expenses of $6.3 million. The increase in general and administrative expenses was due primarily to an increase in fees paid to our Advisors of approximately $1.5 million, general fees of approximately $1.5 million associated with finalizing the formation of the joint venture, legal and regulatory fees of $0.8 million and general and professional fees of approximately $1.0 million.

Net income fee was $0.6 million for the year ended December 31, 2018. This represents an increase of $0.3 million compared to the prior year net income fee of $0.3 million. The net income fee paid to Pillar is calculated at 7.5% of net income.

Advisory fees were $10.7 million for the year ended December 31, 2018. This represents an increase of $0.7 million compared to the prior year advisory fees of $10.0 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

Other income (expense)

Interest income was $15.8 million for the year ending December 31, 2018 compared to $13.9 million for the year ended December 31, 2017 for an increase of $1.9 million. This increase was primarily due to an increase of $2.7 million in interest on receivable owed from our Advisors, offset by a decrease of $0.8 in interest on notes receivable from other related parties.

Other income was $28.2 million and $0.6 million for the years ended December 31, 2018 and 2017, respectively. The increase of $27.6 million was primarily due to a $17.6 million gain recognized in September 2018 for deferred income associated with the sale of assets, as well as income of approximately $7.6 million from insurance proceeds on Mahogany Run Golf Course.

Mortgage and loan interest expense was $58.9 million for the year ended December 31, 2018. This represents a decrease of $1.0 million compared to the prior year expense of $59.9 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

No gain on sales of income producing properties was recognized during the year ended December 31, 2018. Gain on sale of income-producing properties was $9.8 million for the year ended December 31, 2017, attributable to the recognition of deferred gain.

Gain on land sales was $17.4 million and $4.9 million for the years ended December 31, 2018 and 2017, respectively. The increase of approximately $12.5 million was primarily due to sales of land at Mercer Crossing recognized in 2018.

Gain on disposition of 50% interest in VAA was $154.1 million for the year ended December 31, 2018. There was no such gain in prior years, the gain was the result of the contribution of fifty-two properties to the joint venture VAA.

Liquidity and Capital Resources

General

Our principal liquidity needs are:

fund normal recurring expenses;

meet debt service and principal repayment obligations including balloon payments on maturing debt;

fund capital expenditures, including tenant improvements and leasing costs;

fund development costs not covered under construction loans; and

fund possible property acquisitions.

Our principal sources of cash have been and will continue to be:

property operations;

proceeds from land and income-producing property sales;

collection of mortgage notes receivable;

collections of receivables from related companies;

refinancing of existing mortgage notes payable; and

additional borrowings, including mortgage notes payable, and lines of credit.

It is important to realize that the current status of the banking industry has had a significant effect on our industry. The banks’ willingness and/or ability to originate loans affects our ability to buy and sell property, and refinance existing debt. We are unable to foresee the extent and length of this down-turn. A continued and extended decline could materially impact our cash flows. We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans, which are converted to traditional mortgages upon completion of the project.

We may also issue additional equity securities, including common stock. Management anticipates that our cash and cash equivalents as of December 31, 2019, along with cash that will be generated in 2020 from notes and interest receivables, will be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet its liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of the Company’s current maturity obligations.

Management reviews the carrying values of TCI’s properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. The property review generally includes: (1) selective property inspections; (2) a review of the property’s current rents compared to market rents; (3) a review of the property’s expenses; (4) a review of maintenance requirements; (5) a review of the property’s cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The note receivable review includes an evaluation of the collateral property securing such note.

Cash Flow Summary

The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands):

  Year Ended December 31,    
  2019  2018  Incr /(Decr) 
Net cash (used in) operating activities $(35,747) $(181,187) $145,440 
Net cash (used in) provided by investing activities $(9,598) $147,625  $(157,223)
Net cash provided by financing activities $22,041  $51,785  $(29,744)

The primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash from operating activities is from rental income on properties.

Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties.

Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. During the year ended December 31, 2019, we advanced $21.4 million toward various notes receivable, purchased land for development for $3.4 million, and invested approximately $33.7 million for the construction and development of new properties and improvement of income producing properties. For the year ended December 31, 2018, we advanced $16.8 million toward various notes receivable and invested $85.1 million for development of new properties and improvement of income producing properties. 

Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the year ended December 31, 2019, we received aggregate sales proceeds of $27.3 million from the sale of 105.1 acres of land and recorded a gain of $15.1 million, received $13.9 in payments from related party note receivables, and sold a residential property for which we received cash proceeds of $1.3 million and a plot of land valued at $1.8 million. For the year ended December 31, 2018, we received aggregate sales proceeds of $11.9 million from the sale of approximately 112 acres of land and recorded a gain on the sale of $17.4 million. In addition, we received aggregate sale proceeds of $4.9 million from the sale of seven income producing properties and a golf course, $236.8 million from the formation of the joint venture with Macquarie, and collected $6.5 million from a related party note receivable.

Our primary sources of cash from financing activities are from proceeds on notes payables. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable.

For the year ended December 31, 2019, the increase in cash flow from financing activities was due to proceeds from borrowings of $25.7 million, and $78.1 million from the sale of nonconvertible Series C Bonds by Southern, offset by payments to our notes payable of $51.9 million and bond payments of $21.7 million.

For the year ended December 31, 2018, the increase in cash flow from financing activities was due primarily to proceeds from borrowings of $123.3 million, and proceeds received from the sale of nonconvertible Series B Bonds by Southern of $59.2 million, offset by payments to our notes payable of $124.6 million.

Equity Investments

TCI has from time to time purchased shares of IOR and ARL. The Company may purchase additional equity securities of IOR and ARL through open market and negotiated transactions to the extent TCI’s liquidity permits. Equity securities of ARL and IOR held by TCI may be deemed “restricted securities” under Rule 144 of the Securities Act of 1933 (“Securities Act”). Accordingly, TCI may be unable to sell such equity securities other than in a registered public offering or pursuant to an exemption under the Securities Act for a one-year period after they are acquired. Such restrictions may reduce TCI’s ability to realize the full fair value of such investments if TCI attempted to dispose of such securities in a short period of time.

TCI also holds a voting and profit participation right of 50% and 49%, respectively in VAA. VAA actively participates in the development and/or acquisitions of Class A multi-family assets.  


Contractual Obligations

The following table represents our contractual obligations at December 31, 2019 (in thousands):

  Total  2020  2021  2022  2023  2024  Thereafter 
Notes and interest payable (1) $334,132  $36,592  $63,775  $18,920  $41,951  $5,401  $167,493 
Bonds and interest payable (1)  276,642   37,317   47,573   45,057   120,324   13,599   12,772 
Total $610,774  $73,909  $111,348  $63,977  $162,275  $19,000  $180,265 

(1)TCI’s long-term debt may contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the note to become due immediately.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, TCIwe may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.

Management is

We are not aware of any environmental liability relating to the above matters that would have a material adverse effect on TCI’sour business, assets or results of operations.

Inflation

The effects of inflation on TCI’sour operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI’sour earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.

Results of Operations
Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting our properties described above, including those related to the Lease-Up Properties and the Disposition Properties (each as defined below).
For purposes of the discussion below, we define "Same Properties" as those properties that are substantially leased-up and in operation for the entirety of both periods of the comparison. Non-Same Properties for comparison purposes include those properties that have been recently constructed or leased-up (“Lease-up Properties”) and properties that have been disposed of ("Disposition Properties"). A developed property is considered leased-up, when it achieves occupancy of 80% or more.We move a property in and out of Same Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison. Accordingly, the Same Properties consist of all properties, excluding the Lease-up Properties and the Disposition Properties for the periods of comparison.
For the comparison of the year ended December 31, 2020 to the year ended December 31, 2019, the Lease-up Properties are Forest Grove, Parc at Denham Springs Phase II and Sugar Mill Phase III; and the Disposition Properties are Bridge View Plaza, Farnham Park and Villager.






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The following table shows the total number of income-producing properties, and other key financial measures as of December 31, 2020 and 2019:
For the Years Ended December 31,
20202019Variance
Multifamily Segment
   Revenue$14,686 $13,517 $1,169 
   Operating expenses(8,482)(8,824)342 
6,204 4,693 1,511 
Commercial Segment
   Revenue37,223 32,714 4,509 
   Operating expenses(15,878)(16,389)511 
21,345 16,325 5,020 
Segment operating  income27,549 21,018 6,531 
Other non-segment items of income (expense)
   Depreciation and amortization(14,755)(13,379)(1,376)
   General, administrative and advisory(17,935)(17,114)(821)
   Interest, net(10,714)(12,209)1,495 
   Loss on extinguishment of debt— (5,219)5,219 
  (Loss) gain on foreign currency transactions(13,378)(15,108)1,730 
   Gain sale or write down of assets32,107 14,809 17,298 
   Income (loss) from joint ventures(519)(2,758)2,239 
   Other income5,109 3,823 1,286 
Net income (loss)$7,464 $(26,137)$33,601 
Comparison of the year ended December 31, 2020 to the year ended December 31, 2019:
Our $33.6 million increase in net income during the year ended December 31, 2020 is primarily attributed to the following:
The $1.5 million increase in operating profits in our multifamily segment is primarily due a $2.1 million increase at our Lease-Up Properties offset in part by a decrease at our Disposition Properties. The increase in profit at our Lease-Up Properties is due to an increase in occupancy at Overlook at Allenville Phase II, Parc at Denham Springs Phase II and Forest Grove in 2020.
The $5.0 million increase in operating profits in our commercial segment is primarily due to a $6.0 million lease termination payment at Browning Place offset in part by a decrease in rental revenue at our Same Properties due to a decline in occupancy. The lease termination payment relates to a former tenant that has been replaced by a new tenant at increased rents.
The $5.2 million loss on extinguishment of debt in 2019 is due to the early extinguishment of our mortgage note payable on Browning Place (See "Financing Activities" in Management's Overview).
The $17.3 million increase in gain on sale of assets is due to an increase of $10.3 million sales of land; the sale of Bridge View Plaza, Farnham Park and Villager in 2020 (See "Acquisitions and Dispositions" in Management's Overview); and the recognition of $3.0 million in gain in 2020 from sales that had been previously deferred.
The $2.2 million decrease in loss from joint ventures is due to the increased in occupancy of the various lease-up properties at VAA.

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Comparison of the year ended December 31, 2019 to the year ended December 31, 2018:
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 for a discussion of our results of operations for the year ended December 31, 2019.
Liquidity and Capital Resources
Our principal sources of cash have been, and will continue to be, property operations; proceeds from land and income-producing property sales; collection of mortgage notes receivable; collections of receivables from related companies; refinancing of existing mortgage notes payable; and additional borrowings, including mortgage notes and bonds payable, and lines of credit.
Our principal liquidity needs are to fund normal recurring expenses; meet debt service and principal repayment obligations including balloon payments on maturing debt; fund capital expenditures, including tenant improvements and leasing costs; fund development costs not covered under construction loans; and fund possible property acquisitions.
We anticipates that our cash and cash equivalents as of December 31, 2020, along with cash that will be generated in 2021 from notes and interest receivables, will be sufficient to meet all of our cash requirements. We intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet our liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of our current maturity obligations.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands):
Year Ended December 31, 
20202019Incr /(Decr)
Net cash provided by (used in) operating activities$5,631 $(35,747)$41,378 
Net cash provided by (used in) investing activities$381 $(9,598)$9,979 
Net cash (used in) provided by financing activities$(2,306)$22,041 $(24,347)
The increase in cash from operating activities is primarily due to the $35.3 million decrease in receivable from related parties in 2019.
The increase in cash provided by investing activities is primarily due to a $16.2 million decrease in development and renovation of real estate and a $12.4 million increase in proceeds from sale of assets offset in part by a $11.6 million decrease in originations and advances on notes receivable and a $9.4 million decrease in collection of notes receivable.
The increase in cash used in financing activities is primarily due to a $73.1 million decrease in proceeds from mortgages, notes and bonds payable offset in part by a $42.0 million decrease in payments of mortgages, notes and bonds payable. The decrease in proceeds and payment on mortgage, notes and bonds payable is due to the refinancing of Browning Place in 2019 (See "Financing Activities" in Management's Overview).
Funds From Operations ("FFO")
We use FFO in addition to net income to report our operating and financial results and considers FFO and FFO-diluted as supplemental measures for the real estate industry and a supplement to GAAP measures. The National Association of Real Estate Investment Trusts ("Nareit") defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of properties, plus real estate related depreciation and amortization, impairment write-downs of real estate and write-downs of investments in an affiliate where the write-downs have been driven by a decrease in the value of real estate held by the affiliate and after adjustments for unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO on the same basis. We also presents FFO excluding the impact of the effects of foreign currency translation.
23


FFO and FFO on a diluted basis are useful to investors in comparing operating and financial results between periods. This is especially true since FFO excludes real estate depreciation and amortization, as we believe real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. We believe that such a presentation also provides investors with a meaningful measure of our operating results in comparison to the operating results of other real estate companies. In addition, we believe that FFO excluding gain (loss) from foreign currency transactions provide useful supplemental information regarding our performance as they show a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our results.
We believe that FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP, and is not indicative of cash available to fund all cash flow needs. We also caution that FFO, as presented, may not be comparable to similarly titled measures reported by other real estate companies.
We compensate for the limitations of FFO by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of FFO and a reconciliation of net income to FFO and FFO-diluted. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.
The following reconciles our net income attributable to FFO and FFO-basic and diluted, excluding (loss) gain from foreign currency transactions for the years ended December 31, 2020, 2019 and 2018 (dollars and shares in thousands):
For the Year Ended
December 31,
202020192018
Net income (loss) attributable to the Company$6,669 $(26,920)$180,550 
Depreciation and amortization on consolidated assets14,755 13,379 22,761 
Gain on sale or write down of assets(32,107)(14,809)(171,530)
Gain on sale of land23,383 14,889 17,404 
Depreciation and amortization on unconsolidated joint ventures at pro rata share3,291 238 (1,863)
FFO-Basic and Diluted15,991 (13,223)47,322 
Loss on extinguishment of debt— 5,219 — 
Loss (gain) on foreign currency transaction13,378 15,108 (12,399)
FFO-adjusted$29,369 $7,104 $34,923 
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TCI’s primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates

Optional and maturing debt that has to be refinanced. TCI’s future operations, cash flow and fair values of financial instruments are also partially dependent on the then existing market interest rates and market equity prices.

As of December 31, 2019, our outstanding notes payable consisted of approximately $253.1 million, out of which $249.2 million were notes with fixed interest rates and $3.9 million represented a note with a variable interest rate of 9.75%. Our overall weighted average interest rate at December 31, 2019 and 2018 was 4.9% and 7.1%, respectively.

TCI’s interest rate sensitivity position is managed by the capital markets department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. TCI’s earnings are affected as changes in short-term interest rates affect its cost of variable-rate debt and maturing fixed-rate debt.

If market interest rates for our variable-rate debt average 100 basis points more in 2020 than they did during 2019, TCI’s interest expense would increase and net income would decrease by $0.036 million. This amount is determined by considering the impact of hypothetical interest rates on TCI’s borrowing cost. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCI’s financial structure.

included.

The following table contains exposures at December 31, 2019. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level (dollars in thousands):

  2020  2021  2022  2023  2024  Thereafter  Total 
Note Receivable                            
Fixed interest rate - fair value                         $114,182 
Instrument’s maturities $54,807  $33,328  $5,096  $  $  $20,951  $114,182 
Interest  10,442   6,833   3,126   2,514   2,514   2,514  $27,943 
Weighted Average Rate  6.59%  11.12%  12.00%  12.00%  12.00%  12.00%    
                             
Notes Payable:                            
Variable Rate - fair value                         $3,908 
Instrument’s maturities $3,908  $  $  $  $  $  $347 
Interest  347                  2,467 
Average interest rate (1)  9.75%                   
                             
Fixed interest rate - fair value                         $249,207 
Instrument’s maturities $22,074  $55,393  $13,437  $36,770  $1,995  $119,538  $249,207 
Interest  10,263   8,382   5,483   5,181   3,406   47,954  $80,669 
Average interest rate  8.73%  5.90%  3.99%  5.22%  3.63%  3.74%    

(1) Interest rates on variable rate notes payable are equal to the variable rates in effect on December 31, 2019.



ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

24


ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS



25


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of and

Stockholders of Transcontinental Realty Investors, Inc.

Dallas, Texas

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2020, and the related notes and schedules collectively(collectively referred to as the “consolidatedconsolidated financial statements.”statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of TranscontinentalAmerican Realty Investors, Inc. as of December 31, 20192020 and 20182019 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with U.S.accounting principles generally accepted accounting principles.

in the United States of America.

Basis of Opinion

These consolidated financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of investment in real estate
Description of the Matter
The Company’s net investment in real estate totaled $377.3 million as of December 31, 2020. As discussed in Note 2 to the consolidated financial statements, the Company periodically assesses whether there has been any impairment in the carrying value of its properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. Impairment is recognized on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows for a real estate asset are less than its carrying amount, at which time the real estate asset is written down to its estimated fair value.

26


Auditing the Company's impairment assessment for real estate assets was complex because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment. Our evaluation of management’s identification of indicators of impairment included our related assessment of such indicators, either individually or in combination, in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the real estate asset.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s controls over the Company’s real estate asset impairment assessment process. Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment existed for the Company’s real estate assets. Our procedures included obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments, including searching for significant tenant write-offs or upcoming lease expirations with little prospects for replacement tenants. We also searched for any significant declines in operating results of a real estate asset due that could be a triggering event or an indicator of potential impairment.
Collectability of Notes Receivable
Description of the Matter
At December 31, 2020, the Company had notes receivable in the amount of $123.5 million. The Company performs an assessment as to whether or not substantially all of the amounts due under these notes receivable is deemed probable of collection. Subsequently, for notes where the Company concludes that it is not probable that it will collect substantially all payments due under the note, the Company creates an allowance for any amounts not probable of collection.
Auditing the Company's collectability assessment is complex due to the judgment involved in the Company’s determination of the collectability of these notes. The determination involves consideration of the terms of the note, whether or not the note is currently performing, and any security for the note.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company's controls over notes receivable and their collectability assessment. Our testing included among other things, confirming selected notes receivable, determining if the notes were performing according to their terms and testing the Company’s evaluation of the underlying security interest if necessary.
Revenue Recognition (straight-line) for commercial tenants
Description of the Matter
During 2020, the Company recognized office rental revenues and tenant recoveries of $37.2 million and recorded tenant receivables of $.1 million and deferred rent receivables of $3.2 million at December 31, 2020. As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from commercial properties on a straight-line basis over the terms of the related leases.
Auditing the Company's straight-line calculations is complex due to the free rent periods, lease amendments and escalation clauses contained in many of the leases.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company's controls over office rental revenues and tenant recoveries, including controls over management’s calculation of the straight-line calculation and deferred rent receivable. To test the straight-line rent revenue and deferred rent receivable, we performed audit procedures that included, among others, evaluating the data and assumptions used in determining the calculation and agreeing amounts in the calculation to copies of lease agreements. In addition, we tested the completeness and accuracy of the data that was used in management’s straight-line rent and deferred rent receivable calculation.
27


Emphasis of Liquidity

As described in the Note 17, Transcontinental Realty Investors, Inc.’s management intends to sell landincome-producing assets, refinance real estate and income-producing properties and refinance or extend debtobtain additional borrowings primarily secured by real estate to meet the Company’s liquidity needs.

requirements.

Supplemental Information

The supplemental information contained in Schedules III and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Security and Exchange Commission’s rules. In our opinion, the supplemental information is fairly stated, in all material respects, the financial date required to be set forth therein in relation to the financial statements as a whole.

FARMER, FUQUA & HUFF, PC

Richardson, Texas

March 30, 2020

24, 2021

We have served as the Company’s auditor since 2004.

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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

  December 31, 
  2019  2018 
       
  (dollars in thousands, except share and par value amounts) 
Assets      
Real estate, at cost $469,997  $461,718 
Real estate subject to sales contracts at cost  7,966   2,014 
Less accumulated depreciation  (90,173)  (79,228)
Total real estate  387,790   384,504 
         
Notes and interest receivable (including $57,260 in 2019 and $51,945 in 2018 from related parties)  120,986   83,541 
Cash and cash equivalents  51,179   36,358 
Restricted cash  32,082   70,207 
Investment in VAA  59,148   68,399 
Investment in other unconsolidated investees  22,632   22,172 
Receivable from related parties  141,541   133,642 
Other assets  50,560   63,557 
Total assets $865,918  $862,380 
         
Liabilities and Shareholders’ Equity        
Liabilities:        
Notes and interest payable $246,546  $277,237 
Bonds and bond interest payable  229,722   158,574 
Deferred revenue (including $9,468 in 2019 and $17,522 in 2018 to related parties)  9,468   17,522 
Deferred tax liability     2,000 
Accounts payable and other liabilities (including $935 in 2019 and $3 in 2018 to related parties)  26,115   26,646 
Total liabilities  511,851   481,979 
         
Shareholders’ equity:        
Common stock, $0.01 par value, authorized 10,000,000 shares; issued 8,717,967 shares in 2019 and 2018; outstanding 8,717,767 shares in 2019 and 2018  87   87 
Treasury stock at cost, 200 shares in 2019 and 2018  (2)  (2)
Paid-in capital  257,853   258,050 
Retained earnings  74,665   101,585 
Total Transcontinental Realty Investors, Inc. shareholders’ equity  332,603   359,720 
Non-controlling interest  21,464   20,681 
Total shareholders’ equity  354,067   380,401 
Total liabilities and shareholders’ equity $865,918  $862,380 

(dollars in thousands, except par value amounts)
December 31,
20202019
Assets
Real estate$377,383 $387,790 
Cash and cash equivalents36,761 51,179 
Restricted cash50,206 32,082 
Notes receivable (including $62,448 and $53,027 at December 31, 2020 and 2019, respectively, from related parties)123,556 112,357 
Investment in unconsolidated joint ventures51,786 81,780 
Receivable from related parties159,777 141,541 
Other assets79,613 59,189 
Total assets$879,082 $865,918 
Liabilities and Equity
Liabilities:
Mortgages and other notes payable$236,069 $241,527 
Bonds payable237,888 223,265 
Accounts payable and other liabilities (including $930 and $935 at December 31, 2020 and 2019, respectively, to related parties)26,729 30,361 
Interest payable7,550 7,230 
Deferred revenue9,315 9,468 
Total liabilities517,551 511,851 
Equity:
Shareholders' equity
Common stock, $0.01 par value, 10,000,000 shares authorized; 8,639,516 shares issued, 8,639,316 outstanding87 87 
Treasury stock at cost, 200 shares(2)(2)
Additional paid-in capital260,388 257,853 
Retained earnings81,334 74,665 
Total shareholders’ equity341,807 332,603 
Noncontrolling interest19,724 21,464 
Total equity361,531 354,067 
Total liabilities and equity$879,082 $865,918 
The accompanying notes are an integral part of these consolidated financial statements.


