UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)
x

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

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


For the fiscal year ended December 31, 20152017


OR
oro

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

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


For the transition period from ____________ to

____________


Commission File Number: 001-15409

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST


PILLARSTONE CAPITAL REIT

(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)

Its Charter)
Maryland39-6594066
Maryland39-6594066
(State or other jurisdiction
Other Jurisdiction of incorporation)Incorporation or		(I.R.S. Employer
Organization)Identification Number)No.)
  
10011 Valley Forge Drive,2600 South Gessner, Suite 555, Houston, Texas7704277063
(Address of principal executive offices)Principal Executive Offices)(Zip code)Code)

Registrant’s


Registrant's telephone number: 440-283-6319

number, including area code: (832) 810-0100

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

None


Securities registered underpursuant to Section 12(g) of the Act:
Common Shares $0.01of Beneficial Interest, par value

$0.01 per share


(Title of Class)

Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in ruleRule 405 of the Securities Act. Yes [  ] o No [X]

x


Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to sectionSection 13 or Section 15(d) of the exchange act.Act. Yes [  ] o No [X]

x


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 pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to thesuch filing requirements for the past 90 days. Yes[X] x No [  ]

o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulationRegulation 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 [  ] o No [X]

x


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’sregistrant'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 [X].

10-K. o


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

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ]Smaller reporting company [X]

:


Large accelerated filer o Accelerated filer oNon-accelerated filer oSmaller reporting company x
Emerging growth company o

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. o

Indicate by check mark whether the Registrantregistrant is a shell company (as defined in ruleRule 12b-2 of the Exchange Act.)Act). Yes[X] Noo [  ]No

At February 5, 2016, the Registrant had issued 443,226 common shares of beneficial interest and had 405,096 shares outstanding after deducting 38,130 shares held in treasury. At June 30, 2015, thex


The aggregate market value of the voting common shares held by non-affiliatesnonaffiliates of the Registrantregistrant as of June 30, 2017 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $323,155$628,383 based on the closing price of $1.80$3.50 per common share on the over-the-counter bulletin board on that date.


As of March 23, 2018, the Registrant had issued 443,299 common shares of beneficial interest and had 405,169 shares outstanding after deducting 38,130 shares held in treasury.

DOCUMENTS INCORPORATED BY REFERENCE: We incorporate by reference in Part III of this Annual Report on Form 10-K portions of our definitive proxy statement for our 2018 Annual Meeting of Shareholders, which proxy statement will be filed no later than 120 days after the end of our fiscal year ended December 31, 2017 .


PILLARSTONE CAPITAL REIT
FORM 10-K
Year Ended December 31, 2017


 

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2014 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

Page
PART I
Item 1Business3
Item 2Properties4
Item 3Legal Proceedings4
Item 4Mine Safety Disclosures4Page
   
PART III
  
Item 51.
Business.
2
Item 1B.
Unresolved Staff Comments.
4
Item 2.   
Properties.
4
Item 3.    
Legal Proceedings.
5
Item 4.       
Mine Safety Disclosures.
5
PART II
Item 5.  
Market for Registrant’s Common Equity, Related StockholderShareholder Matters and Issuer Purchases of Equity Securities.

4

6
Item 77. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
5
7
Item 88.    
Financial Statements and Supplementary Data.
9
10
Item 99.       
Changes Inin and Disagreements withWith Accountants on Accounting and Financial Disclosure.
9
10
Item 9A9A.  
Controls and Procedures.
9
10
Item 9B9B. 
Other Information.
9
10
PART III
  
PART III
Item 1010.  
Directors,Trustees, Executive Officers and Corporate Governance.
10
Item 1111.
Executive CompensationCompensation.
13
10
Item 1212. 
Security Ownership of Certain Beneficial Owners and Management and Related StockholderShareholder Matters.

15

10
Item 1313.   
Certain Relationships and Related Transactions, and Director Independence.
18
11
Item 1414.    
Principal AccountingAccountant Fees and Services.
20
11
PART IV
Item 15.  
Exhibits and Financial Statement Schedules.
12
   
PART IV 
Item 15Exhibits, Financial Statement Schedules21
  
SIGNATURESSIGNATURES.
25
EXHIBITS
Exhibit 31.1Section 302 CEO Certificate
Exhibit 31.2Section 302 CFO Certificate
Exhibit 32.1Section 906 CEO & CFO Certificate
15




Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us” or “our” are to Pillarstone Capital REIT and its consolidated subsidiary.

Forward-Looking Statements

The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto in this Annual Report on Form 10-K. 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Annual Report on Form 10-K include:
uncertainties related to the national economy, the real estate industry in general and in our specific markets;

legislative or regulatory changes;

adverse economic conditions in Texas;

adverse changes in governmental rules and fiscal policies;

increases in interest rates and operating costs;

availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures;

decreases in rental rates or increases in vacancy rates; 

litigation risks; 

lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants; 

our inability to renew tenants or obtain new tenants upon the expiration of existing leases; and 

our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws.

In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

our cash resources are limited;

we have a history of losses;

we have not raised funds through a public equity offering;

our trustees control a significant percentage of our voting shares;


shareholders could experience possible future dilution through the issuance of additional shares;

we are dependent on a small number of key senior professionals who are part-time employees; and

we currently do not plan to distribute dividends to the holders of our shares.
PART I


Item 1. Business.


Company Overview

Paragon Real Estate Equity and Investment Trust

Pillarstone Capital REIT (the “Company,” “Paragon,“Pillarstone,” “we,” “our,” or “us”) is a Maryland shell corporation primarily focused on maintaining its corporate existence and Securities and Exchange Commission (“SEC”) reporting history to enable it, in the future, to raise additional capital and make real estate investments.investment trust engaged in investing in, owning and operating commercial properties. Future real estate investments may include (i) acquisition and development of retail, office, office warehouse, industrial, multifamily, hotel, and other commercial properties, (ii) acquisition of or merger with a real estate investment trust (“REIT”) or a real estate operating company and (iii) joint venture investments. Excess funds can be invested in cash equivalents depending on market conditions.

The Company was formed on March 15, 1994 as a Maryland REIT. The Company operated as a traditional real estate investment trustREIT by buying, selling, owning and operating commercial and residential properties through December 31, 1999. In 2000, the Company purchased a software technology company, resulting in the Company no longer meeting qualifications to be a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). In 2002, the Company discontinued the operations of the technology segment.

From 2003 through 2006, we pursued a value-added business plan primarily focused on acquiring well located, under-performing multi-family residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding. In 2006, the Company did not complete a public offering for a portfolio acquisition due to market conditions, and consequently, was not able to meet the listing requirements of the former American Stock Exchange (“Amex”). Accordingly, Paragon’sPillarstone’s common shares were delisted from the Amex and commenced being quoted on the Over-The-Counter Bulletin Board (“OTC Bulletin Board”) and on the pink sheets under the symbol “PRLE”.

Because our unrestricted cash“PRLE.”

From 2006 until December 2016, the Company continued its existence as a corporate shell filing its quarterly and annual reports with the Securities and Exchange Commission (“SEC”) so that it could be used for future real estate transactions. During this time, the Company was not sufficient to allow us to continue operations,funded by the trustees who contributed $500,000 in the third quarter of 2006, three independent trustees on our board of trustees signed subscription agreements to purchaseexchange for 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000. On November 20, 2015, five trustees on our board of trustees loanedand $197,780 to the Company in exchange for convertible notes payable. The loan was madeIn 2016, the shareholders of Pillarstone approved changing the Company's name from Paragon Real Estate Equity and Investment Trust to allowPillarstone Capital REIT.
Substantially all of our business is conducted through Pillarstone Capital REIT Operating Partnership, a Delaware limited partnership organized in 2016 (“Pillarstone OP”). We are the Companysole general partner of Pillarstone OP. As of December 31, 2017, we owned 18.6% of the outstanding equity in Pillarstone OP.