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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

  For the Years Ended December 31, 
  2019  2018  2017 
  (dollars in thousands, except per share amounts) 
Revenues:         
Rental and other property revenues (including $841, $767 and $839 for the years ended 2019, 2018 and 2017, respectively, from related parties) $47,970  $120,955  $125,233 
             
Expenses:            
Property operating expenses (including $991, $943 and $929 for the years ended 2019, 2018 and 2017, respectively, from related parties)  25,213   59,420   63,056 
Depreciation and amortization  13,379   22,761   25,558 
General and administrative (including $4,144, $4,578 and $3,120 for the years ended 2019, 2018 and 2017, respectively, from related parties)  10,951   11,359   6,269 
Net income fee to related party  357   631   250 
Advisory fee to related party  5,806   10,663   9,995 
Total operating expenses  55,706   104,834   105,128 
Net operating (loss) income  (7,736)  16,121   20,105 
             
Other income (expenses):            
Interest income (including $17,413, $13,132 and $11,485 for the years ended 2019, 2018 and 2017, respectively, from related parties)  19,607   15,793   13,862 
Other income  84   28,150   625 
Mortgage and loan interest (including $1,999, $423 and $1,174 for the year ended 2019, 2018 and 2017, respectively, from related parties)  (31,816)  (58,872)  (59,944)
Foreign currency transaction (loss) gain  (15,108)  12,399   (4,536)
Loss on debt extinguishment  (5,219)      
Equity (loss) earnings from VAA  (2,774)  44    
Earnings from other unconsolidated investees  16   1,085   26 
Total other expenses  (35,210)  (1,401)  (49,967)
(Loss) income before gain on disposition of 50% interest in VAA, gain on land sales, non-controlling interest, and taxes  (42,946)  14,720   (29,862)
             
Gain on disposition of 50% interest in VAA     154,126    
(Loss) gain on sale of income producing properties  (80)     9,842 
Gain on land sales  14,889   17,404   4,884 
Net (loss) income from continuing operations before taxes  (28,137)  186,250   (15,136)
Income tax expense - current     (1,210)  (180)
Income tax benefit (expense) - deferred  2,000   (2,000)   
Net (loss) income from continuing operations  (26,137)  183,040   (15,316)
Net (loss) income  (26,137)  183,040   (15,316)
Net (income) attributable to non-controlling interest  (783)  (1,590)  (499)
Net (loss) income attributable to Transcontinental Realty Investors, Inc.  (26,920)  181,450   (15,815)
Preferred dividend requirement     (900)  (900)
Net (loss) income applicable to common shares $(26,920) $180,550  $(16,715)
             
Earnings per share - basic            
Net (loss) income from continuing operations $(3.00) $20.89  $(1.86)
Net (loss) income applicable to common shares $(3.09) $20.71  $(1.92)
             
Earnings per share - diluted            
Net (loss) income from continuing operations $(3.00) $20.89  $(1.86)
Net (loss) income applicable to common shares $(3.09) $20.71  $(1.92)
             
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767 
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767 
Amounts attributable to Transcontinental Realty Investors, Inc.            
Net (loss) income from continuing operations $(26,137) $183,040  $(15,316)
Net (loss) income applicable to common shares $(26,920) $180,550  $(16,715)

(Dollars in thousands, except per share amounts)
For the Years Ended December 31,
202020192018
Revenues:
Rental revenues (including $1,083, $841 and $737 for 2020, 2019 and 2018, respectively, from related parties)$51,909 $46,231 $113,944 
Other income5,113 1,823 35,161 
   Total revenue57,022 48,054 149,105 
Expenses:
Property operating expenses (including $990, $991 and $943 for 2020, 2019 and 2018, respectively, from related parties)24,360 25,213 59,420 
Depreciation and amortization14,755 13,379 22,761 
General and administrative (including $3,869, $4,144 and $4,578 for 2020, 2019 and 2018, respectively, from related parties)9,287 8,704 11,359 
Advisory fee to related party8,648 8,410 11,294 
   Total operating expenses57,050 55,706 104,834 
   Net operating (loss) income(28)(7,652)44,271 
Interest income (including $19,515, $17,413 and $13,132 for 2020, 2019 and 2018, respectively, from related parties)18,660 19,607 15,793 
Interest expense (including $1,581, $1,999 and $423 for the year ended 2020, 2019 and 2018, respectively, from related parties)(29,374)(31,816)(58,872)
(Loss) gain on foreign currency transactions(13,378)(15,108)12,399 
Loss on extinguishment of debt(5,219)
Equity in (loss) income from unconsolidated joint ventures(519)(2,758)1,129 
Gain on sale or write-down of assets, net32,107 14,809 171,530 
Income tax provision(4)2,000 (3,210)
Net income (loss)7,464 (26,137)183,040 
Net (income) attributable to noncontrolling interest(795)(783)(1,590)
Net income (loss) attributable to the Company6,669 (26,920)181,450 
Preferred dividend(900)
Net income (loss) attributable to common shares$6,669 $(26,920)$180,550 
Earnings per share - basic
Basic and diluted$0.77 $(3.09)$20.71 
Weighted average common shares used in computing earnings per share
Basic and diluted8,639,316 8,717,767 8,717,767 
The accompanying notes are an integral part of these consolidated financial statements.

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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Three Years Ended December 31, 2019

2020

(audited, dollars in thousands, except share amounts)

  Total  Comprehensive  Common Stock  Treasury  Paid-in  Retained  Non-controlling 
  Equity  Income (Loss)  Shares  Amount  Stock  Capital  Earnings  Interest 
Balance, December 31, 2016 $224,477  $(64,852)  8,717,967  $87  $(2) $269,849  $(64,050) $18,592 
Net loss  (15,316)  (15,316)              (15,815)  499 
Series D preferred stock dividends (9.0% per year)  (900)              (900)      
Balance, December 31, 2017 $208,261  $(80,168)  8,717,967  $87  $(2) $268,949  $(79,865) $19,091 
Net income  183,040   181,450               181,450   1,590 
Series D preferred stock dividends (9.0% per year)  (900)              (900)      
Redemption of Series D preferred stock  (10,000)              (9,999)      
Balance, December 31, 2018 $380,401  $101,282   8,717,967  $87  $(2) $258,050  $101,585  $20,681 
Distribution to equity partner  (197)              (197)      
Net loss  (26,137)  (26,920)              (26,920)  783 
Balance, December 31, 2019 $354,067  $74,362   8,717,967  $87  $(2) $257,853  $74,665  $21,464 

Common StockTreasury
Stock
Paid-in
Capital
Retained
Earnings
Total Shareholders' EquityNoncontrolling
Interest
Total Equity
Balance, January 1, 2018$87 $(2)$268,950 $(79,865)$189,170 $19,091 $208,261 
Net income— — — 181,450 181,450 1,590 183,040 
Series D preferred stock dividends (9% per year)— — (900)— (900)— (900)
Redemption of Series D preferred stock— — (10,000)— (10,000)— (10,000)
Balance, December 31, 201887 (2)258,050 101,585 359,720 20,681 380,401 
Net loss— — — (26,920)(26,920)783 (26,137)
Distribution to equity partner— — (197)— (197)— (197)
Balance, December 31, 201987 (2)257,853 74,665 332,603 21,464 354,067 
Net income— — — 6,669 6,669 795 7,464 
Adjustment to noncontrolling interest— — 2,535 — 2,535 (2,535)
Balance, December 31, 2020$87 $(2)$260,388 $81,334 $341,807 $19,724 $361,531 
The accompanying notes are an integral part of these consolidated financial statements.


31



TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  Year Ended December 31, 
  2019  2018  2017 
  (dollars in thousands)    
Cash Flow From Operating Activities:            
Net (loss) income $(26,137) $183,040  $(15,316)
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:            
Gain on disposition of 50% inerest in VAA     (154,126)   
Loss (gain) on sale of income-producing properties  80      (9,842)
Foreign currency transaction loss (gain)  15,108   (12,399)  4,536 
Loss on debt extinguishment  5,219       
Gain on sale of land  (14,889)  (17,404)  (4,884)
Depreciation and amortization  13,379   22,761   25,558 
Amortization of deferred borrowing costs  662   4,994   3,574 
Amortization of bond issuance costs  1,544   2,994   971 
Loss (earnings) from joint venture  2,774   (44)   
Earnings from other unconsolidated investees  (16)  (1,085)  (26)
(Increase) decrease in assets:            
Accrued interest receivable  (8,916)  (22,601)  (668)
Other assets  (1,149)  (105,531)  (1,433)
Prepaid expense  10,237   19,124   (5,661)
Rent receivables  626   (3,213)  543 
Related party receivables  (35,257)  (14,995)  (9,972)
Increase (decrease) in liabilities:            
Accrued interest payable  2,349   (2,307)  4,573 
Other liabilities  (1,361  (80,395)  (17,027)
Net cash (used in) operating activities  (35,747)  (181,187)  (25,074)
             
Cash Flow From Investing Activities:            
Proceeds from disposition of 50% interest in VAA     236,752    
Proceeds from notes receivable  13,862   6,541   26,230 
Originations or advances on notes receivable  (21,434)  (16,801)  (16,420)
Acquisition of land held for development  (3,422)      
Acquisition of income-producing properties     (10,558)  (37,044)
Distribution from equity investee  6,701       
Distributions to equity partner  (197)      
Proceeds from sale of income-producing properties  1,296   4,889    
Proceeds from sale of land  27,326   11,857   6,301 
Improvement of income-producing properties  (5,257)  (3,688)  (64,443)
Construction and development of new properties  (28,473)  (81,367)  (12,936)
Net cash (used in) provided by investing activities  (9,598)  147,625   (98,312)
             
Cash Flow From Financing Activities:            
Proceeds from notes payable  25,675   123,345   135,116 
Recurring payment of principal on notes payable  (10,446)  (124,616)  (83,070)
Payment on commercial note payable  (41,531)      
Debt extinguishment costs  (3,799)      
Proceeds from bonds  78,125   59,213   115,335 
Bond payments  (21,742)      
Bond issuance costs  (4,241)  (5,257)  (6,887)
Deferred financing costs        (3,599)
Preferred stock dividends - Series D     (900)  (900)
Net cash provided by financing activities  22,041   51,785   155,995 
             
Net (decrease) increase in cash, cash equivalents and restricted cash  (23,304)  18,223   32,609 
Cash, cash equivalents and restricted cash, beginning of period  106,565   88,342   55,733 
Cash, cash equivalents and restricted cash, end of period $83,261  $106,565  $88,342 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $29,430  $61,587  $49,791 
             
Schedule of noncash investing and financing activities:            
Land received in exchange for note receivable $1,800  $  $ 
Notes receivable received from sale of income-producing properties $  $1,735  $ 
Seller financing note - acquisition of income-producing properties $  $1,895  $ 
Notes payable issued on acquisition of income-producing properties $  $31,175  $ 
Notes payable issued on acquisition of land $1,155  $  $ 

(Dollars in thousands)
Year Ended December 31,
202020192018
Cash Flow From Operating Activities:
Net income (loss)$7,464 $(26,137)$183,040 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale or write down of assets(32,107)(14,809)(171,530)
Loss (gain) income on foreign currency transactions13,378 15,108 (12,399)
Loss on debt extinguishment5,219 
Depreciation and amortization18,579 15,585 30,749 
Provision for bad debts984 
Equity in loss (income ) from unconsolidated joint ventures519 2,758 (1,129)
Distribution of income from unconsolidated joint ventures1,782 
Changes in assets and liabilities, net of dispositions:
Other assets(7,397)798 (112,221)
Related party receivables4,389 (35,257)(14,995)
Accrued interest payable(1,340)2,349 (2,307)
Accounts payable and other liabilities(620)(1,361)(80,395)
Net cash provided by (used in) operating activities5,631 (35,747)(181,187)
Cash Flow From Investing Activities:
Collection of notes receivable4,436 13,862 6,541 
Originations and advances on notes receivable(33,015)(21,434)(16,801)
Acquisition of real estate(3,422)(10,558)
Development and renovation of real estate(17,505)(33,730)(85,055)
Deferred leasing costs(2,603)0
Proceeds from sale of assets40,982 28,622 253,498 
Distribution from unconsolidated joint ventures8,086 6,504 
Net cash provided by (used in) investing activities381 (9,598)147,625 
Cash Flow From Financing Activities:
Proceeds from mortgages, other notes and bonds payable30,727 103,800 182,558 
Payments on mortgages, other notes and bonds payable(31,736)(73,719)(124,616)
Debt extinguishment costs(3,799)
Deferred financing costs(1,297)(4,241)(5,257)
Preferred stock dividends(900)
Net cash (used in) provided by financing activities(2,306)22,041 51,785 
Net increase (decrease) in cash, cash equivalents and restricted cash3,706 (23,304)18,223 
Cash, cash equivalents and restricted cash, beginning of period83,261 106,565 88,342 
Cash, cash equivalents and restricted cash, end of period$86,967 $83,261 $106,565 
The accompanying notes are an integral part of these consolidated financial statements.


32


TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

  Year Ended December 31, 
  2019  2018  2017 
  (dollars in thousands) 
          
Net (loss) income $(26,137) $183,040  $(15,316)
Total comprehensive (loss) income  (26,137)  183,040   (15,316)
Comprehensive (income) attributable to non-controlling interest  (783)  (1,590)  (499)
Comprehensive (loss) income attributable to Transcontinental Realty Investors, Inc. $(26,920) $181,450  $(15,815)

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


TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of Transcontinental Realty Investors, Inc. “TCI” and consolidated entities have been prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in Note 1. “Summary of Significant Accounting Policies.” The Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are

(Dollars in thousands, except per share amounts.

Certain prior year amounts have been reclassifiedamounts)


1. Organization
As used herein, the terms “the Company”, “We”, “Our”, or “Us” refer to conform to the current year presentation on the consolidated statements of operations, consolidated balance sheets and the consolidated statements of cash flows.

NOTE 1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and business.TCI,Transcontinental Realty Investors, Inc., a Nevada corporation is headquarteredwhich was formed in Dallas, Texas and its1984. Our common stock is listed and trades on the New York Stock Exchange (“NYSE American”NYSE”) under the symbol “TCI”.

TCI is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with We are owned approximately 78% by American Realty Investors, Inc. “ARL”(“ARL”), whose common stock is traded on the NYSE American under the symbol “ARL”. Subsidiaries of ARL own approximately 78.38% of the Company’s common stock.

In 2009, the Company acquired an additional 2,518,934 shares of common stock of Income Opportunity Realty Investors, Inc. “IOR”, and in doing so, increased its ownership from approximately 25% to over 80%7% by the parent of the shares of common stock of IOR outstanding. Upon acquisition of the additional shares in 2009, IOR’s results of operations began consolidating with those of the Company for tax and financial reporting purposes. As of December 31, 2019, TCI owned 81.23% of the outstanding IOR common shares. Shares of IOR are traded on the New York Exchange (“NYSE American”) under the symbol “IOR”.

TCI’s Board of Directors are responsible for directing the overall affairs of TCI and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by TCI’s Board of Directors. The directors of TCI are also directors of ARL and IOR. The Chairman of the Board of Directors of TCI also serves as the Chairman of the Board of Directors of ARL and IOR. The officers of TCI also serve as officers of ARL, IOR and Pillar.

Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. “RAI”, a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc. “RAMI”, effective August 7, 2014), a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to ARL and IOR.  As the contractual advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  TCI has no employees. Employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement.

ARL.

Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), manages our commercial properties and provides brokerage services. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Refer to Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”.   TCI engages third-party companies to lease and manage its apartment properties.

Southern Properties Capital Ltd. (“Southern”) is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures that cannot be converted into shares on the Tel-Aviv Stock Exchange. Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in the consolidated financial statements of TCI. 

On January 1, 2012, the Company entered into a development agreement with Unified Housing Foundation, Inc. “UHF” a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.

On November 19, 2018, we executed an agreement between the Macquarie Group (“Macquarie”) and Southern and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, Southern and TCI contributed a portfolio of 47 income producing apartment complexes, and 5 development projects in various stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).

VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of Southern and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie.  Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”).  The remaining 2% of the profits interest is held by Daniel J. Moos, who serves as the President and Chief Executive officer of the Company (“Class B Member”) and Manager of the joint venture.

Our primary business is the acquisition, development and ownership of income-producing residentialmultifamily and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate incomerevenues from gains on sales of income-producing properties and land.

Substantially all of our assets are held by our wholly-owned subsidiary, Southern Properties Capital Ltd (“SPC”), which was formed to allow us to raise funds by issuing non-convertible bonds that are listed and traded on the Tel-Aviv Stock Exchange ("TASE").
At December 31, 2019, we owned ten residential apartment communities comprising2020, our portfolio of 1,657 units, sevenincome-producing properties consisted of:
●     NaN commercial properties consisting of 5 office buildings and 1 retail property comprising anin aggregate of approximately 1.7 million rentable1,600,000 square feet, anfeet;
●    NaN multifamily properties owned directly by us comprising in 1,639 units, excluding apartments being developed;
●    Approximately 1,980 acres of developed and undeveloped land; and
●    NaN multifamily properties totaling 10,137 units owned by our 50% owned investment in 1,951 acresVAA.
Our day to day operations are managed by Pillar Income Asset Management, Inc. (“Pillar”). Their duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing with third party lenders and investors. All of undevelopedthe Companies employees are Pillar employees. Our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and partially developed land. In addition, our joint venture VAA owns fifty-one residential apartment communities comprisedbrokerage services. Our multifamily properties are managed by outside management companies. Pillar and Regis are considered to be related parties (See Note 12 – Related Party Transactions).
2. Summary of 9,888 units.

Significant Accounting Policies

Basis of presentation.    The Company presents its

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States (“GAAP”). The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and allAmerica.
We consolidate entities in which we are considered to be the primary beneficiary of a variable interest entity (“VIE”) or have a controlling interest. Arrangements that are not controlled throughmajority of the voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance withinterest of the provisions and guidance of ASC Topic 810 “Consolidation”, whereby weentity. We have determined that we are a primary beneficiary of the VIE and meet certain criteriawhen we have (i) the power to direct the activities of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership whenVIE that most significantly impacts its economic performance, and (ii) the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligationobligations to absorb expected losses or residual returns of the entity, or have voting rightsright to receive benefits that are not proportionalcould potentially be significant to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

VIE. In determining whether we are the primary beneficiary, of a VIE, we consider qualitative and quantitative factors, including but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ownership interest, management representation, ability to control or significantly influence key decisionsdecision and other contractual rights. We account for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions.

For entities in which we have less than a controlling financial interest or entities where it iswe are not deemed to be the primary beneficiary the entities are accounted for usingunder the equity method of accounting. Accordingly, we include our share of the net earnings or losses of these entities are included in consolidated net income. TCI’s investmentsour results of operations.

33

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in ARL and VAA are accounted for underthousands, except per share amounts)
Certain prior year amounts have been reclassified to conform to the equity method.

The Company in accordance with the VIE guidance in ASC 810 “Consolidations” consolidates ten and nine multifamily residential properties located throughout the United States at December 31, 2019 and December 31, 2018, respectively, with total units of 1,657 and 1,489, respectively.  Assets totaling $477.9 million and $463.7 million at December 31, 2019 and 2018, respectively, are consolidated and included in “Real estate, at cost”current year presentation on the consolidated balance sheetsheets, consolidated statements of operations and are all collateral for their respective mortgage notes payable, nonethe consolidated statements of which are recourse to the partnership in which they are in or to the Company. 

cash flows.

Real estate, depreciation, and impairment.
Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated remaining useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements—10-4010 to 40 years; furniture, fixtures and equipment—5-105 to 10 years).
We continually evaluateassess whether an indicator of impairment in the recoverability of the carrying value of itsour real estate assets usingexists by considering expected future operating income, trends and prospects, as well as the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment,” Factors considered by management in evaluating impairmenteffects of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating lossesdemand, competition and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investmenteconomic factors. Such factors include projected rental revenue, operating costs and capital expenditures as well as estimated holding periods and capitalization rates. If an impairment indicator exists, the determination of recoverability is not considered impaired ifmade based upon the estimated undiscounted estimated future net cash flows, excluding interest expense. The amount of an asset (bothimpairment loss, if any, is determined by comparing the annual estimatedfair value, as determined by a discounted cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduceflows analysis, with the carrying value of the asset to its estimated fair value.

Properties that are treated as “subject to sales contract” onrelated assets. We generally hold and operate our income producing real estate long-term, which decreases the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we havelikelihood of their carrying values not recognized the legal sale according to the guidance in ASC 360-20 due to various factors. For sales transactions where the guidance reflects a sale did not occur, the asset involved in the transaction, including the debt, if applicable, and property operations, remain on the books of the Company. We continue to charge depreciation to expense as a period cost for the property until such time as the property has beenbeing recoverable. Real estate classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairmentare measured at the lower of the carrying amount or Disposal of Long-Lived Assets.”

fair value less cost to sell.

Real estate held for sale.
We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 20192020 or 2018.

2019.

Effective as of January 1, 2015, we adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after January 1, 2015, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.

Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in Item 1 “Significant Real Estate Acquisitions/Dispositions and Financing.” Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt, if appropriate, and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets.”

Cost capitalization.

The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. CostsWe also capitalize development costs including costs directly related to planning, developing, initial leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. Capitalized development costs includewell as interest, property taxes, insurance, and other direct project costs incurred during the period of development.

A variety of Capitalized costs are incurred inalso include direct and certain indirect costs clearly associated with the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest – Capitalization of Interest” and ASC Topic 970 “Real Estate - General”. Theproject. Indirect costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salariesinsurance and relatedcertain shared administrative costs. In assessing the amounts of direct and indirect costs and otherto be capitalized, allocations are made to projects based on estimates of the actual amount of time spent on each activity. Indirect costs incurred during thenot clearly associated with specific projects are expensed as period of development. costs.

We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.

Deferred leasing costs
We capitalize leasing costs on our commercial properties, which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.

Fair value measurement.    We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair
Fair value asrepresents the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developingdate. In determining fair value estimateswe apply the following hierarchy:
Level 1 —Unadjusted quoted prices for identical and require disclosureunrestricted assets or liabilities in active markets.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Level 2 —Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of fair value measurements by level withinthe financial instrument.
Level 3 —Unobservable inputs that are significant to the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:

Level 1 —Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.

Level 2 —Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
measurement.

Level 3 —Unobservable inputs that are significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Related parties. We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships.
Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

Recognition of revenue.    Our revenues,
Rental revenue includes fixed minimum rents, reimbursement of operating costs and other leasing income. Rental revenue for residential property, which are composed largely ofis generally leased for twelve months or less, is recorded when due from residents, whereas rental income, include rents reportedrevenue for commercial properties, which is generally leased for more than twelve months, is recognized on a straight-line basis over the lease term. In accordance with ASC 805 “Business Combinations”, we recognize rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respectiverelated leases.

Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.

Rental revenue for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less.

An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

Sales

Cash and the associated gains or losses related to real estate assets are recognized in accordance with the provisions of ASC Topic 360-20, “Property, PlantCash Equivalents and Equipment—Real Estate Sale.” The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain recognition and accounts for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Non-performing notes receivable.Restricted Cash

We consider a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

Interest recognition on notes receivable.    We record interest income as earned in accordance with the terms of the related loan agreements.

Allowance for estimated losses.    We assess the collectability of notes receivable on a periodic basis, the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. Refer to Note 5 “Notes and Interest Receivable” for details on our notes receivable.

Cash equivalents.For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are consideredwhen purchased to be cash equivalents.


Restricted cash. equivalents, for which cost approximates fair value. Restricted cash is comprised primarily ofincludes cash balances held in escrow by financial institutions under the terms of certain secured notes payable and certain unsecured bonds payable.

Concentration of credit risk.The Company maintains itsrisk
We maintain our cash balances at commercial banks and through investment companies, the deposits of whichthat are insured by the Federal Deposit Insurance Corporation (FDIC). At December 31,2020 and 2019, and 2018, the Company maintained balances in excess of the insured amount.

Earnings

Income taxes
We are a “C” corporation” for U.S. federal income tax purposes. However, we are included in the May Realty Holdings, Inc. (the "MRHI") consolidated group for tax purposes. We have a tax sharing agreement that specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group.
Comprehensive income (loss)
Net income (loss) and comprehensive income (loss) are the same for the year ended December 31, 2020, 2019 and 2018.
35

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share.    Income (loss) per share is presented in accordance with ASC 620 “Earnings per Share” and is computed based upon the weighted average number of shares of common stock outstanding during each year.

amounts)


Use of estimates.estimates
In the preparation of Consolidated Financial Statementsconsolidated financial statements in conformity with GAAP, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statementsconsolidated financial statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.

Income taxes.    The Company is a “C” corporation” for U.S. federal income tax purposes. The Company and the rest of the ARL group are included in the MRHI, consolidated group for tax purposes. TCI is a member of a tax sharing agreement that specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group.

Recent accounting pronouncements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions from ASC 740. Also, the amendments in this Update simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination, and other targeted changes. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact that the adoption of ASU 2019-12 may have on its consolidated financial statements.

pronouncements.

In October 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update ("ASU") 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted retrospectively with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value

Measurement that eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. ASU 2016-02 was effective for reporting periods beginning after December 15, 2018. The adoption of ASU 2016-02January 1, 2020, did not have a material impact on the Company’sour financial position and results of operations.


In May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“March 2020, the FASB issued ASU 2014-09”), “Revenue from Contracts with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. As the majority2020-04, Reference Rate Reform (Topic 848): Facilitation of the Company’s revenueEffects of Reference Rate Reform on Financial Reporting. The standard provides guidance, optional expedients and exceptions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The standard was effective upon issuance and can be applied through December 31, 2022. We have mortgage notes payable with interest rates that reference LIBOR, and therefore, we will adopt this standard when LIBOR is from rental revenuediscontinued.

On April 10, 2020, the FASB issued a Staff Q&A (“Q&A”) related to leases, the Company has determined thatapplication of the lease guidance in ASC 842 for the accounting impact of lease concessions related to the COVID-19 pandemic. The Q&A, allows an entity to make an election to account for lease concessions related to the effects of the COVID-19 as though enforceable rights and obligations for those concessions existed. As a result of this election, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance in ASC 842, as long as the concessions do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Our adoption of this Standard was immaterial to the guidance of the Q&A did not have a significant impact on our consolidated financial statements and related disclosures.

NOTE 2.INVESTMENT IN VAA

On November 19, 2018, we executed an agreement betweenduring the Macquarie Groupyear ended December 2020.

3. Earnings Per Share
Earnings per share (“Macquarie”EPS”) and Southern and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, Southern and TCI contributed a portfolio of 47 income producing apartment complexes, and 5 development projects in various stages of construction. TCI received cash consideration of $236.8 million and recognized a gain of approximately $154.1 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).

VAA is equally owned and controlledhas been computed by Abode JVP, LLC, a wholly-owned subsidiary of Southern and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie.  Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”).  The remaining 2% of the profit participation interest is held by Daniel J. Moos TCI’s President and Chief Executive Officer (“Class B Member”) who serves also as the Manager of the joint venture. In addition, upon the closing of the agreement the Class B Member received a payment of $1.9 million.

The Company accounts for VAA as an equity method investment. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share ofdividing net income or loss fromavailable to common shares, adjusted for preferred dividends, by the joint ventures is included withinweighted-average number of common shares outstanding during the Consolidated Statementsperiod.

The following table provides our basic and diluted EPS calculation:
For the Year Ended
December 31,
202020192018
Net income (loss)$7,464 $(26,137)$183,040 
Net (income) attributable to noncontrolling interest(795)(783)(1,590)
Net income (loss) attributable to the Company6,669 (26,920)181,450 
Preferred dividend(900)
Net income (loss) attributable to common shares$6,669 $(26,920)$180,550 
Weighted-average common shares outstanding-basic and diluted8,639 8,718 8,718 
EPS - attributable to common shares- basic and diluted$0.77 $(3.09)$20.71 
36

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
4. Supplemental Cash Flows Information
The following presents the schedule of Operations. The joint venture agreements may designate different percentage allocations among investors for profitsinterest paid and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds.

other supplemental cash flow information:

For the Year Ended
December 31,
202020192018
Cash paid for interest$27,127 $29,430 $61,587 
Cash - Beginning of period
Cash and cash equivalents$51,179 $36,358 $42,705 
Restricted cash32,082 70,207 45,637 
$83,261 $106,565 $88,342 
Cash - End of Period
Cash and cash equivalents$36,761 $51,179 $36,358 
Restricted cash50,206 32,082 70,207 
$86,967 $83,261 $106,565 
Proceeds from mortgages, notes and bonds payable
Proceeds from mortgages and notes payable$10,942 $25,675 $123,345 
Proceeds from bonds19,785 78,125 59,213 
$30,727 $103,800 $182,558 
Payment of mortgages, notes and bonds payable
Recurring payment on mortgages and notes payable$12,144 $51,977 $124,616 
Bond payments19,592 21,742 
$31,736 $73,719 $124,616 

The following is a summaryschedule of noncash investing and financing activities:
For the Year Ended
December 31,
202020192018
Property acquired in exchange for note payable$3,350 $1,155 $1,895 
Note receivable issued in exchange for property1,761 
Property acquired in exchange for note receivable1,800 1,735 
Debt assumed in sale of properties8,238 31,175 

5. Operating Segments
Our segments are based on the financial positioninternal reporting that we review for operational decision-making purposes. We operate in 2 reportable segments: (i) the acquisition, development, ownership and resultsmanagement of operationsmultifamily properties and (ii) the acquisition, ownership and management of VAA (dollarscommercial real estate properties. The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, advisory fees, interest income and interest expense are not included in thousands):

  As of December 31,
Balance Sheet 2019 2018
     
Net real estate assets $1,242,957  $1,257,557 
Other assets  62,222   67,020 
Debt, net  (832,779)  (791,225)
Other liabilities  (271,291)  (280,288)
Total equity  (201,109)  (253,064)

Results of Operations  For the Year Ended
December 31, 2019
   For the period
November 19 to
December 31, 2018
 
Total revenue $115,377  $12,887 
Total property, operating, and maintenance expenses  (56,967)  (4,507)
Interest expense  (61,487)  (5,818)
Depreciation and Amortization  (43,942)  (6,987)
Total other expense  (3,377)  (5,297)
Net loss $(50,396) $(9,722)


The following issegment profit as our internal reporting addresses these items on a reconciliation from VAA’s net loss to TCI’s equitycorporate level.

37

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in earnings of VAA (dollars in thousands):

  For the Year Ended
December 31, 2019
 For the period
November 19 to
December 31, 2018
VAA net loss $(50,396) $(9,722)
Adjustments to reconcile to income (loss) from VAA        
  Interest expense on mezzanine loan  25,014   2,815 
  In-place lease intangibles - amortization expense  14,703   3,983 
  Depreciation basis differences  5,132   3,012 
Net loss $(5,547) $88 
Percentage ownership in VAA  50%  50%
Loss from VAA $(2,774) $44 

thousands, except per share amounts)

The following table sets forthpresents our profit by reportable segment:
For the Year Ended
December 31,
202020192018
Multifamily Segment
Revenue$14,686 $13,517 $80,821 
Operating expenses(8,482)(8,824)(42,588)
Profit from segment6,204 4,693 38,233 
Commercial Segment
Revenue37,223 32,714 33,123 
Operating expenses(15,878)(16,389)(16,832)
Profit from segment21,345 16,325 16,291 
Total profit from all segments$27,549 $21,018 $54,524 

The following table reconciles our profit by reportable segment to net income (loss):
For the Year Ended
December 31,
202020192018
Profit from reportable segments$27,549 $21,018 $54,524 
Other non-segment items of income (expense)
Depreciation and amortization(14,755)(13,379)(22,761)
General and administrative(9,287)(8,704)(11,359)
Advisory fee to related party(8,648)(8,410)(11,294)
Other income5,113 1,823 35,161 
Interest income18,660 19,607 15,793 
Interest expense(29,374)(31,816)(58,872)
(Loss) gain on foreign currency transactions(13,378)(15,108)12,399 
Loss on extinguishment of debt(5,219)
Equity in (loss) income from unconsolidated joint ventures(519)(2,758)1,129 
Gain on sale or write-down of assets, net32,107 14,809 171,530 
Income tax provision(4)2,000 (3,210)
Net income (loss)$7,464 $(26,137)$183,040 


38

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The table below reconciles our segment information to the locationcorresponding amounts in our consolidated balance sheets:
December 31,
20202019
Segment assets$342,965 $348,404 
Real estate65,149 70,006 
Investment in unconsolidated joint ventures51,786 81,780 
Notes receivable123,556 112,357 
Receivable from related parties159,777 141,541 
Cash and other non-segment assets135,849 111,830 
Total assets$879,082 $865,918 
6. Lease Revenue
We lease our multifamily properties and commercial properties under agreements that are classified as operating leases. Our multifamily leases generally include minimum rents and charges for ancillary services. Our commercial property leases generally included minimum rents and recoveries for property taxes and common area maintenance. Minimum rental revenues are recognized on a straight-line basis over the terms of our real estate heldthe related leases.
The following table summarizes the components of rental revenue for investment (income-producing properties only) by asset type asthe years ended December 2020, 2019 and 2018:

For the Year Ended
December 31,
202020192018
Fixed component$49,974 $43,749 $112,203 
Variable component1,935 2,482 1,741 
Total rental revenue$51,909 $46,231 $113,944 

The following table summarizes the future rental payments to us from under non-cancelable leases. The table exclude multifamily leases, which typically have a term of December 31, 2019:

  Apartments 
Location No.  Units 
Alabama  1   168 
Arkansas  5   1,122 
Colorado  2   260 
Florida  2   388 
Georgia  1   222 
Louisiana  3   464 
Mississippi  1   196 
North Carolina  1   201 
Nevada  1   308 
Tennessee  4   708 
Texas-Greater Dallas-Ft Worth  19   3,709 
Texas-Greater Houston  2   416 
Texas-Other  9   1,726 
 Total  51   9,888 

one-year or less:


YearAmount
2021$23,419 
202221,363 
202316,003 
202410,889 
20256,938 
Thereafter25,566 
Total$104,178 


39

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
7. Real Estate Activity
At December 31, 2020 and 2019, our apartment projects in development included (dollars in thousands):

Property Location No. of Units  Costs to Date (1)  Total Projected Costs (1) 
Lakeside Lofts apartments Farmers Branch, TX  249 $50,357  $80,622 
Total    249  $50,357  $80,622 

(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.

During 2019, the Company received $19.4 million cash distribution from VAA as a result of the annual surplus cash computation from its HUD collaterized residential properties and other amounts owed to the Company as agreed to in the joint venture operating agreement.

53

NOTE 3.REAL ESTATE

At December 31, 2019 and 2018, TCI’s real estate investment is comprised of the following (dollars in thousands):

  December 31, 
  2019  2018 
       
Apartments $156,173  $126,274 
Apartments under construction  22,363   27,261 
Commercial properties  229,424   224,167 
Land held for development  62,037   84,016 
Real estate subject to sales contract  7,966   2,014 
Total real estate, at cost, less impairment $477,963  $463,732 
Less accumulated deprecation  (90,173)  (79,228)
Total real estate, net of depreciation $387,790  $384,504 

Expendituresfollowing:

December 31,
20202019
Land$50,759 $49,887 
Building and improvements297,644 286,280 
Tenant improvements30,935 49,431 
Construction in progress77,891 84,399 
   Total cost457,229 469,997 
Less accumulated deprecation(82,418)(90,173)
   Total real estate, net374,811 379,824 
Property held for sale2,572 7,966 
Total real estate$377,383 $387,790 
Our property held for repairs and maintenancesale consists of land parcels at Mercer Crossing that are charged to operations as incurred. Significant betterments are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or losscurrently under contract for the period.

Depreciation is computed on a straight line basis over the estimated useful lives of the assets as follows:

Land improvements25 to 40 years
Buildings and improvements10 to 40 years
Tenant improvementsShorter of useful life or terms of related lease
Furniture, fixtures and equipment3 to 7 years

Fair Value Measurement

The Company applies the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. The Company is required to assess the fair value of its consolidated real estate assets with indicators of impairment. The value of impaired real estate assets is determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flow of each asset, as well as the income capitalization approach, which considers prevailing market capitalization rates, analyses of recent comparable sales transactions, information from actual sales negotiations and bona fide purchase offers received from third parties. The methods used to measure fair value may produce an amount that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The fair value measurements used in these evaluations are considered to be Level 2 and 3 valuations within the fair value hierarchy in the accounting rules, as there are significant observable (Level 2) and unobservable inputs (Level 3). Examples of Level 2 inputs the Company utilizes in its fair value calculations are appraisals and bona fide purchase offers from third parties. Examples of Level 3 inputs the Company utilizes in its fair value calculations are discount rates, market capitalization rates, expected lease rental rates, timing of new leases, an estimate of future sales prices and comparable sales prices of similar assets, if available. There was no provision for impairment during the years ended December 31, 2019, 2018 and 2017.

sale.

The following is a description of the Company’s significant real estate transactions for the year ended December 31, 2019:

Sold 35.9 acres of land located in Farmers Branch, Texas for an aggregate sales price of $18.9 million and recognized a gain on the sale of $9.0 million.

Sold 29.4 acres of land located in Forney, Texas for a total sales price of $5.0 million and recognized a gain on the sale of approximately $4.1 million.

Sold 10.33 acres of land located in Dallas, Texas for a total sales price of $2.1 million and recognized a gain on the sale of approximately $0.4 million.

Sold 6.25 acres of land located in Nashville, Tennessee for a total sales price of $2.3 million and recognized a gain on the sale of approximately $0.9 million.

Sold 23.24 acres of land located in Fort Worth, Texas for a total sales price of $1.8 million and recognized a gain on the sale of approximately $0.5 million.

Sold a multifamily residential property, located in Mary Ester, Florida for a total sales price of $3.1 million out of which $1.8 million represents land received with a total acreage of 1.27 acres located in Riverside, California in exchange for a note receivable of the same value. The Company recognized a loss from this sale of approximately $0.08 million.

Purchased 33.05 acres of land in Athens, Alabama for a total purchase price of $2.1 million, out of which $0.9 million was paid in cash and the remaining balance of $1.2 million was issued as a note payable. The note payable matures in eighteen months and bears an annual interest rate of 5.91%.

Purchased from a third party 8.94 acres of land located in Collin County, Texas for a total purchase price of $2.5 million.

Purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from a third party land developer.

The Company continuesWe continue to invest in the development of apartment projects.multifamily properties. During the year ended December 31, 2019, TCI has2020, we invested $28.5 million$17,505 related to the construction and development projects.

Gain on sale or write-down of various apartment complexesassets, net consists of the following:
For the Year Ended
December 31,
202020192018
Land(1)$23,383 $14,889 $17,404 
Multifamily(2)3,702 (80)154,126 
Commercial(3)4,610 
Other(4)412 
$32,107 $14,809 $171,530 

(1)    Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and capitalized $0.8 millionother land holdings.
(2)    On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort Walton, Florida for $2,426, resulting in a gain on sale of interest$960. The sales price was funded by the issuance of a $1,761 note receivable and the assumption of the $665 mortgage note payable on the property (See Note 10 – Mortgages and Other Notes Payable). On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port Arthur, Texas for $13,300, resulting in a gain on the sale of of $2,742. The sales price was funded by cash payment of $4,215 and the assumption of the $9,085 mortgage note payable on the property (See Note 10 – Mortgages and Other Notes Payable).
(3)    On September 14, 2020, we sold Bridge View Plaza, a 122,205 square foot retail center in La Crosse, Wisconsin for $5,250, resulting in a gain on sale of $4,610. The proceeds from the sale were used to pay off the $3,375 mortgage note payable on the property (See Note 10 – Mortgages and Other Notes Payable) and for general corporate purposes.
(4)    Includes the write-off of development costs.



NOTE 4.SUPPLEMENTAL CASH FLOW INFORMATION

For the years ended

40

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
8. Notes Receivable
The following table summarizes our notes receivables at December 31, 20192020 and 2018, the Company paid2019:
Carrying ValueInterest
Rate
Maturity
Date
Borrower / Project20202019
ABC Land and Development, Inc.$4,408 $4,408 9.50 %6/30/21
ABC Paradise, LLC1,210 1,210 9.50 %6/30/21
Autumn Breeze(1)1,867 1,302 5.00 %7/1/22
Bellwether Ridge(1)3,858 3,765 5.00 %11/1/21
Forest Pines(1)2,869 2,868 5.00 %11/1/22
JEM Holdings, Inc.300 6.00 %7/1/16
Lake Wales3,000 3,000 9.50 %6/30/21
Legacy Pleasant Grove496 496 12.00 %10/23/22
McKinney Ranch4,554 4,554 6.00 %9/15/22
One Realco Land Holding, Inc.1,728 1,728 9.50 %6/30/21
Oulad-Chikh Family Trust174 8.00 %3/1/21
Parc at Ingleside(1)2,523 1,531 5.00 %12/1/21
Parc at Windmill Farms(1)7,803 7,602 5.00 %11/1/22
Phillips Foundation for Better Living, Inc.(2)314 12.00 %3/31/22
Phillips Foundation for Better Living, Inc.(2)61 12.00 %3/31/23
Plum Tree(1)857 413 5.00 %4/26/26
Riverview on the Park Land, LLC1,045 1,045 9.50 %6/30/21
RNC Portfolio, Inc.8,853 8,802 5.00 %9/1/24
Spartan Land5,907 5,907 12.00 %1/16/23
Spyglass of Ennis(1)5,360 5,288 5.00 %11/1/22
Steeple Crest(1)6,498 6,665 5.00 %8/1/21
Unified Housing Foundation, Inc. (2)(3)2,880 3,793 12.00 %7/31/21
Unified Housing Foundation, Inc. (2)(3)212 212 12.00 %8/30/21
Unified Housing Foundation, Inc. (2)(3)6,831 6,831 12.00 %10/31/21
Unified Housing Foundation, Inc. (2)(3)10,896 10,926 12.00 %12/31/21
Unified Housing Foundation, Inc. (2)(3)10,096 10,096 12.00 %3/31/22
Unified Housing Foundation, Inc. (2)(3)6,990 12.00 %3/31/23
Unified Housing Foundation, Inc. (2)(3)3,615 12.00 %5/31/23
Unified Housing Foundation, Inc. (2)(3)19,139 19,127 12.00 %12/31/32
$123,556 $112,357 

(1)    The note is convertible, at our option, into a 100% ownership interest of $29.4 million and $61.6 million, respectively.

Cash and cash equivalents, and restricted cash for fiscal year ended 2019 and 2018 was $83.3 million and $106.6 million, respectively. The following is a reconciliation of the Company’s cash and cash equivalents, and restricted cash to the total presented in the consolidated statement of cash flows:

  December 31, 
  2019  2018 
       
Cash and cash equivalents $51,179  $36,358 
Restricted cash (cash held in escrow)  15,540   37,946 
Restricted cash (certificate of deposits)  3,759   9,688 
Restricted cash (held with Trustee)  12,783   22,573 
Total cash, cash equivalents and restricted cash $83,261  $106,565 

Amounts included in restricted cash represent funds required to meet contractual obligations with certain financial institutions for the payment of reserve replacementunderlying development property, and tax and insurance escrow. In addition, restricted cash includes funds to the Bond’s Trustee for payment of principal and interests.


NOTE 5.NOTES AND INTEREST RECEIVABLE

A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase money financing of property sales. Notes receivable are generallyis collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured. Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity (dollars in thousands).

Borrower

 

Maturity

Date

 

Interest

Rate

  Amount  Security
Performing loans:             
Prospectus Endeavors 4, LLC  01/23  12.00%  5,907  Secured
Prospectus Endeavors 6, LLC  10/22  12.00%  496  Secured
Oulan-Chikh Family Trust  03/21  8.00%  174  Secured
H198, LLC (McKinney Ranch Land)  09/20  6.00%  4,554  Secured
Forest Pines  11/20  5.00%  2,868  Secured
Spyglass Apartments of Ennis, LP  11/20  5.00%  5,288  Secured
Bellwether Ridge  05/20  5.00%  3,765  Secured
Parc at Windmill Farms  05/20  5.00%  7,602  Secured
Autumn Breeze  10/21  5.00%  1,302  Secured
Plum Tree  10/21  5.00%  413  Secured
Ingleside  12/21  5.00%  1,531  Secured
RNC  09/24  5.00%  8,802  Secured
Revolving Line of Credit Steeple Crest  10/20  5.00%  6,665  Secured
RAI PFBL 2018 Purch Fee Note Weatherford  12/21  12.00%  525  Secured
Unified Housing Foundation, Inc. (Echo Station) (1)  12/32  12.00%  1,481  Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  12/32  12.00%  2,000  Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  12/32  12.00%  6,369  Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12/32  12.00%  1,953  Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12/32  12.00%  2,000  Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12/32  12.00%  4,000  Secured
Unified Housing Foundation, Inc. (Timbers of Terrell) (1)  12/32  12.00%  1,323  Secured
Unified Housing Foundation, Inc. (1)  12/21  12.00%  10,401  Unsecured
Unified Housing Foundation, Inc. (1)  06/20  12.00%  5,314  Unsecured
Unified Housing Foundation, Inc. (1)  03/22  12.00%  4,782  Unsecured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  07/21  12.00%  838  Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)  07/21  12.00%  773  Secured
Unified Housing Foundation, Inc. (Marquis at Vista Ridge) (1)  07/21  12.00%  839  Secured
Unified Housing Foundation, Inc. (Timbers at the Park) (1)  07/21  12.00%  432  Secured
Unified Housing Foundation, Inc. (Trails at White Rock) (1)  07/21  12.00%  913  Secured
Unified Housing Foundation, Inc. (Bella Vista) (1)  08/21  12.00%  212  Secured
Unified Housing Foundation, Inc. (1)  10/21  12.00%  6,831  Unsecured
Other related party notes  Various  Various   3,553  Various secured interests
Other non-related party notes  Various  Various   10,276  Various secured interests
Accrued interest         8,629   
Total Performing        $122,811   
Allowance for estimated losses         (1,825)  
Total        $120,986   

(1) Related party notes

As of December 31, 2019, the obligors on $54.0 million of the mortgage notes receivable portfolio were due from related entities.underlying development property.