On December 8, 2016, Pillarstone and Pillarstone OP entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT (“Whitestone”), both of which are related parties to maintainPillarstone and Pillarstone OP. Pursuant to the terms of the Contribution Agreement, Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its existence aswholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a corporate shell current in its SEC filings suchDelaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”, and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that it may be used in the future forown fourteen real estate transactions or sold to another company. There can be no assurance that we will be able to close a transaction or keep the Company currently filedassets (the “Real Estate Assets” and, together with the SEC. Even if our management is successfulEntities, the “Property”) for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in closingPillarstone OP (“OP Units”), issued at a transaction, investors may not valueprice of $1.331 per OP Unit; and (2) the transaction orassumption of approximately $65.9 million of liabilities by Pillarstone OP, consisting of (a) approximately $15.5 million of Whitestone OP’s liability under that certain Amended and Restated Credit Agreement, dated as of November 7, 2014, as amended, among the current filing statusBank of Montreal, as Administrative Agent (the “Agent”), the lenders party thereto, BMO Capital Markets, Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and U.S. Bank, National Association, Whitestone OP, as borrower, and Whitestone and certain subsidiaries of Whitestone OP, as guarantors (as amended, the “Whitestone Credit Facility”); (b) an approximately $16.3 million promissory note (the “Whitestone Uptown Tower Promissory Note”) of Uptown Tower issued under that certain Loan Agreement, dated as of September 26, 2013, (as amended, the “Whitestone Uptown Tower Loan Agreement” and, together with the Whitestone Uptown Tower Promissory Note, the “Whitestone Uptown Tower Loan Documents”) between Uptown Tower, as borrower, and U.S. Bank National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as lender, and (c) an approximately $34.1 million promissory note (the “Whitestone Industrial-Office Promissory Note”) of Industrial-Office issued under that certain Loan Agreement, dated as of November 26, 2013 (the “Whitestone Industrial-Office Loan Agreement” and, together with the Whitestone Industrial-Office Promissory Note, the “Whitestone Industrial-Office Loan Documents”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Acquisition”).

Pursuant to the Contribution Agreement, Pillarstone has agreed to file with the SEC on or prior to June 8, 2018, a shelf registration statement to register for sale under the Securities Act of 1933, as amended (the “Securities Act”), the issuance of the common shares of beneficial interest in Pillarstone (the “Common Shares”) that may be issued upon redemption of the OP Units issued pursuant to each of the Contribution Agreement and the OP Unit Purchase Agreement (as defined below) and the offer and resale of such Common Shares by the holders thereof. In addition, pursuant to the Contribution Agreement, in the same mannerevent of a Change of Control (as defined therein) of Whitestone, Pillarstone OP shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit.
In connection with the Acquisition, (1) with respect to each Real Estate Asset (other than the Real Property Asset owned by Uptown Tower), Whitestone TRS, Inc. (“Whitestone TRS”), a subsidiary of Whitestone, entered into a Management Agreement with the Entity that owns such Real Estate Asset and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Real Estate Asset (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Real Estate Asset in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Real Estate Asset and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, we did,generally, the purchase price of the respective Real Estate Asset based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Real Estate Asset. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and investors may not valueday-to-day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to 3.0% of the transactionmonthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower.
As a result of the Acquisition, Whitestone OP owns approximately 81.4% of the outstanding equity in Pillarstone OP as they would value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially and adversely affectDecember 31, 2017. We account for Pillarstone OP on our financial statements using the Company’s ability to continue operations.

equity method.


Competition


We compete for the acquisition of properties with many entities, including, among others, publicly traded REITs, life insurance companies, pension funds, partnerships and individual investors. Many competitors have substantially greater financial resources than us. In addition, certain competitors may be willing to accept lower returns on their investments. If competitors prevent us from buying properties that may be targeted for acquisition, our capital appreciation and valuation may be impacted.


Employees

As of February 5, 2016,March 1, 2018, the Company has two part-time employees.