(2)     The Company recognized $6.9 million of interest income from these related party notes receivables. In addition, during the quarter ended June 30, 2019, TCI purchased notes receivables with a face value of $29.0 million (out of which $1.0 million represented accrued interest receivables) from related parties.

As of December 31, 2019, none of the mortgage notes receivable portfolio were non-performing.

The Company has various notes receivable from Unified Housing foundation, Inc. “UHF”. UHFborrower is determined to be a related party due to our significant investment in the performance of the collateral secured underby the notes receivable. Payments

(3)    Principal and interest payments on the notes from Unified Housing Foundation, Inc. (“UHF”) are duefunded from surplus cash flow from operations, sale or refinancing of the underlying properties. These notesproperties and are cross collateralized to the extent that any surplus cash available from any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes. Furthermore, any surplus cash available from any


41

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
9. Investment in Unconsolidated Joint Ventures
On November 19, 2018, we formed the VAA joint venture with the Macquarie Group (“Macquarie”). In connection with the formation of the properties UHF owns, besides the properties underlying these notes, can be used to repay outstanding interest and principal for these notes. The allowance on the notes wasVAA, we sold a purchase allowance that was netted against the notes when acquired.


NOTE 6.INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND INVESTEES

Investments in unconsolidated subsidiaries, jointly owned companies and other investees in which we have a 20% to 50% ownership interest or otherwise exercise significant influence are carried at cost, adjustedin certain multifamily properties to Macquarie for a $236.8 million cash payment, resulting in a gain on sale of assets of $154.1 million. We then immediately transferred our respective ownership interests in the Company’s proportionate sharemultifamily projects ("VAA Portfolio") to VAA in exchange for a 50% voting interest / 49% profit participation interest ("Class A interest") in VAA and note payable (“Mezzanine Loan”) in accordance with the terms of their undistributed earnings or losses, viaa contribution agreement (the “Contribution”). Upon completion of the equity methodContribution, VAA owned and controlled 52 multifamily properties. VAA assumed all liabilities of accounting. ARLthose properties, including mortgage debt insured by the Department of Housing and Urban Development (“HUD”).

Concurrent with the Contribution, VAA issued Class B interests with a 2% profits participation interest and no voting rights to Daniel J. Moos, our former President and Chief Executive Officer (“Class B Member”). The Class B Member serves as the Manager of VAA.
Interest on the Mezzanine loan is our parent companylimited to cash generated from the properties and is an unconsolidated joint venture.

Ourmatures concurrently with the termination of VAA. Accordingly, we account for our interest in the common stock of ARL in the amount of 0.90% is accounted for under theMezzanine Loan as additional equity method.

The summary data presented belowinterest and includes our investments accounted for under the equity method, except for our investment in VAA which is discussed in detail in Note 2 ‘Investment in VAA’.

The following is a summary of the financial position and results of operationsany interest payments accrued as income from our unconsolidated parent (dollars in thousands): 

  December 31, 
  2019  2018  2017 
ARL      
Real estate, net of accumulated depreciation $  $549  $12,349 
Notes receivable  35,213   42,517   41,928 
Other assets  67,441   66,712   126,238 
Notes payable  (8,327)  (9,637)  (6,507)
Other liabilities  (26,947)  (21,123)  (102,014)
Shareholders’ equity/partners capital  (67,380)  (79,018)  (71,994)
             

  For the Year Ended December 31, 
  2019  2018  2017 
Rents, interest and other income $12,569  $7,132  $9,193 
Depreciation        (157)
Operating expenses  (3,765)  (2,420)  (3,149)
Gain on land sales  1,016      4,765 
Interest expense  (8,043)  (7,191)  (6,228)
Income (loss) from continuing operations $1,777  $(2,479) $4,424 
Net  income (loss) $1,777  $(2,479) $4,424 
             
Company’s proportionate share of income (loss) $16  $(22) $40 

During the fourth quarter ofjoint ventures.

On December 31, 2018, TCIwe purchased from RAI 900,000 shares of ARL Series A convertible preferred shares ("ARL Preferred Stock for $9.0 million. The Series A Preferred Stock may be converted into common stock at 90.0%Shares") from Realty Advisors, Inc. ("RAI"). On December 22, 2020, we transferred our ownership of the average daily closing price of ARL’sARL Preferred Shares and the ARL common stockshares that we had previously acquired to RAI for the prior 20 trading days.

The investment$18,878 and $3,747, respectively. RAI has a controlling ownership interest in ARL convertible Preferred Stock is being carried at the Company’s cost of $9 million and is included in investment in other unconsolidated investees. Additionally, TCI purchased from RAI $9.9 million accrued unpaid dividendstherefore deemed a related party. The transfer was recorded at cost as an increase to the ARL Series A convertible Preferred Stock whichrelated party receivable.

The following is carried at the cost and included ina summary of our investment in unconsolidated investeesjoint ventures:
As of December 31,
20202019
Condensed Balance Sheets of VAA
Assets
Real estate$1,217,725 $1,242,957 
Other assets63,102 62,222 
   Total assets$1,280,827 $1,305,179 
Liabilities and Partners Capital
Mortgage notes payable$830,721 $832,858 
Mezzanine notes payable239,878 240,422 
Other liabilities37,262 30,790 
Our share of partners' capital84,983 99,775 
Outside partner's capital87,983 101,334 
   Total liabilities and partners' capital$1,280,827 $1,305,179 
Investment in unconsolidated joint ventures
Our share of partners' capital$84,983 $99,775 
Our share of Mezzanine note payable119,939 120,211 
Basis adjustment (1)(153,136)(160,838)
   Our investment in unconsolidated joint ventures51,786 59,148 
Investment ARL common shares606 
Investment in ARL preferred shares22,026 
   Total investment in unconsolidated joint ventures$51,786 $81,780 
42

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

(1)     We amortize the difference between the cost of our investment in unconsolidated joint ventures and the book value of our underlying equity into income on a straight-line basis consistent with the balance sheet.

lives of the underlying assets.

The following is a summary of our (loss) income from investments in unconsolidated joint ventures:
NOTE 7.NOTES AND INTEREST PAYABLE

For the Years Ended December 31,
202020192018
Condensed Statements of Operations of VAA
Revenue
   Rental revenue$117,336 $109,746 $11,568 
   Other revenue5,779 5,631 1,319 
      Total revenue123,115 115,377 12,887 
Expenses
   Operating expenses62,458 60,516 9,827 
   Depreciation and amortization30,456 43,942 6,987 
   Interest56,903 61,315 5,795 
      Total expenses149,817 165,773 22,609 
Net loss$(26,702)$(50,396)$(9,722)
Our share of net (loss) income in unconsolidated joint ventures$(519)$(2,758)$1,129 

43

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
10. Mortgages and Other Notes Payable
Below is a summary of our notes and interest payable as of December 31, 20192020 and 2018 (dollars2019:
Carrying ValueInterest
Rate
Maturity
Date
Property/ Entity20202019
600 Las Colinas$35,589 $36,302 5.30 %11/1/2023
770 South Post Oak11,871 12,077 4.40 %6/1/2025
Bridge View Plaza(1)3,824 7.75 %11/1/2020
Chelsea8,194 8,749 3.40 %12/1/2050
EQK Portage - Land(2)3,350 10.00 %11/13/2024
HSW Partners(3)14,690 13,032 9.50 %6/17/2021
Farnham Park(4)9,144 3.39 %12/1/2050
Forest Grove(5)7,333 1,390 3.75 %5/5/2024
Landing Bayou14,643 15,467 3.50 %9/1/2053
Athens(6)1,155 1,155 5.90 %8/28/2022
Legacy at Pleasant Grove13,653 13,944 3.60 %4/1/2048
McKinney 36 Land820 944 8.00 %6/30/2022
Overlook at Allenville Phase II15,621 15,798 3.80 %5/1/2059
Parc at Denham Springs Phase II16,128 14,785 4.10 %2/1/2060
Stanford Center(7)39,093 39,255 6.00 %2/26/2022
Sugar Mill Phase III9,298 5,908 4.50 %2/1/2060
Toulon13,975 14,219 3.20 %12/1/2051
Villager(8)556 2.50 %3/1/2043
Villas at Bon Secour10,280 11,026 4.00 %1/1/2022
Vista Ridge9,979 10,122 4.00 %8/1/2053
Windmill Farms(9)10,397 13,830 6.00 %2/28/2023
$236,069 $241,527 
(1)    On September 14, 2020, we paid off the loan in thousands):

  December 31, 
  2019  2018 
Apartments $120,024  $94,759 
Apartments under Construction  9,017   14,402 
Commercial  92,838   135,951 
Land  14,806   22,200 
Real estate held for sale     376 
Corporate and other notes  16,430   18,130 
Total notes payable $253,115  $285,818 
Less: unamortized deferred borrowing costs  (7,342)  (9,425)
Total outstanding notes payable, net $245,773  $276,393 
Accrued Interest  773   844 
Total notes payable, net and accrued interest $246,546  $277,237 

Future principal payments due (including scheduled amortization payments and payments due upon maturity)connection with the sale of the underlining property (See Note 7 – Real Estate Activity).

(2)     On March 5, 2020, we acquired 49.2 acres of land in Kent, Ohio in exchange for the note payable.
(3)    On, December 3, 2020, we extended the maturity on the Company’s notes payableloan to June 17, 2021.
(4)    On July 16, 2020, the loan was assumed by a third party in connection with the sale of the underlying property (See Note 7 – Real Estate Activity).
(5)    The loan bears interest at December 31, 2019 are as follows (in thousands): 

Year  Amount 
2020  $25,982 
2021   55,393 
2022   13,437 
2023   36,770 
2024   1,995 
Thereafter   119,538 
Total  $253,115 

prime rate plus 0.5%.

(6)    On March 2, 2021, the loan was extended to August 28, 2022.
(7)    On May 1, 2020, the loan was extended to February 26, 2022.
(8)    On May 1, 2020, the loan was assumed by a third party in connection to sale of the underlying property (See Note 7 – Real Estate Activity).
(9)    On March 4, 2021, the loan was extended to February 28, 2023 at an interest of 5%.

Interest payable at December 31, 2020 and 2019, was $773 and 2018, was $.08 million$844, respectively. We capitalized interest of $858 and $.09 million,$585 during the years ended December 31, 2020 and 2019, respectively. Our debt has interest rates ranging from 2.5% to 9.75%
44

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per annum with maturity dates between 2021 and 2059. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $311.5 million.

share amounts)

There are various land mortgages, secured by the property, that are in the process of a modification or extension to the original note due to expiration of the loan. We are in constant contactworking with theseour existing lenders working together in orderand new lenders to modify, extend the loans before they become due or refinancing the loans with terms of these loans and we anticipate a timely resolution that isare similar to the existing agreement or subsequent modification. 

In conjunction with the developmentagreement.

As of various apartment projects and other developments, we drew down $28.5 million and $81.0 million in construction loans during the year ended December 31, 2019, and 2018, respectively.

2020, we were in compliance with all our loan covenants.

Future principal payments due on our notes payable at December 31, 2020 are as follows:

NOTE 8.     BONDS AND BONDS INTEREST PAYABLE

In August 2016, Southern Properties Capital LTD (“Southern”), a British Virgin Islands corporation was incorporated for the purpose of raising funds by issuing

YearAmount
2021$14,079 
202214,403 
202337,690 
20242,575 
202512,927 
Thereafter159,580 
241,254 
Deferred finance cost(5,185)
$236,069 
11. Bonds to be traded on the Tel Aviv Stock Exchange (“TASE”).  The Company transferred certain residential and commercial properties located in the United States to Southern, its wholly owned subsidiary. 

On February 13, 2017, Southern filed a final prospectus with the TASE for an offering and salePayable

We have issued three series of nonconvertible Series A Bonds to be issued by Southern. The bonds ("Bonds') through SPC, which are obligations of Southern.  During the year ended December 31, 2017 on three separate occasions Southern issued nonconvertible Series A Bonds with a total value of approximately NIS400 million New Israeli Shekels (“NIS”) or approximately $115 million dollars.  The Series A Bonds have a stated interest rate of 7.3%.  At March 31, 2018 the effective interest rate is 9.17%. The bonds require semi-annual equal installments on January 31 and July 31 of each year from 2019 to 2023 (inclusive). The interest will be repaid on January 31 and July 31 of each of the years 2018 to 2023 (inclusive), with the first payment commencing on July 31, 2017.

On January 25, 2018, interest payment of approximately NIS 14.6 million (or approximately $4.3 million) was paid to the Series A bondholders.

On February 15, 2018, Southern issued Series B bonds in the amount of NIS 137.7 million par value (approximately $39.2 million as of February 15, 2018). The Series B bonds are registeredtraded on the TASE. The bondsBonds are reporteddenominated in NISNew Israeli Shekels ("NIS") and bear annual interest rate of 6.8%. Interest shall be repaid January 31 and July 31 of each of the years 2019 to 2023 (inclusive), first payment commencing on July 31, 2018. The principal shall be repaid in ten equal installments on January 31 and July 31 of each of the years from 2021 to 2025 (inclusive). A total bond issuance cost of $1.4 million was incurred. The effective interest rate is 7.99%.

On July 19, 2018, Southern closed a private placement of its Series B bonds in the amount of NIS 72.3 million (or approximately $19.8 million). The bonds are reported in NIS, are registered on the TASE, bear an annual interest rate of 6.8% and have an effective interest rate of 9.60%. Interest will be paid on January 31 and July 31 of each of the years 2019 and 2013 (inclusive). The principal will be repaid in ten equal installment on January 31 and July 31 of each of the years from 2021 to 2012 (inclusive). The Company incurred bonds issuance costs of approximately $1.9 million.

On July 26, 2018, interest payment of approximately NIS 18.9 million (or approximately $5.2 million) was paid to the Series A and B bondholders.

On July 28, 2019, SPC issued Series C bonds in the amount of NIS 275 million (or approximately $78.1 million). The bonds are reported in NIS, and registered on the TASE, and bear an annual interest of 4.65%. The interest will be paid on January 31 and July 31 of each of the years 2020 through 2023, with the principal payment due in 2023. The Company incurred bond issuance costs of approximately $4.2 million.

On September 23, 2019, Southern entered into a foreign exchange risk hedging transaction agreement with Bank Leumi with the aim of hedging the risk that the NIS exchange rate against the dollar will fall below 3, thereby reducing the exposure of the bonds (Series A, B and C) to exchange rate volatility.  The term of the agreement is six months and the face value of the transaction is NIS 664 million ($ 221 million).  The hedge transaction costs as well as the fair value as of December 31, 2019 were immaterial.

During the year ended December 31, 2019, the Company made payments of $21.8 million and $11.6 million on bondprovide for semiannual principal and interests, respectively.

On January 27, 2020, the Company madeinterest payments of NIS 60.6 million in bond principal on the Series A and interests on the Series A, B, C (or approximately $17.6 million).

through maturity.

On February 2, 2020, the S&Global&P Global Ratings announced the increase of the Company’s issuer rating to ‘ilA-’ from ‘ilBBB+’ for Bonds (Seriesour Series A and B)Series C bonds increased to 'ilA-' from 'ilBBB+'. In addition, the rating on our Series C bond rating (secured by one of SPC’s commercial properties) increasebonds increased to ‘ilA’'ilA' from ‘ilA-’'ilA-' rating due to the expectation of continued improvement in coverage ratios and the expansion of Company’sour portfolio.


In connection with the Bonds, we incurred a (loss) gain on foreign currency transactions of $(13,378), $(15,108), and $12,399, for the years ended December 31, 2020, 2019 and 2018, respectively. From September 23, 2019 to December 31, 2019, we had hedging agreement that effectively prevented the exchange rate for the NIS to the U.S. Dollar from falling below three.

The outstanding balance of theseour Bonds at December 31, 20192020 and 20182019 is as follows:

  December 31, 
  2019  2018 
Bonds (Series A) $92,653  $106,686 
Bonds (Series B)  39,844   36,740 
Bonds (Series B expansion)  20,920   19,290 
Bonds (Series C)  79,572    
Total outstanding bonds $232,989  $162,716 
Less: deferred bond issuance costs  (9,724)  (8,179)
Total outstanding bonds, net  223,265   154,537 
Accrued Interest  6,457   4,037 
Total oustanding bonds, net and accrued interest $229,722  $158,574 

December 31,
Bond Issuance20202019Interest RatMaturity
Series A Bonds(1)(2)$95,133 $92,653 7.30 %7/31/23
Series B Bonds(3)65,318 60,764 6.80 %7/31/25
Series C Bonds(2)85,537 79,572 4.65 %1/31/23
245,988 232,989 
Less unamortized deferred issuance costs(8,100)(9,724)
$237,888 $223,265 
(1)    On November 30, 2020, we issued $19,693 in additional bonds for $18,822 in net proceeds.
(2)    The bonds are collateralized by the assets of SPC.
(3)    The bonds are collateralized by a trust deed in Browning Place, a 625,297 square foot office building in Farmers Branch, Texas.

45

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The aggregate maturities of the bondsour Bonds are as follows:

Year  Agrregage Maturities 
2020  $23,148 
2021   35,301 
2022   35,301 
2023   114,873 
2024   12,153 
Thereafter   12,213 
   $232,989 

The recorded unrealized gain or loss is reflected as a separate line item to highlight the fact that it is a non-cash transaction until such time as actual payment

YearAmount
2021$44,775 
202244,775 
2023130,310 
202413,064 
202513,064 
$245,988 
As of principal and interest on the bonds is made. For the year ended December 31, 2019 and 2018, the Company recorded a loss on foreign currency transaction of approximately $15.1 million, and a gain of $12.4 million, respectively.

NOTE 9.    RELATED PARTY TRANSACTIONS AND FEES  

We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships.2020, we were in compliance with our bond covenants.

12. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity. 

The Company has historically engaged in and may continue toParty Transactions

We engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions.dispositions of real estate. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

Since April 30, 2011,

Pillar and Regis are wholly owned by an affiliates of the sole shareholderMRHI, which also owns approximately 91% of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOR.  As the contractual advisor,ARL. Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  TCI has no employees. Employees of Pillar renderfor advisory services to TCI in accordance with the terms of the Advisory Agreement.


Effective January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties and provides brokerage services.an agreement. Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement. In addition, Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Refer to Part III, Item 10. “Directors, Executive Officers

Rental income includes $1,083, $841 and Corporate Governance – Property Management and Real Estate Brokerage”.   TCI engages third-party companies to lease and manage its apartment properties. 

Below is a description of the related party transactions and fees between Pillar and Regis:

Fees, expenses and revenue paid to and/or received from our advisor: 

          
  For the year ended December 31, 
  2019  2018  2017 
  (dollars in thousands) 
Fees:         
Advisory $5,806  $10,663  $9,995 
Mortgage brokerage and equity refinancing     852   1,551 
Net income fee  357   631   250 
  $6,163  $12,146  $11,796 
Other Expense:            
Cost reimbursements $6,687  $4,398  $2,895 
Interest paid (received)  (8,475)  (7,404)  (4,859)
  $(1,788) $(3,006) $(1,964)
Revenue:            
Rental $1,311  $1,178  $783 

Fees paid to Regis and related parties:

  For the year ended December 31, 
  2019  2018  2017 
  (dollars in thousands) 
Fees:         
Property Sales/Acquisition $318  $43,856  $9,819 
Property management, construction management and leasing commissions  165   540   963 
Real estate brokerage  71   2,068   1,369 
  $554  $46,464  $12,151 

The Company received rental revenue of $1.3 million, $1.2 million, and $0.8 million in$737 for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively, fromfor office space leased to Pillar and its related partiesRegis.

Property operating expense includes $990, $991 and $943 for properties owned by the Company.

As ofyears ended December 31, 2020, 2019 and 2018, respectively, for management fees on commercial properties payable to Regis.

General and administrative expense includes $3,869, $4,144 and $4,578 for the Company had notesyears ended December 31, 2020, 2019 and interest2018, respectively, for employee compensation and other reimbursable costs payable to Pillar.
Advisor fees paid to Pillar were $8,648, $8,410 and $11,294 for the years ended December 31, 2020, 2019 and 2018, respectively.
Notes receivable net of allowances of $54.0 millionare includes amounts held by UHF and $3.2 million, respectively, due fromPillar (See Note 8 – Notes Receivable). UHF is determined to be a related party. During 2019, the Company recognized interest income of $6.9 million, originated $21.4 million, received $12.4 million in principal payments, and received interest payments of $7.6 million from these related party notes receivables.

On January 1, 2012, the Company entered into a development agreement with UHF, a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment propertiesdue to UHF in prior years. Due to this ongoing relationship and theour significant investment in the performance of the collateral secured by the notes receivable. Interest income on these notes was $19,515, $17,413 and $13,132 for the years ended December 31, 2020, 2019 and 2018, respectively.

Interest expense on notes payable to Pillar was $1,581, $1,999 and $423 for the years ended December 31, 2020, 2019 and 2018, respectively.
Related party receivables represents amounts outstanding from Pillar for loans and advances, net of unreimbursed fees, expenses and costs as provided above.



46

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
13. Noncontrolling Interests
The noncontrolling interest represents the third party ownership interest in Income Opportunity Realty Investors, Inc. ("IOR"). Shares of of IOR are listed on the New York stock exchange under the notes receivable, UHF has been determined to be a related party.


The Company issymbol of IOR. We owned 18.9% in in IOR during the primary guarantor, on a $25.0 million mezzanine loan between UHF and a lender. In addition, ARL, and an officer of the Company are limited recourse guarantors of the loan. As ofyears ended December 31, 2020, 2019 UHF was in compliance with the covenantsand 2018.

14. Stockholders Equity
Dividends:
Our decision to the loan agreement.

The Company is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and IOR and their subsidiaries that was entered into in July of 2009. That agreement continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOR and MRHI for the remainder of 2012 and subsequent years. The expense (benefit) in each year was calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory tax rate of 21%.

In addition, SPC is part of a management service agreement with the controlling shareholder owned company in which SPC for an annual payment of 0.5% on the value of the investment properties receives from the Advisor office space, administrative and management services. During 2019, SPC paid management fees to Pillar in the amount of $2.2 million.

The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of December 31, 2019 (dollars in thousands):

          
  Pillar  ARL  Total 
          
Related party receivable, beginning balance, December 31, 2018 $  $133,642  $133,642 
Cash transfers  29,395      29,395 
Advisory fees  (5,806)     (5,806)
Net income fee  (357)     (357)
Fees and commissions  (71)     (71)
Cost reimbursements  (6,687)     (6,687)
Interest income     8,475   8,475 
Notes receivable purchased  (28,669)     (28,669)
Expenses (paid)/received by advisor  9,073      9,073 
Financing (mortgage payments)         
Sales/Purchases Commissions  (318)     (318)
Intercompany property transfers  2,864      2,864 
Income tax expense         
Deferred tax asset         
Purchase of obligations          
Related party receivable, ending balance, December 31, 2019 $(576) $142,117  $141,541 

NOTE 10. DEFERRED INCOME

In previous years, the Company has sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method is not met, and as such the Company has deferred some or all of the gain recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gains on these transactions have been deferred until the properties are sold to a non-related third party. As of December 31, 2019, we had a deferred gain of $9.5 million.

NOTE 11.    DIVIDENDS 

TCI’s Board of Directors established a policy that dividend declarationsdeclare dividends on common stock would beare determined on an annual basis following the end of each year. In accordance with that policy, no dividends on TCI’sour common stock were declared for 2020, 2019, 2018, or 2017.2018. Future distributions to common stockholders will be determined by the Board of Directors in light of conditions then existing, including the Company’s our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.

our board of directors.

Preferred Stock:

NOTE 12.    PREFERRED STOCK

In November 2006, TCIwe issued 100,000 shares of Series D Preferred Stock with a liquidation preference of $100 per share. The preferred stock is not convertible into any other security, requires dividends payable at the initial rate of 7% annually. The dividend rate increases ratably from 7% to 9% in future periods and can be redeemed at any point after September 30, 2011. 

During the fourth quarter ofyear ended December 31, 2018, all 100,000 shares of Series D Preferred Stock were redeemed for $17.2 million,$17,200, of which $7.2 million$7,200 was accrued unpaid dividends. At December 31, 2020, 2019 and 2018, there were no0 preferred shares outstanding.

NOTE 13.    INCOME TAXES

15. Deferred Income
In previous years, we have sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method is not met, and as such we have deferred some or all of the gain recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gains on these transactions have been deferred until the properties are sold to a non-related third party. As of December 31, 2020, we had a deferred gain of $9,315.
16. Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

(Loss) income from continuing operations before income taxes

 Years Ended December 31, 
 2019  2018  2017 
 (In thousands) 
 $(28,137) $186,250  $(15,136)


47

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The (benefit) expense for income taxes consists of:

  Years Ended December 31, 
  2019  2018  2017 
  (In thousands) 
Current:         
Federal $  $42,805  $(5,603)
State   —   1,210   10 
             
Deferred and Other:            
Federal  (2,000  (40,805)  5,603 
State        170 
Total tax (benefit) expense $(2,000 $3,210  $180 

Year Ended December 31,
202020192018
Current:
Federal00$42,805 
State01,210 
Deferred and Other:
Federal(2,000)(40,805)
State000
Total tax expense (benefit)$$(2,000)$3,210 

The reconciliation between the Company’sour effective tax rate on income from continuing operations and the statutory rate is as follows:

  Years Ended December 31, 
  2019  2018  2017 
  (In thousands) 
Income tax (benefit) expense at federal statutory rate $(5,909 $39,113  $(5,603)
State and local income taxes net of federal tax benefit      1,210   10 
Permanent differences  (2,406 )  (143)   
Timing differences            
Installment note on land sale  —    (2,876)  (1,917)
Allowance for losses on note  —    (383)  (256)
Deferred gains  (588 )  (9,417)  (7,723)
Basis difference on fixed assets    23,675   10,082 
Other basis/timing differences  3,173    (7,164)  (16)
Generation (use) of net operating loss carryforwards  5,730    (42,805)  5,603 
Calculated income tax expense $  $1,210  $180 
Effective tax rate  0.0%  0.6%  N/A 

The company is

Year Ended December 31,
202020192018
Income tax (benefit) expense at federal statutory rate$1,568 $(5,909)$39,113 
State and local income taxes net of federal tax benefit1,210 
Permanent differences(1,766)(2,406)(143)
Timing differences
Installment note on land sale(2,876)
Allowance for losses on note(383)
Deferred gains(878)(588)(9,417)
Basis difference on fixed assets1,307 23,675 
Other basis/timing differences2,296 3,173 (7,164)
Generation (use) of net operating loss carryforwards(2,527)3,730 (40,805)
Calculated income tax expense (benefit)$$(2,000)$3,210 
Effective tax rate%%0.6 %
We are subject to taxation in the United States and various states and foreign jurisdictions.  As of December 31, 2019, the Company’s2020, our tax years for 2019, 2018, 2017, and 20162017 are subject to examination by the tax authorities.  With few exceptions, as of December 31, 2019, the Company is2020, we are no longer subject to U.S federal, state, local, or foreign examinations by tax authorities for the years before 2016.

The 20192020 and 20182019 effective tax rate is driven primarily by the passing of the Tax Cuts and Jobs Act by congress on December 22, 2017.  This act reduced the statutory tax rate for corporations from 35% to 21%, starting in 2018.2019. As a result, theour tax assets of TCI had to be re-pricedwere remeasured to reflect the new tax rate for future years with the impact on the 20172018 provision for income taxes.

48

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Components of the Net Deferred Tax Asset or Liability

  Years Ended December 31, 
  2019  2018 
  (In thousands) 
Deferred Tax Assets:        
Cumulative foreign currency translation loss $1,522  $ 
Deferred gain   1,988    
Net operating loss carryforward  9,633   3,904 
Total Deferred Tax Assets 13,143   3,904 
Less: valuation allowance  (6,480   
Total net deferred tax assets 6,663  3,904 
         
Deferred Tax Liabilities:        
Deferred gain $  $2,603 
Basis differences for fixed assets  6,663   3,301 
Total Deferred Tax Liability 6,663  5,904 
         
Net deferred tax asset (liability)    $(2,000)
         
Current net deferred tax asset  6,663   3,904 
Long-term net deferred tax liability  6,663   5,904 
Net deferred tax liability   (2,000)

Operating Loss and Tax Credit Carryforwards

Year Ended December 31,
20202019
Cumulative foreign currency translation loss$3,818 1,522 
Basis difference for fixed assets1,426 
Deferred gain1,956 1,988 
Net operating loss carryforward7,107 9,633 
14,307 13,143 
Less: valuation allowance(14,307)(6,480)
$$6,663 
Deferred gain$$
Basis differences for fixed assets6,663 
Total Deferred Tax Liability$$6,663 
Current net deferred tax asset6,663 
Long-term net deferred tax liability(6,663)
$$
We have state NOLsnet operating losses in many of the various states in which we operate.


Valuation Allowance

Management assessesWe assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. At December 31, 2019 TCI2020, we had a net deferred tax asset due to tax deductions available to itus in future years. However, as managementwe could not determine that it was more likely than not that TCIwe would realize the benefit of the deferred tax asset, we established a 100% valuation allowance was established.

NOTE 14.    FUTURE MINIMUM RENTAL INCOME UNDER OPERATING LEASES

TCI’S real estate operations include the leasing of commercial properties (office buildings, industrial warehousesallowance.

17. Commitments and retail centers). These leases expire at various dates through 2029. The following is a schedule of minimum future rents on non-cancelable operating leases at December 31, 2019 (dollars in thousands):

Year  Amount 
2020   26,208 
2021   23,558 
2022   20,382 
2023   14,882 
2024   8,861 
Thereafter   7,109 
Total  $101,000 

NOTE 15.    OPERATING SEGMENTS

Our segments are based on management’s method of internal reporting which classifies its operations by property type. The segments are commercial, apartments, land and other. Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow.

Items of incomeContingencies

We believe that are not reflected in the segments are interest, other income, equity in partnerships and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on sale of real estate.

The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.


Presented below is the Company’s reportable segments’ operating income including segment assets and expenditures for the years 2019, 2018 and 2017 (dollars in thousands): 

                
  Commercial             
For the Year Ended December 31, 2019 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $32,707  $15,257  $ $6  $47,970 
Property operating expenses  (15,805)  (8,375)  (255)  (778)  (25,213)
Depreciation  (10,229)  (3,150)       (13,379)
Mortgage and loan interest  (7,018)  (4,069)  (1,000)  (19,729)  (31,816)
Loss on debt extinguishment  (5,219)           (5,219)
Interest income           19,607   19,607 
Loss on sale of income producing property     (80)        (80)
Gain on land sales        14,889      14,889 
Segment operating (loss) income $(5,564) $(417) $13,634  $(894) $6,759 
                     
Capital expenditures $5,257  $25,001  $3,489  $  $33,747 
Assets $229,424  $178,536  $70,003  $  $477,963 
                     
Property Sales                    
Sales price $  $3,096  $30,012  $  $33,108 
Cost of sale     (3,176)  (15,123)     (18,299)
(Loss) gain on sales $  $(80) $14,889  $  $14,809 

  Commercial             
For the Year Ended December 31, 2018 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $33,113  $87,832  $ $10  $120,955 
Property operating expenses  (16,558)  (42,134)  (275)  (453)  (59,420)
Depreciation  (9,530)  (13,217)    (14)  (22,761)
Mortgage and loan interest  (7,662)  (20,671)  (318)  (30,221)  (58,872)
Interest income           15,793   15,793 
Gain on land sales        17,404      17,404 
Segment operating income (loss) $(637) $11,810  $16,811  $(14,885) $13,099 
                     
Capital expenditures $8,246  $16,954  $  $  $25,200 
Assets $153,018  $143,500  $84,016  $3,970  $384,504 
                     
Property Sales                    
Sales price $2,313  $8,512  $43,311  $  $54,136 
Cost of sale  (2,313)  (8,512)  (25,907)     (36,732)
Gain on land sales $  $  $17,404  $  $17,404 

  Commercial             
For the Twelve Months Ended December 31, 2017 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $32,323  $92,807  $87  $16  $125,233 
Property operating expenses  (17,724)  (43,677)  (667)  (988)  (63,056)
Depreciation  (9,200)  (16,354)     (4)  (25,558)
Mortgage and loan interest  (7,528)  (22,346)  (1,588)  (28,482)  (59,944)
Interest income           13,862   13,862 
Recognition of deferred gain on sale of income producing properties     9,842         9,842 
Gain on land sales        4,884      4,884 
Segment operating income (loss) $(2,129) $20,272  $2,716  $(15,596) $5,263 
                     
Capital expenditures $3,157  $1,402  $609  $  $5,168 
Assets $137,157  $726,852  $115,205  $656  $979,870 
                     
Property Sales                    
Sales price $  $  $11,177  $  $11,177 
Cost of sale        (6,293)     (6,293)
Recognized prior deferred gain     9,842         9,842 
Gain on sale $  $9,842  $4,884  $  $14,726 

The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:

          
  For the Years Ended December 31, 
  2019  2018  2017 
Segment operating  income $6,759  $13,099  $5,263 
Other non-segment items of income (expense)            
General and administrative  (10,951)  (11,359)  (6,269)
Net income fee to related party  (357)  (631)  (250)
Advisory fee to related party  (5,806)  (10,663)  (9,995)
Other income  84   28,150   625 
Gain on formation of joint venture     154,126    
Foreign currency translation (loss) gain  (15,108)  12,399   (4,536)
(Loss) earnings from joint venture  (2,774)  44    
Earnings from other unconsolidated investees  16   1,085   26 
Income tax benefit (expense)  2,000   (3,210)  (180)
Net (loss) income from continuing operations $(26,137) $183,040  $(15,316)

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:

          
  As of December 31, 
  2019  2018  2017 
Segment assets $387,790  $384,504  $979,870 
Investments in unconsolidated subsidiaries and investees  81,780   90,571   2,472 
Notes and interest receivable  120,986   83,541   70,166 
Other assets and receivables  275,362   303,764   260,914 
Total assets $865,918  $862,380  $1,313,422 

NOTE 16.    QUARTERLY RESULTS OF OPERATIONS  

The following is a tabulation of TCI’s quarterly results of operations for the years 2019, 2018 and 2017. Quarterly results presented may differ from those previously reported in TCI’s Form 10-Q due to the reclassification of the operations of properties sold or held for sale to discontinued operations in accordance with ASC topic 360:

  Three Months Ended 2019
  March 31, June 30, September 30, December 31,
  (dollars in thousands, except share and per share amounts)
         
Total operating revenues $11,929  $11,840  $11,883  $12,318 
Total operating expenses  13,182   15,220   12,948   14,356 
Operating loss  (1,253)  (3,380)  (1,065)  (2,038)
Other expense  (6,389)  (4,639)  (11,841)  (12,341)
(Loss) income before gain on formation of joint venture, gain on sales, non-controlling interest, and taxes  (7,642)  (8,019)  (12,906)  (14,379)
(Loss) on sale of income producing properties  —     (80)  —     —   
Gain on land sales  2,216   2,133   5,140   5,400 
Income tax benefit - deferred  —     —     —     2,000 
Net (loss) income from continued operations  (5,426)  (5,966)  (7,766)  (6,979)
Net loss  (5,426)  (5,966)  (7,766)  (6,979)
Less: net (loss) attributable to non-controlling interest  (183)  (379)  (21)  (200)
Net loss applicable to common shares $(5,609) $(6,345) $(7,787) $(7,179)
                 
PER SHARE DATA                
Earnings per share - basic                
(Loss) income from continued operations $(0.62) $(0.68) $(0.89) $(0.81)
Net (loss) income applicable to common shares $(0.64) $(0.73) $(0.89) $(0.83)
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
(Loss) income from continued operations $(0.62) $(0.68) $(0.89) $(0.81)
Net (loss) income applicable to common shares $(0.64) $(0.73) $(0.89) $(0.83)
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 

  Three Months Ended 2018
  March 31, June 30, September 30, December 31,
  (dollars in thousands, except share and per share amounts)
         
Total operating revenues $31,082  $31,607  $33,505  $24,761 
Total operating expenses  25,894   26,966   27,734   24,240 
Operating income  5,188   4,641   5,771   521 
Other (expense) income  (6,624)  2,731   5,896   (3,404)
(Loss) income before gain on formation of joint venture, gain on sales, non-contolling interest, and taxes  (1,436)  7,372   11,667   (2,883)
Gain on formation of joint venture  —     —     —     154,126 
Gain on land sales  1,335   —     12,243   3,826 
Income tax expense  —     —     (792)  (2,418)
Net (loss) income from continued operations  (101)  7,372   23,118   152,651 
Net (loss) income  (101)  7,372   23,118   152,651 
Less: net (loss) attributable to non-controlling interest  (132)  (126)  (915)  (417)
Preferred dividend requirement  (222)  (224)  (227)  (227)
Net (loss) income applicable to common shares $(455) $7,022  $21,976  $152,007 
                 
PER SHARE DATA                
Earnings per share - basic                
(Loss) income from continued operations $(0.05) $0.81  $2.52  $17.44 
Net (loss) income applicable to common shares $(0.05) $0.81  $2.52  $17.44 
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
(Loss) income from continued operations $(0.05) $0.81  $2.52  $17.44 
Net (loss) income applicable to common shares $(0.05) $0.81  $2.52  $17.44 
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 

69

  Three Months Ended 2017
  March 31, June 30, September 30, December 31,
  (dollars in thousands, except share and per share amounts)
         
Total operating revenues $31,535  $31,302  $31,491  $30,905 
Total operating expenses  26,337   25,460   25,725   27,606 
Operating income (loss)  5,198   5,842   5,766   3,299 
Other expense  (10,658)  (15,613)  (8,967)  (14,729)
Loss before gain on sales, non-contolling interest, and taxes  (5,460)  (9,771)  (3,201)  (11,430)
Gain (loss) on sale of income producing properties  —     —     9,841   1 
Gain (loss) on land sales  445   (476)  530   4,385 
Income tax benefit (expense)  —     —     —     (180)
Net income (loss) from continued operations  (5,015)  (10,247)  7,170   (7,224)
Net income (loss)  (5,015)  (10,247)  7,170   (7,224)
Less: net (income) loss attributable to non-controlling interest  (119)  (163)  (96)  (121)
Preferred dividend requirement  (222)  (224)  (224)  (230)
Net (loss) income applicable to common shares $(5,356) $(10,634) $6,850  $(7,575)
                 
PER SHARE DATA                
Earnings per share - basic                
Loss from continued operations $(0.61) $(1.22) $0.79  $(0.88)
Net income (loss) applicable to common shares $(0.61) $(1.22) $0.79  $(0.88)
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
Loss from continued operations $(0.61) $(1.22) $0.79  $(0.88)
Net income (loss) applicable to common shares $(0.61) $(1.22) $0.79  $(0.88)
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 

70

NOTE 17.    COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

Liquidity.     Management believes that TCIwe will generate excess cash from property operations in 2020;the next twelve months; such excess, however, might not be sufficient to discharge all of TCI’sour obligations as they become due. Management intendsWe intend to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet itsour liquidity requirements.

GuaranteesThe Company is

We were the primary guarantor, on a $25.0 million$24,300 mezzanine loan between UHF and a lender. In addition, ARL, and an officerThe guarantee was remove on January 29, 2021, concurrent with the repayment of the Company are limited recourse guarantors ofloan by UHF.
We were the loan. As of December 31, 2019 UHF was in compliance with the covenants to the loan agreement.

Partnership Buyouts.    TCI is the limited partner in various partnerships related the construction of residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buy out the nonaffiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements.

ART and ART Midwest, Inc.

While the Company and all entities in which the Company has a direct or indirect equity interest are not parties to or obligated in any way for the outcome, a formerly owned entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have been engaged since 1999 in litigation with Mr. David Clapper and entities related to Mr. Clapper (collectively, the “Clapper Parties”). The matter originally involved a transaction in 1998 in which ART Midwest, Inc. was to acquire eight residential apartment complexes from the Clapper Parties. Through the years, a number of rulings, both for and against American Realty Trust, Inc. “ART” and ART Midwest, Inc., were issued. In October 2011, a ruling was issued under which the Clapper Parties received a judgment for approximately $74 million, including $26 million in actual damages and $48 million interest. The ruling was against ART and ART Midwest, Inc., but no other entity. During February 2014, the Court of Appeals affirmed a portion of the judgment in favor of the Clapper Parties, but also ruled that a double counting of a significant portion of the damages had occurred and remanded the case back to the trial court to recalculate the damage award, as well as pre- and post-judgment interest thereon. Subsequently, the trial court recalculated the damage award, reducing it to approximately $59 million, inclusive of actual damages and then current interest. ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.

The Clapper Parties subsequently filed a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. “EQK”, and ART. The Clapper Parties seek damages from ARL for payment by ART to ARL of ART’s stock in EQK in exchange for a release of the Antecedent Debt owed by ART to ARI. In February 2018 the court determined that this legal matter should not have been filed in federal court and therefore granted motions to dismiss on jurisdictional grounds. In June 2018, the court overruled its own grant of motions to dismiss and reinstated the case. We continue to vigorously defend the case and management believes it has defenses to the claims. The case has not been set for trial.

 In 2005, ART filed suit against a major national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties was pending, but the abatement was recently lifted. The trial court subsequently dismissed the case on procedural grounds, but ART has filed a notice of appeal. The appeal was heard in February 2018 and the case was subsequently appealed to the Texas Supreme Court. The application for Review is still pending with the Texas Supreme Court. In January 2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount of $10 million. At December 31, 2012, the Company fully reserved and valued such note at zero.

Dynex Capital, Inc.

On July 20, 2015, the 68th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).


An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resultedplaintiff in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgmentlawsuit against Dynex Commercial, Inc. on July 20, 2015.

The Final Judgment entered against Dynex Commercial, Inc. on July 20,(“Dynex”) for failure to fulfill certain loan commitments. In January 2015, the court awarded Basic was $0.256 millionus with a judgment of $24,800. We are pursuing all legal means to collect this award. However, due to the uncertainty of the collectability of the award, the receivable has been fully reserved.

In February 2019, we were charged in damages, plus pre-judgment interesta lawsuit brought by Paul Berger (“Berger”) that alleges that we completed improper sales and/or transfers of $0.192 million for a total amount of $0.448 million. The Judgment awarded ART was $14.2 million in damages, plus pre-judgment interest of $10.6 million for a total amount of $24.8 million. The Judgment awarded TCI was $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 until the date their respective damages were paid. Lastly, the Judgement awarded Basic, ART, and TCI was $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.

TCI is workingproperty with counsel to identify assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as pursue additional claims, if any, against Dynex Capital, Inc. Post judgment interest continues to accrue. 

Berger Litigation

On February 4, 2019, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed a Complaint in the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certain officers and directors of the Companies (“Additional Parties”) and two other individuals. The Complaint filed allegesour consolidated subsidiary. Berger requests that the sale and/or exchange of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges otherwe pay off various related claims. The Plaintiff seeks certification as a representative ofparty loans to IOR and all ofthat IOR then distribute the funds to its shareholders, unspecified damages, a return to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named Defendantsshareholders. We intend to vigorously defend against the action, deny allallegations.

In connection with the formation of VAA, 10 of the allegationsproperties that we contributed to the joint venture are subject to an earn-out provision that provides for a remeasurement of the Complaint, and believevalue of those properties after a two-year period following the allegations to be wholly without any merit. The Defendants have filed motions to dismiss the case in its entirety in June 2019. On February 26, 2020, the Court denied IOR’s demand futility motion. The remaindercompletion of the motions to dismiss are pending.

LitigationThe ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.


NOTE 18.   EARNINGS PER SHARE

Earnings per share.Earnings per share (“EPS”) have been computed pursuant to the provisions of ASC 260 “Earnings per Share.” Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding.

Prior to July 9, 2014, TCI had 30,000 shares of Series C cumulative convertible preferred stock issued and outstanding. These 30,000 shares were owned by RAI, a related party, and had accrued dividends unpaid of $0.9 million. The stock had a liquidation preference of $100.00 per share and could be converted into common stock at 90% of the daily average closing price of the common stock for the prior five trading days. On July 9, 2014, RAI converted all 30,000 shares into the requisite number of shares of common stock. The conversion resulted in the issuance of 304,298 new shares of common stock. The effects of the Series C Cumulative Convertible Preferred Stock are no longer included in the dilutive earnings per share calculation for the current period, but are considered in the calculation for the prior periods if applying the if-converted method is dilutive.

construction. As of December 31, 2020, we have recorded a liability of $10,000, which we believe is the amount that will be required to settle our obligation. We have been unable to reach agreement with our joint venture partner on the remeasured value. As a result, the parties have filed for arbitration in accordance with the joint venture agreement.

49

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
18. Quarterly Results of Operations
The following is a tabulation of our quarterly results of operations for the years 2020, 2019 and 2018, there are no preferred stock or stock options that are required to be included2018. Quarterly results presented may differ from those previously reported in the calculation of EPS.

NOTE 19.   SUBSEQUENT EVENTS

On February 2, 2020, S&P Global Ratings announced the increase of the Company’s issuer rating to ‘ilA-’ from ‘ilBBB+’ for Bonds (Series A and B). In addition, Series C bond rating (secured by one of SPC’s commercial properties) increase to ‘ilA’ from ‘ilA-’ ratingour Form 10-Q due to the expectationreclassification of continued improvement in coverage ratios and the expansion of Company’s portfolio.

During 2020, a strain of coronavirus (“COVID – 19”) was reported worldwide, resulting in decreased economic activity and concerns about the pandemic, which would adversely affect the broader global economy. The Company is taking all necessary steps to keep our business premises, tenants, vendors and employees in a safe environment and are constantly monitoring the impact of COVID – operations.

2020 Quarter Ended
March 31,June 30,September 30,December 31,
Revenues$12,753 $13,431 $12,159 $18,679 
Net operating (loss) income(3,146)635 (1,537)4,020 
Net income (loss) attributable to the Company4,613 (4,158)7,693 (1,479)
Net income (loss) attributable to the Company per share - basic and diluted$0.53 $(0.48)$0.88 $(0.17)

2019 Quarter Ended
March 31,June 30,September 30,December 31,
Revenues$15,821 $12,528 $13,397 $6,308 
Net operating income (loss)2,639 (2,692)449 (8,048)
Net (loss) income attributable to the Company(5,609)(6,345)(7,787)(7,179)
Net (loss) income attributable to the Company per share - basic and diluted$(0.64)$(0.73)$(0.89)$(0.83)

19. At this point, the extent to which COVID – 19 may impact the global economy and our business is uncertain, but pandemics or other significant public health events could have a material adverse effect on our business and results of operations.

Subsequent Events

The date to which events occurring after December 31, 2019,2020, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 30, 2020,24, 2021, which is the date of which the financial statements were available to be issued. There are no subsequent events that would require an adjustment to the financial statements.


50

Schedule III


TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2019

                                     
     Initial Cost  Cost Capitalized Subsequent to Acquisition  Asset Impairment  Gross Amount of Which Carried at End of Year             
                                     
Property/Location Encumbrances  Land  Buildings  Improvements  Asset Impairment  Land  Building & Improvements  Total  Accumulated Depreciation  Date of Construction  Date Acquired  Life on Which Depreciation In Latest Statement of Operation is Computed 
                                                 
Properties Held for Investment Apartments                                                
Legacy at Pleasant Grove, Texarkana, TX $13,944  $2,005  $17,892  $217  $  $2,005  $18,109  $20,114  $2,289   2006   12/14  40 years 
Toulon, Gautier, MS  19,575   1,621   20,107   372      1,621   20,479   22,100   4,273   2011   9/09  40 years 
Villager, Ft. Walton, FL  672   141   1,267         141   1,267   1,408   148   1972   6/15  40 years 
Villas at Bon Secour, Gulf Shores, AL  11,212   2,715   15,385         2,715   15,385   18,100   545   2007   7/18  40 years 
Vista Ridge, Tupelo, MS  10,252   1,339   13,398         1,339   13,398   14,737   1,893   2009   10/15  40 years 
Chelsea, Beaumont, TX  8,794   1,225   11,025   160      1,225   11,185   12,410   303   1999   11/18  40 years 
Overlook at Allensville Phase II, Sevierville, TN  15,829   2,411   17,005         2,411   17,005   19,416   319   2012   11/15  40 years 
Landing, Houma, LA  15,484   2,012   18,115   25      2,012   18,140   20,152   491   2005   12/18  40 years 
Farnham Park, Port Aurther, TX  9,183   1,010   9,086   144      1,010   9,230   10,240   251   1999   11/18  40 years 
Parc at Denham Springs Phase II, Denham Springs, LA  15,079   1,502   12,486   3,508      1,502   15,994   17,496   50   2010   11/9  40 years 
Total Apartments Held for Investment $120,024  $15,981  $135,766  $4,426  $  $15,981  $140,192  $156,173  $10,562             
                                                 
Apartments Under Construction                                                
Forest Pines, Bryan, TX     5,040      301      5,040   301   5,341             
Sugar Mill III, Addis, LA  6,302   576      7,023      576   7,023   7,599         11/15   
McKinney Apts at Heritage, McKinney, TX     2,481      89      2,481   89   2,570         6/17   
Forest Pines Phase II (Forest Grove), Bryan, TX  1,560         4,674         4,674   4,674         4/19   
LD Athens Lindsay Ln, Athens, LA  1,155   2,098      81      2,098   81   2,179         9/19   
Total Apartments Under Construction $9,017  $10,195  $  $12,168  $  $10,195  $12,168  $22,363  $             
                                                 
Commercial                                                
600 Las Colinas, Las Colinas, TX  37,215   5,751   51,759   20,143      5,751   71,902   77,653   32,858   1984   8/05  40 years 
770 South Post Oak, Houston, TX  12,178   1,763   15,834   697      1,763   16,531   18,294   2,117   1970   7/15  40 years 
Bridgeview Plaza, LaCrosse, WI  3,908         1,207         1,207   1,207   804   1979   3/03  40 years 
Browning Place (Park West I), Farmers Branch, TX      5,096   45,868   26,645      5,096   72,513   77,609   29,867   1984   4/05  40 years 
Fruitland Plaza, Fruitland Park, FL      23      83      23   83   106   71      5/92  40 years 
Senlac VHP,  Farmers Branch, TX      622      142      622   142   764   142      8/05  40 years 
Stanford Center, Dallas, TX  39,537   20,278   34,862   8,251   (9,600)  20,278   33,513   53,791   13,752      6/08  40 years 
Total Commercial Held for Investment $92,838  $33,533  $148,323  $57,168  $(9,600) $33,533  $195,891  $229,424  $79,611             
                                                 
Land                                                
Dedeaux, Gulfport, MS     1,612      46   (38)  1,612   8   1,620         10/06   
Gautier, Gautier, MS     202            202      202         7/98   
Lake Shore Villas, Humble, TX     81      3      81   3   84         3/02   
Lubbock, Lubbock, TX     234            234      234         1/04   
Ocean Estates, Gulfport, MS     1,418      390      1,418   390   1,808         10/07   
Union Pacific Railroad, Dallas, TX     130            130      130         3/04   
Willowick, Pensacola, FL     137            137      137         1/95   
Windmill Farms, Kaufman County, TX  13,861   55,668      13,913   (20,343)  55,668   (6,430)  49,238         11/11   
T Palm Desert, Riverside, CA     1,800            1,800      1,800         9/19   
Lacy Longhorn, Farmers Branch, TX     1,169         (760)  1,169   (760)  409         6/04   
Minivest, Dallas, TX     7             7      7         4/13   
Nicholson Croslin, Dallas, TX     184         (118)  184   (118)  66         10/98   
Nicholson Mendoza, Dallas, TX     80         (51)  80   (51)  29         10/98   
Mercer Crossing, Farmers Branch, TX     10,966             10,966      10,966         1/08   
McKinney 36, Collin County, TX  945   635      161   (19)  635   142   777         1/98   
Travis Ranch, Kaufman County, TX     80            80      80         8/08   
Dominion Mercer Phase II, Farmers Branch, TX     2,440      111   (135)  2,440   (24)  2,416         3/99   
Total Land Held for Investment $14,806  $76,843  $  $14,624  $(21,464) $76,843  $(6,840) $70,003  $             
                                                 
Total Properties Held for Investment $236,685  $136,552  $284,089  $88,386  $(31,064) $136,552  $341,411  $477,963  $90,173             
2020

Initial CostCost
Capitalized
Subsequent to
Acquisition
Gross Amount Carried at End of Year
Property/LocationEncumbrancesLandBuildingsLandBuilding &
Improvements
TotalAccumulated
Depreciation
Date of
Construction
Date
Acquired
Multifamily
Chelsea$8,194 $1,225 $11,230 $$1,231 $11,230 $12,461 $596 19992018
Forest Grove7,333 1,440 10,234 26 1,440 10,260 11,700 150 20202020
Landing Bayou14,643 2,011 18,255 14 2,011 18,269 20,280 948 20052018
Legacy at Pleasant Grove13,653 2,005 18,109 2,005 18,109 20,114 2,761 20062014
Overlook at Allenville Phase II15,621 2,410 17,033 12 2,410 17,045 19,455 749 20122015
Parc at Denham Springs Phase II16,128 1,505 16,975 1,505 16,975 18,480 449 20102009
Sugar Mill Phase III9,298 576 9,755 576 9,762 10,338 138 20152015
Toulon13,975 1,621 20,107 372 1,993 20,107 22,100 4,775 20112009
Villas at Bon Secour10,280 2,715 15,385 2,715 15,385 18,100 929 20072018
Vista Ridge9,979 1,339 13,398 1,339 13,398 14,737 2,241 20092015
119,104 16,847 150,481 437 17,225 150,540 167,765 13,736 
Development
Forest Pines3,600 301 3,600 301 3,901 2020
Heritage McKinney3,037 231 3,037 231 3,268 2017
6,637 532 6,637 532 7,169 
Commercial
600 Las Colinas35,589 5,751 55,460 9,609 5,751 65,069 70,820 27,702 19842005
770 South Post Oak11,871 1,763 16,312 615 1,763 16,927 18,690 2,465 19702015
Browning Place85,537 5,096 49,441 14,428 5,096 63,869 68,965 24,624 19842005
Stanford Center39,093 20,278 25,876 6,223 20,278 32,099 52,377 13,817 20072008
Other646 74 646 74 720 74 
172,090 33,534 147,163 30,875 33,534 178,038 211,572 68,682 
Land
Mercer Crossing5,406 5,406 5,406 2008
Windmill Farms10,397 43,973 4,329 48,302 48,302 2011
Other5,325 16,571 3,016 19,587 19,587 
15,722 65,950 7,345 73,295 73,295 
$306,916 $122,968 $297,644 $39,189 $130,691 $329,110 $459,801 $82,418 

SCHEDULE III

(Continued)


51

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

As of December 31, 2019

          
  2019  2018  2017 
Reconciliation of Real Estate            
Balance at January 1, $463,732  $1,165,662   1,066,603 
Additions            
Acquisitions, improvements and construction  92,964   175,996   129,483 
Deductions            
Sale of real estate  (78,733)  (877,926)  (30,424)
Balance at December 31, $477,963  $463,732  $1,165,662 
             
Reconciliation of Accumulated Depreciation            
Balance at January 1,  79,228   177,546   165,597 
Additions            
Depreciation  13,379   22,761   25,558 
Deductions            
Sale of real estate  (2,434)  (121,079)  (13,609)
Balance at December 31, $90,173  $79,228   177,546 

SCHEDULE IV
TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS
December 31, 2019
                   
Description Interest Rate Final Maturity Date Periodic Payment Terms Prior Liens  Face Amount of Mortgage  Carrying Amount of Mortgage  Principal or Loans Subject to Delinquent Principal or Interest 
        (dollars in thousands)    
Prospectus Endeavors 4, LLC 12.00% Jan-23 Excess cash flow     5,907   5,907    
Prospectus Endeavors 6, LLC 12.00% Oct-22 Excess cash flow     496   496    
Oulan-Chikh Family Trust 8.00% Mar-21 Excess cash flow     174   174    
H198, LLC 6.00% Sep-20 Excess cash flow     4,554   4,554    
McKinney Ranch Land                      
Forest Pines 5.00% Nov-20 Excess cash flow        2,868    
Spyglass Apartments of Ennis, LP 5.00% Nov-20 Excess cash flow     5,083   5,288    
Bellwether Ridge 5.00% May-20 Excess cash flow     3,429   3,765    
Parc at Windmill Farms 5.00% May-20 Excess cash flow     6,066   7,602    
RAI PFBL 2018 Purch Fee Note Weatherford 12.00% Dec-21 Excess cash flow          525    
Unified Housing Foundation, Inc. (Echo Station) 12.00% Dec-32 Excess cash flow  9,719   2,794   1,481    
100% Interest in UH of Temple, LLC                     
Unified Housing Foundation, Inc. (Lakeshore Villas/HFS of Humble, LLC) 12.00% Dec-32 Excess cash flow  15,965   2,959   2,000    
100% Interest in HFS of Humble, LLC                     
Unified Housing Foundation, Inc. (Lakeshore Villas/HFS of Humble, LLC) (31.5% of cash flow) 12.00% Dec-32 Excess cash flow  15,756   8,836   6,369    
Interest in Unified Housing Foundation Inc.                     
Unified Housing Foundation, Inc. (Limestone Ranch/UH of Vista Ridge,LLC) 12.00% Dec-32 Excess cash flow        1,953    
Unified Housing Foundation, Inc. (Limestone Ranch/UH of Vista Ridge,LLC) 12.00% Dec-32 Excess cash flow        2,000    
Unified Housing Foundation, Inc. (Limestone Ranch/UH of Vista Ridge,LLC) 12.00% Dec-32 Excess cash flow        4,000    
Unified Housing Foundation, Inc. (Timbers of Terrell) 12.00% Dec-32 Excess cash flow  7,294   1,702   1,323    
100% Interest in UH of Terrell, LLC                      
Unified Housing Foundation, Inc (2015 Advisory Fee) 12.00% Dec-21 Excess cash flow        3,994    
Unified Housing Foundation, Inc (2008-2014 Advisory Fee) 12.00% Dec-21 Excess cash flow        6,407    
Unified Housing Foundation, Inc (2018 Advisory Fee) 12.00% Jun-20 Excess cash flow        5,314    
Unified Housing Foundation, Inc 12.00% Mar-22 Excess cash flow        4,782    
RAI UHF 2019 Advisory Fee Note     Excess cash flow                
Unified Housing Foundation, Inc 12.00% Jul-21 Excess cash flow        838    
2018 Refin Fee (Lakeshore Villas)     Excess cash flow                
Unified Housing Foundation, Inc 12.00% Jul-21 Excess cash flow        773    
2018 Refin Fee (Limestone Ranch)     Excess cash flow                
Unified Housing Foundation, Inc 12.00% Jul-21 Excess cash flow        839    
2018 Refin Fee (Marquis @ Vista Ridge)     Excess cash flow                
Unified Housing Foundation, Inc 12.00% Jul-21 Excess cash flow        432    
2018 Refin Fee (Timbers at the Park)     Excess cash flow                
Unified Housing Foundation, Inc 12.00% Jul-21 Excess cash flow        913    
2018 Refin Fee (Trails @ White Rock)                      
Unified Housing Foundation, Inc 12.00% Aug-21 Excess cash flow        212    
2018 Refin Fee (Bella Vista)                      
Unified Housing Foundation, Inc 12.00% Oct-21 Excess cash flow        1,980    
2017 Fees on Sale LSC/SR/PKCR                      
Unified Housing Foundation, Inc 12.00% Oct-21 Excess cash flow        4,851    
2017 Fees on Profit LSC/SR/PKCR                      
Various related party notes Various Various Excess cash flow        3,553    
Various non-related party notes Various Various Excess cash flow        28,989    
                $114,182     
              Accrued interest   8,629     
              Allowance for estimated losses   (1,825)    
               $120,986     

(1) Fully reserved


SCHEDULE IV
(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS
As of December 31,
          
  2019  2018  2017 
  (dollars in thousands) 
          
Balance at January 1, $83,541  $70,166  $81,133 
Additions            
New mortgage loans  49,671   13,123   16,422 
Increase (decrease) of interest receivable on mortgage loans  9,576   6,329   668 
Deductions            
Amounts received  (21,589)  (6,077)  (26,230)
Non-cash reductions  (213)     (1,827)
Balance at December 31, $120,986  $83,541  $70,166 

77

202020192018
Reconciliation of Real Estate
Balance at January 1,$477,963 $463,732 $1,165,662 
Additions21,223 92,964 175,996 
Deductions(39,385)(78,733)(877,926)
Balance at December 31,$459,801 $477,963 $463,732 
Reconciliation of Accumulated Depreciation
Balance at January 1,90,173 79,228 177,546 
Additions12,188 13,379 22,761 
Deductions(19,943)(2,434)(121,079)
Balance at December 31,$82,418 $90,173 $79,228 


52

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE IV - MORTGAGE LOANS
December 2020

DescriptionInterest RateMaturity DatePeriodic Payment
Terms
Prior LiensFace AmountCarrying Value
Convertible loans
Autumn Breeze5.00%7/1/2022No payments until maturity or conversion$$1,867 $1,867 
Bellwether Ridge5.00%11/1/2021No payments until maturity or conversion3,858 3,858 
Forest Pines5.00%11/1/2022No payments until maturity or conversion2,869 2,869 
Parc at Ingleside5.00%12/1/2021No payments until maturity or conversion2,523 2,523 
Parc at Windmill Farms5.00%11/1/2022No payments until maturity or conversion7,803 7,803 
Plum Tree5.00%4/26/2026No payments until maturity or conversion857 857 
Spyglass of Ennis5.00%11/1/2022No payments until maturity or conversion5,360 5,360 
Steeple Crest5.00%8/1/2021No payments until maturity or conversion6,498 6,498 
31,635 31,635 
Land loans
ABC Land and Development, Inc.9.50%6/30/2021No payments until maturity4,408 4,408 
ABC Paradise, LLC9.50%6/30/2021No payments until maturity1,210 1,210 
Lake Wales9.50%6/30/2021No payments until maturity3,000 3,000 
Legacy Pleasant Grove12.00%10/23/2022No payments until maturity496 496 
McKinney Ranch6.00%9/15/2022No payments until maturity4,554 4,554 
One Realco Land Holding, Inc.9.50%6/30/2021No payments until maturity1,728 1,728 
Riverview on the Park Land, LLC9.50%6/30/2021No payments until maturity1,045 1,045 
RNC Portfolio, Inc.5.00%9/1/2024No payments until maturity8,853 8,853 
Spartan Land12.00%1/16/2023No payments until maturity5,907 5,907 
31,201 31,201 
Subsidized housing
Phillips Foundation for Better Living, Inc.12.00%3/31/2023Payments from excess property cash flows61 61 
Unified Housing Foundation, Inc.12.00%7/31/2021Payments from excess property cash flows2,880 2,880 
Unified Housing Foundation, Inc.12.00%8/30/2021Payments from excess property cash flows212 212 
Unified Housing Foundation, Inc.12.00%10/31/2021Payments from excess property cash flows6,831 6,831 
Unified Housing Foundation, Inc.12.00%12/31/2021Payments from excess property cash flows10,896 10,896 
Unified Housing Foundation, Inc.12.00%3/31/2022Payments from excess property cash flows10,096 10,096 
53

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
DescriptionInterest RateMaturity DatePeriodic Payment
Terms
Prior LiensFace AmountCarrying Value
Unified Housing Foundation, Inc.12.00%3/31/2023Payments from excess property cash flows6,990 6,990 
Unified Housing Foundation, Inc.12.00%5/31/2023Payments from excess property cash flows3,615 3,615 
Unified Housing Foundation, Inc.12.00%12/31/2032Payments from excess property cash flows19,139 19,139 
60,720 60,720 
$$123,556 $123,556 

54

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE IV - MORTGAGE LOANS
As of December 31,
202020192018
Balance at January 1,$112,357 $83,541 $70,166 
Additions26,535 59,241 15,123 
Deductions(15,336)(30,425)(1,748)
Balance at December 31,$123,556 $112,357 $83,541 

55


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention of overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’sour internal control over financial reporting as of December 31, 2019.2020. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on management’s assessments and those criteria, management has concluded that Company’s internal control over financial reporting was effective as of December 31, 2019.

2020.

This annual report does not include an attestation report of the Company’sour registered public accounting firm regarding internal control over financial report. Management’s report was not subject to attestation by the Company’sour registered public accounting firm pursuant to temporary rules of the Securities and Exchange CommissionSEC that permit the Companyus to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

In preparation for management’s report on internal control over financial reporting, we documented and tested the design and operating effectiveness of our internal control over financial reporting. There were no changes in our internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    OTHER INFORMATION

Not applicable.


56



PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

The affairs of TCIthe Company are managed by aour Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved.

It

An objective is the Board’s objective thatfor a majority of theour Board consists ofto be independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with TCI.the Company. The Board has established guidelines to assist it in determining director independence which conform to, or are more exacting than, the independence requirements in the New York Stock Exchange ("NYSE") listing rules. The independence guidelines are set forth in TCI’sour “Corporate Governance Guidelines”. The text of this document has been posted on TCI’sour internet website at (www.transconrealty-invest.com ("Investor Relations Website")and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independence determination.

TCI has

We have adopted a code of conduct that applies to all Directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Stockholders may find our code of conduct on our website by going to our website address at (www.transconrealty-invest.com).Investor Relations Website. We will post any amendments to the code of conduct, as well as any waivers that are required to be disclosed by the rules of the SECSecurity Exchange Commission (the "SEC") or the New York Stock ExchangeNYSE on our website.

Our Board of Directors has adopted charters for our Audit, Compensation and Governance and Nominating Committees of the Board of Directors. Stockholders may find these documents on our website by going to the website address at (www.transconrealty-invest.com). our Investor Relations Website. You may also obtain a printed copy of the materials referred to by contacting us at the following address: 


Transcontinental Realty Investors, Inc. 

Attn: Investor Relations 

1603 LBJ Freeway, Suite 800 

Dallas, Texas 75234 

Telephone: 469-522-4200

All members of the Audit Committee and Nominating and Corporate Governance Committees must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or indirectly, any consulting, advisory, or compensatory fee from TCIthe Company or any of its subsidiaries other than their director’s compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other committee of the Board), and (ii) no member of the Audit Committee may be an “affiliated person” of TCIthe Company or any of its subsidiaries, as defined by the Securities and Exchange Commission.

TheSEC.

Our current directors of TCI are listed below, together with their ages, terms of service, all positions and offices with TCIus and itsour current advisor, Pillar, their principal occupations, business experience and directorships with other companies during the last five years or more. The designation “affiliated”, when used below with respect to a director, means that the director is an officer, director or employee of Pillar, an officer of the Company, or an officer or director of a related party of the Company. The designation “independent”, when used below with respect to a Director, means that the Director is neither an officer of the Company nor a director, officer or employee of Pillar (but may be a director of the Company, although the Company may have certain business or professional relationships with such Director as discussed in Item 13. Certain Relationships and Related Transactions, and Director Independence.


HENRY A. BUTLER, age 69,70, Director, Affiliated, since November 2005 and Chairman of the Board since May 2009

Retired (since April 30, 2019); Mr. Butler served as Vice President for Pillar Income Asset Management, LLC from April 2011 to April 30, 2019. Mr. Butler has been a Director of the Company since November 2005 and Chairman of the Board since May 2009. He also served as Chairman of the Board since May 2009 and as a Director since July 2003 of ARL and Chairman of the Board since May 2011 and a Director since February 2011 of IOR.


57


WILLIAM J. HOGAN, age 62,63, Director, Independent, since February 2020

Registered Representative and Investment Advisor Representative, employed (since January 2013) by Cetera Advisor Networks LLC, a general securities and investment advisory firm, with an office in San Antonio, Texas. From November 2009 through December 2012, Mr. Hogan was a registered representative, employed by Financial Network Investment Corp. in San Antonio, Texas. He holds Series 7 (General Securities Representative), Series 63 (Uniform Securities Agent State Law) and Series 65 (Investment Advisor) licenses issued by Financial Industry Regulatory Authority (“FINRA”). Mr. Hogan was elected as a director of the Company and TCIARL on January 28, 2020 effective February 1, 2020.

ROBERT A. JAKUSZEWSKI, age 57,58, Director, Independent, since November 2005  

Mr. Jakuszewski is currently has served as a Territory Manager for Artesa Labs since April 2015. He was a Medical Specialist from January 2014 to April 2015 for VAYA Pharma, Inc., Senior Medical Liaison from January 2013 to July 2013 for Vein Clinics of America, and the Vice President of Sales and Marketing from September 1998 to December 2012 for New Horizons Communications, Inc. Mr. Jakuszewski has been a Director of the Company since November 2005. He has also been a Director of ARL since November 2005 and a Director of IOR since March 2004.

TED R. MUNSELLE, age 64, Director, Independent, since February 2004  

Mr. Munselle has been Vice President and Chief Financial Officer of Landmark Nurseries, Inc. since October 1998. On February 17, 2012, he was appointed as a member of the Board of Directors for Spindletop Oil & Gas Company and as Chairman of their Audit Committee. Spindletop’s stock is traded on the Over-the-Counter (OTC) market. Mr. Munselle has been a Director of the Company since February 2004. He has also served as Director of ARL since February 2004 and Director of IOR since March 2009. Mr. Munselle is qualified as an Audit Committee financial expert within the meaning of SEC regulations and the Board of Directors of TCI has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the NYSE. Mr. Munselle is a Certified Public Accountant.

BRADFORD A. PHILLIPS, age 55, Director, since March 2021
Mr. Phillips has been the Chief Executive Officer and Chairman of LBL Group of Insurance Companies since 1999. He has served as President of Midland Securities, LLC, a Dallas, TX based broker/dealer since 2002. Prior to joining LBL Group, he served as President of InterFirst Capital Corporation of Los Angeles, California. Mr. Phillips holds a number of securities licenses, including the Series 4 (Options Principal), Series 7 (General Securities License), Series 24 (General Securities Principal), Series 27 (Financial and Operations Principal), Series 53 (Municipal Securities Principal), Series 55 (Equity Trading Principal), and Series 63 (Blue Sky Securities License). He has also been a Director of ARL since March 2021.
RAYMOND D. ROBERTS, SR.SR.., age 88,89, Director, Independent, since June 2016

Mr. Roberts is currently retired. Mr. Roberts has served as Director of the Company since June 2, 2016. He has also served as Director of ARL and IOR since June 2, 2016. For more than five years prior to December 31, 2014, he was Director of Aviation of Steller Aviation, Inc., a privately held corporation engaged in the business of aircraft (Boeing 737) and logistical management.

Board Meetings and Committees

The Board of Directors held five meetings during 2019.2020. For such year, no incumbent director attended fewer than 75% of the aggregate of (1) the total number of meetings held by the Board during the period for which he or she had been a director and (2) the total number of meetings held by all committees of the Board on which he or she served during the period that he served. Under TCI’sour Corporate Governance Guidelines, each Director is expected to dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by attending meetings of the stockholders of the Company, the Board and Committees of which he is a member. The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees.


58


The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:
Director
Audit CommitteeGovernance and Nominating
Committee
Compensation Committee
Henry A. Butler
William J. HoganXXX
Robert A. JakuszewskiXChairX
Ted R. MunselleChairXX
Bradford A. Phillips
Raymond D. Roberts, Sr.XXChair

Audit Committee.Committee.    The current Audit Committee was formed on February 19, 2004,is responsible for review and its function is to review TCI’soversight of our operating and accounting procedures. A charter of theOur Audit Committee has also been adopted by the Board. The charter of the Audit Committee was adopted on February 19, 2004, and is available on the Company’sour Investor Relations website (www.transconrealty-invest.com)(www.transconrealty-invest.com). The Audit Committee is an “audit committee” for purposes of Section 3(a)(58) of the Securities Exchange ActAct. All of 1934. Thethe current members of the Audit Committee all of whom are independent within the meaning of the SEC Regulations, the listing standards of the New York Stock Exchange, Inc.NYSE and TCI’sour Corporate Governance Guidelines, are Messrs. Jakuszewski, Munselle (Chairman) and Roberts.Guidelines. Mr. Ted R. Munselle, a memberthe chairman of theour Audit Committee, is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange, Inc.NYSE. All of the members of the Audit Committee meet the experience requirements of the listing standards of the New York Stock Exchange.NYSE. The Audit Committee met five times during 2019.

2020.

Governance and Nominating Committee.Committee.    The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of TCI’sour Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 17, 2004 and is available on the Company’sour Investor Relations website (www.transconrealty-invest.com). The current members of the Committee are Messrs. Munselle and Jakuszewski (Chairman) and Roberts.Website. The Governance and Nominating Committee met twicetwo during 2019.

2020.

Compensation Committee.Committee.    The Compensation Committee is responsible for overseeing the policies of the Company relating to compensation to be paid by the Company to the Company’sour principal executive officer and any other officers designated by the Board and make recommendations to the Board with respect to such policies, produce necessary reports and executive compensation for inclusion in the Company’sour Proxy Statement in accordance with applicable rules and regulations and to monitor the development and implementation of succession plans for the principal executive officers and other key executives and make recommendations to the Board with respect to such plans. The charter of theour Compensation Committee was adopted on March 17, 2004, and is available on the Company’sour Investor Relations website (www.transconrealty-invest.com). The current members of the Compensation Committee are Messrs. Roberts (Chairman) and Jakuszewski and Munselle.Website. All of the members of the Compensation Committee are independent within the meaning of the listing standards of the NYSE American and the Company’sour Corporate Governance Guidelines. The Compensation Committee is to be comprised of at least two directors who are independent of Management and the Company. The Compensation Committee met twicetwo during 2019.

The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:

DirectorAudit CommitteeGovernance and Nominating
Committee
Compensation Committee
Robert A. JakuszewskiXChairX
Ted R. MunselleChairXX
Raymond D. Roberts. SrXXChair
Henry A. Butler
William J. Hogan

2020.

Presiding Director

In March 2004, the Board created a new position

The primary responsibility of our presiding director whose primary responsibility is to preside over periodic executive sessions of the Board in which Management directors and other members of Management do not participate. The presiding director also advises the Chairman of the Board and, as appropriate, Committee Chairs with respect to agendas and information needs relating to Board and Committee meetings, provides advice with respect to the selection of Committee Chairs and performs other duties that the Board may from time to time delegate to assist the Board in fulfillment of its responsibilities.

The day following the annual meeting of stockholders held December 11, 201916, 2020 representing all stockholders of record dated November 1, 2019,2, 2020, the full Board met and re-appointed Ted R. Munselle as Presiding Director, to serve in such position until the Company’s next annual meeting of stockholders to be held subsequently in 2020. 

2021. 


59


Determination of Director’s Independence

In February 2004, the Board adopted its

Our Corporate Governance Guidelines. The Guidelines adopted by the Board("Guideines") meet or exceed the new listing standards adopted during that year by the New York Stock Exchange.NYSE. The full text of the Guidelinesour Guideines can be found on the Company’sour Investor Relations website (www.transcontrealty-invest.com).

Website.

Pursuant to the Guidelines,Guideines, the Board undertook its annual review of director independence in March, 2019February 2020 and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and TCIthe Company and its subsidiaries and related parties, including those reported under Certain Relationships and Related Transactions below. The Board also examined transactions and relationship between directors or their related parties and members of TCI’sour senior management or their related parties. As provided in the Guidelines,Guideines, the purpose of such review was to determine whether such relationshipsrelationships or transactions were inconsistent with the determination that the director is independent. Prior to this election as director, on January 28, 2020, the Board undertook a similar review with respect to Mr. Hogan.


As a result of these reviews, the Board affirmatively determined of the then directors, Messrs. Munselle, Hogan, Jakuszewski and Roberts are each independent of the Company and its Management under the standards set forth in the Corporate Governance Guidelines.

Executive Officers

Executive officers of the Company are listed below, all of whom are employed by Pillar. None of the executive officers receive any direct remuneration from the Company nor do any hold any options granted by the Company. Their positions with the Company are not subject to a vote of stockholders. In addition to the following executive officers, the Company has several vice presidents and assistant secretaries who are not listed herein. The ages, terms of service and all positions and offices with the Company, Pillar, other related entities, other principal occupations, business experience and directorships with other publicly-held companies during the last five years or more are set forth below. No family relationships exist among any of the executive officers or directors of the Company.

DANIEL J. MOOS, 69

ERIK L. JOHNSON, 53
Mr. MoosJohnson has served as the Executive Vice President since April 2007 and Chief ExecutiveFinancial Officer of the Company and ARL since March 2010 of IOR, ARL and TCI. Mr. Moos has also served as Prime’s President since April 2007, Secretary since June 2011 and Treasurer since October 2013.August 17, 2020. He has also been Chief Financial Officer of Pillar since June 29, 2020. Prior to joining the Company, he served as Vice President of Financial Reporting at Macerich (NYSE: MAC) and has served as the Chief Accounting Officer of North American Scientific, Inc. He began his career as an auditor with PricewaterhouseCooppers and is a Director since December 2016, President since December 2010, Chief Executive Officer since March 2011 and Treasurer since October 2013 of Pillar.

CPA.

LOUIS J. CORNA, 72

73

Mr. Corna has served as Executive Vice President, General Counsel/Tax Counsel and Secretary of the Company, ARL and IOR since February 2004 of IOR, ARL and TCI.2004. He has also been Executive Vice President since March 2011 and Secretary since December 2010 of Pillar. Mr. Corna was also a Director and Vice President from June 2004 to December 2010 and Secretary from January 2005 to December 2010 of First Equity Properties, Inc., a Nevada corporation with securities registered under Section 12(g) of the Exchange Act.

ALLA DZYUBA, 43

44

Mrs. Dzyuba has served as the Vice President and Chief Accounting Officer of the Company, ARL, TCI and Southern Properties Capital, Ltd, (TCIour wholly owned BVI subsidiary)subsidiary (“SPC”), since July 2019 as well as Director for SPC since April 2018. Mrs. Dzyuba has been employed by Pillar since June 2004, she has over fifteen years of real estate accounting and financial reporting experience, including six years of broker-dealer regulatory reporting experience.

In addition to the foregoing executive officers, we have several vice presidents and assistant secretaries that are not listed herein. Since the August 14, 2020 resignation of Daniel J. Moos, age 70, the offices of President and Chief Executive Officer has been vacant. Mr. Moos was President (from April 2007 and August 14, 2020) and Chief Executive Officer (from March 2010 until August 14, 2020). At the time of his resignation, Mr. Moos advised that his resignation was not the result of any disagreement with the Company, its management, the Board of Directors, or any committee of the Board with respect to procedure, policies or operations.

60


Code of Ethics

TCI has

We have adopted a code of ethics entitled “Code of Business Conduct and Ethics” that applies to all directors, officers, and employees (including those of the contractual Advisor to TCI)our Advisor). In addition, TCI haswe have adopted a code of ethics entitled “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer, president, principal financial officer, chief financial officer, principalchief accounting officer, and controller. The text of these documents has been posted on TCI’s internet website at (www.transconrealty-invest.comour Investor Relations Website and are available in print to any stockholder who requests them.


Compliance with Section 16(a) of the Securities Exchange Act of 1934

Under the securities laws of the United States, the directors, executive officers, and any persons holding more than 10% of TCI’sour shares of Common stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the “Commission”).SEC. Specific due dates for these reports have been established and TCI iswe are required to report any failure to file by these dates. All of these filing requirements were satisfied by TCI’sour directors, executive officers, and 10% holders during the fiscal year ending December 31, 2019.2020. In making these statements, TCI haswe have relied on the written representations of itsour incumbent directors and executive officers, and its 10% holders and copies of the reports that they have filed with the Commission.

SEC.

The Advisor

Pillar has been TCI’sour Advisor and Cash Manager since April 30, 2011.  Although the Board of Directors is directly responsible for managing the affairs of TCI,the Company, and for setting the policies which guide it, theour day-to-day operations of TCI are performed by Pillar, as the contractual advisor, under the supervision of the Board.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors.  Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with TCI’sour business plan and investment policy.  Pillar also serves as an Advisor and Cash Manager to ARL and IOR.  As the contractual advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  TCI hasWe have no employees and as such, employees of Pillar render services to TCIus in accordance with the terms of the Advisory Agreement.

Pillar is a Nevada corporation, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust.  

MRHI. The May Trust is a Trust, the beneficiaries of whichthe MRHI are the children of the late Gene E. Phillips.

Under the Advisory Agreement, Pillar is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments. Pillar is required to report quarterly to the Board on TCI’s performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Pillar by the Board.

The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Pillar shall be deemed to be in a fiduciary relationship to the TCIour stockholders; contains a broad standard governing Pillar’s liability for losses incurred by TCI;us; and contains guidelines for Pillar’s allocation of investment opportunities as among itself, TCIthe Company and other entities it advises. Pillar is a company of which Messrs. MoosJohnson and Corna serve as executive officers.

officers, and for which Mr. Moos previously served as an executive officer.

The Advisory Agreement provides for Pillar to be responsible for theour day-to-day operations of TCI and to receive, as compensation for basic management and advisory services, a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves).

In addition to base compensation, Pillar receives the following forms of additional compensation:

(1)an annual net income fee equal to 7.5% of TCI’s net income as an incentive for successful investment and management of the Company’s assets;

(1)an annual net income fee equal to 7.5% of our net income as an incentive for successful investment and management of our assets;
(2)an annual incentive sales fee to encourage periodic sales of appreciated real property at optimum value equal to 10.0% of the amount, if any, by which the aggregate sales consideration for all real estate sold by TCI during such fiscal year exceeds the sum of:

(a)the cost of each such property as originally recorded in TCI’s books for tax purposes (without deduction for depreciation, amortization or reserve for losses);

(b)capital improvements made to such assets during the period owned; and

(c)all closing costs (including real estate commissions) incurred in the sale of such real estate; provided however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8.0% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration, and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5.0% higher in the current fiscal year than in the prior fiscal year;

(3)an acquisition commission, from an unaffiliated party of any existing mortgage or loan, for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of:

(a)up to 1.0% of the cost of acquisition, inclusive of commissions, if any, paid to non-affiliated brokers; or

(b)the compensation customarily charged in arm’s-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property’s appraised value at acquisition;

(4)a construction fee equal to 6.0% of the so-called “hard costs” only of any costs of construction on a completed basis, based upon amounts set forth as approved on any architect’s certificate issued in connection with such construction, which fee is payable at such time as the applicable architect certifies other costs for payment to third parties. The phrase “hard costs” means all actual costs of construction paid to contractors, subcontractors and third parties for materials or labor performed as part of the construction but does not include items generally regarded as “soft costs,” which are consulting fees, attorneys’ fees, architectural fees, permit fees and fees of other professionals; and

(5)reimbursement of certain expenses incurred by the advisor in the performance of advisory services.

(2)an annual incentive sales fee to encourage periodic sales of appreciated real property at optimum value equal to 10.0% of the amount, if any, by which the aggregate sales consideration for all real estate sold by us during such fiscal year exceeds the sum of:
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(a)the cost of each such property as originally recorded in our books for tax purposes (without deduction for depreciation, amortization or reserve for losses);
(b)capital improvements made to such assets during the period owned; and
(c)all closing costs (including real estate commissions) incurred in the sale of such real estate; provided however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8.0% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration, and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5.0% higher in the current fiscal year than in the prior fiscal year;
(3)an acquisition commission, from an unaffiliated party of any existing mortgage or loan, for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of:
(a)up to 1.0% of the cost of acquisition, inclusive of commissions, if any, paid to non-affiliated brokers; or
(b)the compensation customarily charged in arm’s-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property’s appraised value at acquisition;
(4)a construction fee equal to 6.0% of the so-called “hard costs” only of any costs of construction on a completed basis, based upon amounts set forth as approved on any architect’s certificate issued in connection with such construction, which fee is payable at such time as the applicable architect certifies other costs for payment to third parties. The phrase “hard costs” means all actual costs of construction paid to contractors, subcontractors and third parties for materials or labor performed as part of the construction but does not include items generally regarded as “soft costs,” which are consulting fees, attorneys’ fees, architectural fees, permit fees and fees of other professionals; and
(5)reimbursement of certain expenses incurred by the advisor in the performance of advisory services.
The Advisory Agreement also provides that Pillar receive the following forms of compensation:

(1)a mortgage or loan acquisition fee with respect to the acquisition or purchase from an unaffiliated party of any existing mortgage loan by TCI equal to the lesser of:

(a)1.0% of the amount of the mortgage or loan purchased; or

(b)a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by TCI; and

(2)a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of:

(a)1.0% of the amount of the loan or the amount refinanced; or

(b)a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from Pillar, or a related party of Pillar, without the approval of TCI’s Board of Directors. No fee shall be paid on loan extensions.

(1)a mortgage or loan acquisition fee with respect to the acquisition or purchase from an unaffiliated party of any existing mortgage loan by us equal to the lesser of:

(a)1.0% of the amount of the mortgage or loan purchased; or
(b)a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by us; and
(2)a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of:
(a)1.0% of the amount of the loan or the amount refinanced; or
(b)a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from Pillar, or a related party of Pillar, without the approval of our Board of Directors. No fee shall be paid on loan extensions.
Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if theour operating expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on theour book value, net asset value and net income of TCI during the fiscal year.

The Advisory Agreement requires Pillar to pay to TCI,us, one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI;us; provided, however, that the compensation retained by Pillar, or
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any affiliate of Pillar, shall not exceed the lesser of (1) 2.0% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.

The TCI Advisory Agreement further provides that Pillar shall bear the cost of certain expenses of its employees, excluding fees paid to TCI’sour Directors; rent and other office expenses of both Pillar and TCIus (unless TCIwe maintains office space separate from that of Pillar); costs not directly identifiable to TCI’sour assets, liabilities, operations, business or financial affairs; and miscellaneous administrative expenses relating to the performance by Pillar of its duties under the Advisory Agreement.

If and to the extent that TCI shallwe request Pillar, or any director, officer, partner, or employee of Pillar, to render services for TCIus other than those required to be rendered by the Advisory Agreement, Pillar separately would be compensated for such additional services on terms to be agreed upon between such party and TCIus from time to time. As discussed below, under “Property Management and Real Estate Brokerage,” effective January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties and provides brokerage services under similar terms as the previous agreements with Triad and Regis Realty I.

TCI entered intoservices.

We have a Cash Management Agreement with Pillar on April 30, 2011 to further define the administrationthat provides that all of the Company’s day-to-day investment operations, relationship contacts, flow ofour funds and deposit and borrowing of funds. Under the Cash Management Agreement, all funds of the Company are delivered to Pillar which has a deposit liability to the Companyus and is responsible for payment of all payables and investment of all excess funds which earn interest at the Wall Street Journal prime rate plus 1.0% per annum, as set quarterly on the first day of each calendar quarter. Borrowings for theour benefit of the Company bear the same interest rate. The term of the Cash Management Agreement is coterminous with the Advisory Agreement, and is automatically renewed each year unless terminated with the Advisory Agreement. TCI’s management believesWe believe that the terms of the Advisory Agreement are at least as fair as could be obtained from unaffiliated third parties.

Situations may develop in which theour interests of TCI are in conflict with those of one or more directors or officers in their individual capacities, or of Pillar, or of their respective related parties. In addition to services performed for TCI,us, as described above, Pillar actively provides similar services as agent for, and advisor to, other real estate enterprises, including persons and entities involved in real estate development and financing, including ARL and IOR. The Advisory Agreement provides that Pillar may also serve as advisor to other entities.

As advisor, Pillar is a fiduciary of TCI’sour public investors. In determining to which entity a particular investment opportunity will be allocated, Pillar will consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each such entity’s existing mortgage note and real estate portfolios and business plan. To the extent any particular investment opportunity is appropriate to more than one such entity, such investment opportunity will be allocated to the entity that has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among various entities. Refer to Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence”.

Pillar may assign the Advisory Agreement only with theour prior consent of TCI.

consent.

The principal executive officers and directors of Pillar are set forth below:

NameDirectors/Officer(s)
Daniel J. MoosNamePresident, Chief Executive Officer, Treasurer, DirectorOfficers
Erik L. JohnsonChief Financial Officer
Gina H. KayExecutive Vice President and Chief Accounting Officer
Louis J. CornaExecutive Vice President and Secretary


Property Management

Since January 1, 2011,

Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties for a fee of 3.0% or less of the monthly gross rents collected on the commercial properties it manages, and leasing commissions of 6.0% or less in accordance with the terms of its property-level management agreement.

TCI engages

We engage third-party companies to lease and manage our apartment properties for a fee of 6.0% or less of the monthly gross rents collected on the residential properties under their management.



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Real Estate Brokerage

Regis provides real estate brokerage services to TCIus on a non-exclusive basis, and is entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid:

(1)maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% is to be paid to Regis;

(2)maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3.0% is to be paid to Regis;

(3)maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2.0% is to be paid to Regis; and

(4)maximum fee of 2.0% on transaction amounts in excess of $10.0 million of which no more than 1.5% is to be paid to Regis.

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(1)maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% is to be paid to Regis;

(2)maximum fee of 3.5% on transaction amounts between $2.0 million to $5.0 million of which no more than 3.0% is to be paid to Regis;
(3)maximum fee of 2.5% on transaction amounts between $5.0 million to $10.0 million of which no more than 2.0% is to be paid to Regis; and
(4)maximum fee of 2.0% on transaction amounts in excess of $10.0 million of which no more than 1.5% is to be paid to Regis.
ITEM 11.    EXECUTIVE COMPENSATION

TCI has

We have no employees, payroll or benefit plans and payspay no compensation to itsour executive officers. TheOur executive officers of TCI, who are also officers orand employees of Pillar, TCI’s advisor,our Advisor, and are compensated by Pillar. Such executive officers perform a variety of services for Pillar and the amount of their compensation is determined solely by Pillar. Pillar does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. Refer to Item 10. “Directors, Executive Officers and Corporate Governance” for a more detailed discussion of the compensation payable to Pillar by TCI.

us.

The only remuneration paid by TCIus is to theour directors who are not officers or employees of Pillar or its related companies. The Independent Directors (1) review theour business plan of TCI to determine that it is in the best interest of TCI’sour stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) review the reasonableness of theour total fees and expenses of TCI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired.

Effective February, 2011, each

Each non-affiliated Director is entitled to receive an annual retainer of $12,000, with the Chairman of the Audit Committee to receive a one-time annual fee of $500. Directors who are also employees of the Company or its advisor receive no additional compensation for service as a Director.

During 2019, $40,3882020, $54,300 was paid to non-employee Directors in total Directors’ fees. The fees paid to the directors are as follows: Henry A. Butler $5,800; William J. Hogan, $12,000;Robert A. Jakuszewski, $12,000; Ted R. Munselle, $12,500; Henry A. Butler $3,888;$12,500 and Raymond D. Roberts, Sr., $12,000.

Director’s Stock Option Plan

TCI established a Director’s Stock Option Plan (“Director’s Plan”) for the purpose of attracting and retaining Directors who are not officers or employees of TCI or Pillar. The Director’s Plan provides for the grant of options that are exercisable at fair market value of TCI’s Common stock on the date of grant. The Director’s Plan was approved by stockholders at their annual meeting on October 10, 2000, following which each then-serving Independent Director was granted options to purchase 5,000 shares of Common stock of TCI. On January 1 of each year, each Independent Director receives options to purchase 5,000 shares of Common stock. The options are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. The Director’s Plan was terminated by the Board of Directors on December 15, 2005. As of December 31, 2015, there were 5,000 shares of stock options outstanding which were exercisable at $14.25 per share.  These options expired unexercised January 1, 2016.

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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners

The following table sets forth the ownership of TCI’s Commonour common stock, both beneficially and of record, both individually and in the aggregate, for those persons or entities known to be beneficial owners of more than 5.0% of the outstanding shares of Commonour common stock as of the close of business on March 30, 2020.

       
  Amount and Nature of Beneficial Ownership*  Approximate  Percent of Class** 
American Realty Investors, Inc.(1)(2)  5,383,192   62.31%
1603 LBJ Freeway, Suite 800        
Dallas, Texas 75234        
         
Transcontinental Realty Acquisition Corporation(2)  1,383,226   16.01%
1603 LBJ Freeway, Suite 800        
Dallas, Texas 75234        
         
Realty Advisors, LLC (3)  608,984   7.05%
1603 LBJ Freeway, Suite 800        
Dallas, Texas 75234        
24, 2021.
Amount and
Nature of
Beneficial
Ownership*
Approximate  Percent
of Class**
American Realty Investors, Inc.(1)(2)
6,771,718 78.4 %
1603 LBJ Freeway, Suite 800
Dallas, Texas 75234
Transcontinental Realty Acquisition Corporation(2)
1,383,226 16.0 %
1603 LBJ Freeway, Suite 800
Dallas, Texas 75234
Realty Advisors, LLC (3)
621,728 7.2 %
1603 LBJ Freeway, Suite 800
Dallas, Texas 75234
*“Beneficial Ownership” means the sole or shared power to vote, or to direct the voting of, a security or investment power with respect to a security, or any combination thereof.
**Percentage is based upon 8,639,516 shares of Common stock outstanding at March 25, 2020.
(1)Includes 5,383,192 shares (62.31%) directly owned by American Realty Investors, Inc. “ARL” directly, over which the directors al ARL may be deemed to be beneficial owners by virtue of their positions as directors of ARL. The directors of ARL disclaim beneficial ownership of such shares.
(2)Includes 1,383,226 shares owned by Transcontinental Realty Acquisition Corporation (“TRAC”), which is a wholly owned subsidiary of ARL, over which each of the directors of TRAC, Daniel J. Moos and Alla Dzyuba may be deemed to be beneficial owners by virtue of their positions as directors of TRAC. The directors of TRAC disclaim beneficial ownership of such shares.
(3)Includes 336,000 shares owned by RAI and 272,984 shares owned by AEI, over which the executive officers of RAI may be deemed to be the beneficial owners by virtue of their positions. The executive officers of RAI disclaim beneficial ownership of such shares.

Security Ownership of Management.

The following table sets forth the ownership of TCI’s Common stock, both beneficially and of record, both individually and in the aggregate, for the directors and executive officers of TCI as of the close of business on March 30, 2020.

Name of Beneficial Owner Amount and Nature of Beneficial Ownership*  Approximate Percent of Class** 
       
Alla Dzyuba  5,992,176(1)(3)  69.36%
Henry A. Butler  5,383,192(1)  62.31%
Louis J. Corna  5,992,176(1)(3)  69.36%
Robert A. Jakuszewski  5,383,192(1)  62.31%
Daniel J. Moos  7,875,402(1)(2)(3)  85.37%
Ted R. Munselle  5,383,192(1)  62.31%
Raymond D. Roberts, Sr.  5,383,192(1)  62.31%
All Directors and Executive Officers as a group (7 individuals)  7,375,402(1)(2)(3)  85.37%

*    Beneficial Ownership” means the sole or shared power to vote, or to direct the voting of, a security or investment power with respect to a security, or any combination thereof.

**    Percentage is based upon 8,639,516 shares of Common stock outstanding at March 24, 2021.
(1)Includes 5,383,192 shares (62.3%) directly owned by American Realty Investors, Inc.
(2)Includes 1,383,226 shares owned by Transcontinental Realty Acquisition Corporation, which is a wholly-owned subsidiary of ARL.
(3)Includes 341,200 shares owned by RAI and 280,528 shares owned by Arcadia Energy, Inc., which is a wholly-owned subsidiary of RAI.
Security Ownership of Management.
The following table sets forth the ownership of our common stock, both beneficially and of record, both individually and in the aggregate, for our directors and executive officers as of the close of business on March 24, 2021.
Name of Beneficial OwnerAmount and
Nature of
Beneficial
Ownership*
Approximate
Percent of Class**
Henry A. Butler— — %
Louis J. Corna— — %
Alla Dzyuba— — %
William J. Hogan— — %
Erik L. Johnson— — %
Robert A. Jakuszewski— — %
Ted R. Munselle— — %
Bradford A. Phillips— — %
Raymond D. Roberts, Sr.— — %
All Directors and Executive Officers as a group (7 individuals)— — %
*    Beneficial Ownership” means the sole power to vote, or to direct the voting of, a security or investment power with respect to a security, or any combination thereof. 
**    Percentages are based upon 8,639,516 shares of Common Stock outstanding at March 25, 2020.

(1)       Includes 5,383,192 shares owned by ARL and 1,383,226 shares owned by TRAC, over which the executive officers and members of the Board of Directors of ARL may be deemed to be the beneficial owners by virtue of their positions as executive officers and members of the Board of Directors of ARL. The executive officers and current members of the Board of Directors of ARL disclaim beneficial ownership of such shares.

(2)       Daniel J. Moos owns 295,000 shares of Common Stock and is the President and Chief Executive Officer of ARL, the Company, RAI and MRHI.

(3)       Includes 336,000 shares owned by RAI and 272,984 shares owned by AEI, over which the executive officers of RAI may be deemed to be the beneficial owners by virtue of their positions. The executive officers of RAI disclaim beneficial ownership of such shares.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

24, 2021.


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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policies with Respect to Certain Activities

Article 14 of TCI’sour Articles of Incorporation provides that TCIwe shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of TCI,the Company, (2) any director, officer or employee of the advisor, (3) the advisor, or (4) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by TCI’sour Board of Directors or the appropriate committee thereof and (b) TCI’sour Board of Directors or committee thereof determines that such contract or transaction is fair to TCIthe Company and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of our independent directors of TCI entitled to vote thereon.

Article 14 defines an “Independent Director” (for purposes of that Article) as one who is neither an officer or employee of TCI,the Company, nor a director, officer or employee of TCI’sour advisor.

TCI’s

Our policy is to have such contracts or transactions approved or ratified by a majority of the disinterested Directors with full knowledge of the character of such transactions, as being fair and reasonable to the stockholders at the time of such approval or ratification under the circumstances then prevailing. Such Directors also consider the fairness of such transactions to TCI. Managementthe Company. We believes that, to date, such transactions have represented the best investments available at the time and they were at least as advantageous to TCIus as other investments that could have been obtained.

TCI

We may enter into future transactions with entities, the officers, directors, or stockholders of which are also officers, directors, or stockholders of TCI,the Company, if such transactions would be beneficial to theour operations of TCI and consistent with TCI’sour then-current investment objectives and policies, subject to approval by a majority of disinterested Directors as discussed above.

TCI does

We do not prohibit its officers, directors, stockholders, or related parties from engaging in business activities of the types conducted by TCI.

the Company.

Certain Business Relationships

Pillar has been TCI’sis our Advisor and Cash Manager since April 30, 2011.  Although the Board of Directors is directly responsible for managing theour affairs, of TCI, and for setting the policies which guide it, theour day-to-day operations of TCI are performed by Pillar, as the contractual advisor, under the supervision of the Board.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors.  Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with TCI’sour business plan and investment policy.  Pillar also serves as an Advisor and Cash Manager to ARL and IOR.  As the contractual advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  TCI hasWe have no employees and as such, employees of Pillar render services to TCIus in accordance with the terms of the Advisory Agreement.


Pillar is a Nevada corporation, the sole shareholder of which isowned by Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is owned by RAI, a Nevada corporation, MRHI, a Nevada corporation, the sole shareholder of which is a trust known asowned by MRHI, which is owned by the May Trust.  

All of TCI’s directorsour directors also serve as Directors of ARL and IOR. TheOur executive officers of TCI also serve as executive officers of ARL and IOR.ARL. As such, they owe fiduciary duties to that entity as well as to Pillar under applicable law. ARL has the same relationship with Pillar, as does TCI.the Company. Mr. Daniel J. Moos is the sole Manager and Class B 2% income Member of Victory Abode Apartments LLC, and owes fiduciary duties to VAA as well asuntil August 2020, was the President of ARL, TCI and IOR.

Effective since January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties for a fee of 3.0% or less of the monthly gross rents collected on the commercial properties it manages, and leasing commissions of 6.0% or less in accordance with the terms of its property-level management agreement.

At December 31, 2019, TCI2020, we owned approximately 81.23%81.1% of the outstanding common shares of IOR.

The Company is

We are part of a tax sharing and compensating agreement with respect to federal income taxes among ARL, TCI and IOR and their subsidiaries. ThatIn accordance with the agreement, continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOR and MRHI for the remainder of 2012 and subsequent years. Theour expense (benefit) in each year wasis calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory tax rate of 21%.

The Company has

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We have a development agreement with Unified Housing Foundation, Inc. “UHF” a non-profit corporation that provides management services for the development of residential apartment projects in the future. The Company hasWe have also invested in surplus cash notes receivables from UHF and hashave sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.

Related Party Transactions

The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interest of our company.

In 2019, the Company2020, we paid Pillar advisory fees of $5.8 million, net income fees of $0.4 million mortgage brokerage and equity refinancing fees of $0 million, and cost reimbursements of $6.7$3.6 million.

The Company

We paid property management fees, construction management fees and leasing commissions of $0.2$1.0 million to RegisRegis in 2019.  2020.  In addition, SPC is part of a management service agreement with the controlling shareholder owned company in which SPC for an annual payment of 0.5% on the value of the investment properties receives from the Advisor office space, administrative and management services. During 2019,2020, SPC paid management fees to Pillar in the amount of $2.2$2.5 million.

During 2019, the Company received $19.4 million cash distribution from VAA as a result of the annual surplus cash computation from its HUD collaterized residential properties and other amounts owed to the Company as agreed to in the joint venture operating agreement.

In accordance with the provisions of the VAA Joint Venture Agreement dated November 19, 2018, Southern and TCI are expected to receive approximately $14 million ($6 million and $8 million, respectively) for the cash balances remaining in the transferred properties as of the date of the transaction. The cash balance was determined and agreed upon by the partners in the joint venture, and based on the estimated bank balances on the day of closing. Additionally, VAA did not purchase the accounts receivable or the utilities’ and other deposits. These items as well as the reconciliation of the expense pro-rations will result in additional adjustments being required, subject to the consent of both parties. On February 6, 2019, Abode JVP, LLC, a fully owned subsidiary of SPC, received $7.4 million related to the cash credit and transferred it to TCI. On May 15, 2019, Members of the Joint Venture agreed to record approximately $1.1 million of pro-ration adjustments and on July 25,2019, the remaining outstanding balance has been paid in full.

As of December 31, 2019,2020, the Companywe had notes and interest receivables net of allowances, of $54.0$63.3 million and $3.2$3.9 million, respectively, due from related parties. Refer to Part 2, Item 8. Note 5. “Notes and Interest Receivable”.8 Notes Receivable of our consolidated financial statements. During the current period, the Companywe recognized interest income of $6.9$6.3 million, originated $21.4$10.9 million, received $12.4$1.3 million principal payments, and received interest payments of $7.6$6.8 million from these related party notes receivables.


The Company isWe were the primary guarantor, on a $25.0$24.3 million mezzanine loan between UHF and a lender. In addition, TCI, ARL, and an officerThe guarantee was remove on January 29, 2021, concurrent with the repayment of the Company are limited recourse guarantors of the loan. As of December 31, 2019 UHF was in compliance with the covenants to the loan agreement.

Operating Relationships

The Companyby UHF.

We received rental revenue of $1.3$1.1 million, $1.2 million, and $0.8 million infor the years ended December 31, 2019, 2018, and 2017, respectively, from2020 for office space leased to Pillar and its related parties for properties owned by the Company.

Advances and Loans

Regis.

From time to time, TCI and its related partieswe have made advances to eachand/or borrowing to/fom other related parties, which generally have not had specific repayment terms, did not bear interest, are unsecured, and have been reflected in TCI’sour financial statements as other assets or other liabilities. TCI and the advisorWe charge interestinterest on the outstanding balance of funds advanced to or from TCI.us. The interest rate, set at the beginning of each quarter, is the prime rate plus 1.0% on the average daily cash balances advanced. At December 31, 2019, TCI has2020, we had a receivable from ARL in the amount of $142.1 million.

Director Independence

See “Determination of Director Independence” under Item 10 above to which reference is made.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets for

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES
For the aggregate fees for professional services rendered to TCI and its subsidiaries for the yearyears ended December 31, 2020 and 2019, and 2018we were billed by TCI’s principal accounting firms: Farmer, Fuqua and SwalmHuff, L.P. for services in the following categories:
Audit Fees. Fees for audit services were $198,250 and Associates, P.C.

  2019  2018 
  Farmer, Fuqua & Huff, L.P.  Swalm & Associates, P.C. (*)  Farmer, Fuqua & Huff, L.P.  Swalm & Associates, P.C. (*) 
Audit Fees $227,755  $53,024  $551,996  $72,210 
Tax Fees  12,377   —     38,304   —   
Total $240,132  $53,024  $590,300  $72,210 

(*) Fees related to IOT

The audit fees for 2019 and 2018 were for professional services rendered$227,755 for the auditsyears ended December 31, 2020 and reviews of the consolidated financial statements of TCI and its subsidiaries. Tax fees for 2019, and 2018 were for services related to federal and state tax compliance and advice.

All services rendered by the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid to the principal auditors for the services described in the above table fall under the categories listed below:

Audit Fees.respectively. These are fees for professional services performed by the principal auditor for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s 10-Q filings and services that are normally provided in connection with statutory and regulatory filing or engagement.

Audit-Related Fees. No fees for audit-related services were paid for the years ended December 31, 2020 and 2019.  These are fees for assurance and related services performed by the principal auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements. These services include attestations by the principal auditor that are not required by statute or regulation and consulting on financial accounting/reporting standards.


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Tax Fees. Fees for tax services were $11,850 and $12,377 for the years ended December 31, 2020 and 2019, respectively.. These are fees for professional services performed by the principal auditor with respect to tax compliance, tax planning, tax consultation, returns preparation and review of returns. The review of tax returns includes the Company and its consolidated subsidiaries.

All Other Fees. No other fees were paid for the years ended December 31, 2020 and 2019. These are fees for other permissible work performed by the principal auditor that do not meet the above category descriptions.

All services rendered by the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid to the principal auditors for the services described in the above table fall under the categories listed below:
These services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in the principal auditor’s core work, which is the audit of the Company’s consolidated financial statements.

The Audit Committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Audit Committee has the responsibility to engage and terminate TCI’sour independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for permitted non-audit services and fees. All fees for 20192020 and 20182019 were pre-approved by the Audit Committee or were within the pre-approved guidelines for permitted non-audit services and fees established by the Audit Committee, and there were no instances of waiver of approved requirements or guidelines during the same periods.

Under the Sarbanes-Oxley Act of 2002 (the “SOX Act”), and the rules of the Securities and Exchange Commission (the “SEC”), the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SOX Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SOX Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee’s administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor’s independence. Accordingly, the

Our Audit Committee has adopted a pre-approval policy of audit and non-audit services (the “Policy”), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be pre-approved. Consistent with the SEC rules establishing two different approaches to pre-approving non-prohibited services, the Policy of the Audit Committee covers Pre-approval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and will approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. Typically, in addition to the generally pre-approved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to pre-approve services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
(a)The following documents are filed as part of this Report:

1.Financial Statements

Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets—December 31, 2019 and 2018
Consolidated Statements of Operations—Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows—Years Ended December 31, 2019, 2018, and 2017
Statements of Consolidated Comprehensive Income (Loss) – Years Ended December 31, 2019, 2018, and 2017
Notes to Financial Statements

2.Financial Statement Schedules

Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loan Receivables on Real Estate

All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated filed as part of this Report:

1.Financial Statements or the Notes thereto.

3.Incorporated Financial Statements

Reports of Independent Registered Public Accounting Firms
Consolidated FinancialBalance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income Opportunity Realty Investors, Inc. (incorporated by reference to Item 8 of Income Opportunity Realty Investors, Inc.’s Annual Report on Form 10-KOperations for the year endedYears Ended December 31, 2019.

2020, 2019, and 2018

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
Notes to Financial Statements of American Realty Investors, Inc. (incorporated by reference to Item 8 of American Realty Investors, Inc.’s Annual Report
2.Financial Statement Schedules
Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loan Receivables on Form 10-K for the year ended December 31, 2019). 

(b)Exhibits

Real Estate

(b)Exhibits

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The following documents are filed as Exhibits to this Report:

Exhibit

Number

Description
3.0Exhibit
Number
Description
3.0Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.1Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).
3.2Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.3Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
3.4Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, Preferences, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).

3.5Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
3.6Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
3.7By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.8Certificate of designation of Transcontinental Realty Investors, Inc. setting forth the Voting Powers, Designations, Preferences Limitations, Restrictions and Relative rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrants current report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof.

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Exhibit

Number

Description
10.0Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc. and Pillar Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring April 30, 2011).
10.1Leman Development Ltd. and Kaufman Land Partners, Ltd. (incorporated by reference to Registrant’s current report in Form 8-K dated November 21, 2006 at Exhibit 10.1 thereof.
14.0Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
Subsidiaries of the Registrant.
Certification Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934 as amended of Principal Executive and Financial Officer.
31.2*Certification Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934 as amended of Principal Financial and Accounting Officer.
32.1*Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


* Filed herewith.

ITEM 16.     FORM 10-K SUMMARY

Optional and not included herein.


Not applicable

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Transcontinental Realty Investors, Inc.
TRANSCONTINENTAL REALTY INVESTORS, INC.
Dated: March 30, 202024, 2021By:

/s/  ALLA DZYUBA 

ERIK L. JOHNSON

Alla Dzyuba 

Erik L. Johnson

Executive Vice President and Chief AccountingFinancial Officer

(Principal Executive and Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature

Title

Date

SignatureTitleDate

/s/ HENRY A. BUTLER

Chairman of the Board and DirectorMarch 30, 202024, 2021
Henry A. Butler
/s/ WILLIAM J. HOGANDirectorMarch 30, 202024, 2021
William J. Hogan

/s/ ROBERT A. JAKUSZEWSKI

DirectorMarch 24, 2021
Robert A. Jakuszewski
/s/ TED R. MUNSELLEDirectorMarch 24, 2021
Ted R. Munselle
/s/ BRADFORD A. PHILLIPSDirectorMarch 24, 2021
Bradford A. Phillips
/s/ RAYMOND D. ROBERTS, SR.

DirectorMarch 30, 202024, 2021
Raymond D. Roberts, Sr.

/s/ ROBERT A. JAKUSZEWSKI

ERIK L. JOHNSON
DirectorMarch 30, 2020
Robert A. Jakuszewski

/s/ TED R. MUNSELLE 

DirectorMarch 30, 2020
Ted R. Munselle

/s/ DANIEL J. MOOS 

Executive Vice President and Chief ExecutiveFinancial Officer (Principal Executive Officer)March 30, 202024, 2021
Erik L. Johnson(Principal Executive and Financial Officer)
Daniel J. Moos 

/s/ ALLA DZYUBA

Vice President and Chief Accounting Officer (Principal Financial Officer)March 30, 202024, 2021
Alla Dzyuba
Alla Dzyuba 


ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

For the Year Ended December 31, 2019

Exhibit

Number

Description

3.0Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.1Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).
3.2Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.3Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
3.4Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, Preferences, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.5Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
3.6Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
3.7By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.8Certificate of designation of Transcontinental Realty Investors, Inc. setting forth the Voting Powers, Designations, Preferences Limitations, Restrictions and Relative rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrants current report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof.)
10.0Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc. and Pillar Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring April 30, 2011).
10.1Leman Development Ltd. and Kaufman Land Partners, Ltd. (incorporated by reference to Registrant’s current report in Form 8-K dated November 21, 2006 at Exhibit 10.1 thereof.
14.0Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
21.1*Subsidiaries of the Registrant.
31.1*Certification Pursuant to Rule 13a-14(a) and 15d-14 under the Securities Exchange Act of 1934, as amended of Principal Executive Officer.
31.2*Certification Pursuant to Rule 13a-14(a) and 15d-14 under the Securities Exchange Act of 1934, as amended of Principal Financial and Accounting Officer
32.1*Certification pursuant to 18 U.S.C. Section 1350.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

*Filed herewith.

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