Reports to Security Holders
We file or furnish with the SEC pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, proxy statements with respect to meetings of our shareholders, as well as Reports on Forms 3, 4 and 5 regarding our officers, trustees or 10% beneficial owners. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC as we do. The website address is http://www.sec.gov. Copies of our Audit Committee Charter, Management, Organization and Compensation Committee Charter, Nominating Committee Charter, and Code of Conduct and Ethics are available free of charge through our website (www.pillarstone-capital.com). In the event of any changes to these documents, revised copies will also be made available on our website. Materials on our website are not part of our Annual Report on Form 10-K. The contents of these websites are not incorporated into this filing.

Item 1B.  Unresolved Staff Comments.
None.

Item 2.  Properties.

As


General Physical and Economic Attributes
Pursuant to the Contribution Agreement, Pillarstone, through Pillarstone OP, acquired an investment portfolio consisting of the Real Estate Assets as described in Item 1. The following table sets forth certain information relating to each of our properties owned as of December 31, 2015, the Company did not own any real estate assets.

2017.
Pillarstone Capital REIT
Real Estate Assets
As of December 31, 2017
               
 
 
Community Name
 
 
 
Location
 
 
Year Built/
Renovated
 
Gross Leasable Area (“GLA��)
 
Percent
Occupied at
12/31/2017
 
Annualized Base
Rental Revenue 
(in thousands) (1)
 
Average
Base Rental
Revenue Per
Sq. Ft. (2)
 
Average Net Effective Annual Base Rent Per Leased Sq. Ft.(3)
9101 LBJ Freeway Dallas 1985 125,874
 75% $1,439
 $15.24
 $14.43
Corporate Park Northwest Houston 1981 174,359
 79% 1,863
 13.53
 13.54
Corporate Park West Houston 1999 175,665
 78% 1,540
 11.24
 11.27
Corporate Park Woodland Houston 2000 99,937
 97% 1,003
 10.35
 10.76
Corporate Park Woodland II Houston 2000 16,220
 88% 167
 11.70
 15.55
Dairy Ashford Houston 1981 42,902
 37% 110
 6.93
 7.56
Holly Hall Industrial Park Houston 1980 90,000
 91% 642
 7.84
 7.34
Holly Knight Houston 1984 20,015
 100% 375
 18.74
 18.94
Interstate 10 Warehouse Houston 1980 151,000
 86% 579
 4.46
 4.60
Main Park Houston 1982 113,410
 79% 540
 6.03
 6.69
Plaza Park Houston 1982 105,530
 64% 636
 9.42
 9.11
Uptown Tower Dallas 1982 253,981
 81% 4,144
 20.14
 20.09
Westbelt Plaza Houston 1978 65,619
 67% 501
 11.40
 10.99
Westgate Service Center Houston 1984 97,225
 99% 720
 7.48
 7.46
               
Total / Weighted Average     1,531,737
 81% $14,259
 $11.49
 $11.51


(1)
Calculated as the tenant's actual December 31, 2017 base rent (defined as cash base rents including abatements) multiplied by 12. Excludes vacant space as of December 31, 2017. Because annualized base rental revenue is not derived from historical results that were accounted for in accordance with generally accepted accounting principles in the United States (“GAAP”), historical results differ from the annualized amounts. Total abatements for leases in effect as of December 31, 2017 equaled approximately $51,000 for the month ended December 31, 2017.
(2)  
Calculated as annualized base rent divided by GLA leased as of December 31, 2017.  Excludes vacant space as of December 31, 2017.

(3)
Represents (i) the contractual base rent for leases in place as of December 31, 2017, adjusted to a straight-line basis to reflect changes in rental rates throughout the lease term and amortize free rent periods and abatements, but without regard to tenant improvement allowances and leasing commissions, divided by (ii) square footage under commenced leases of December 31, 2017.

Item 3.  Legal Proceedings.

Should we acquire properties

We may from time to time become a party to legal proceedings and claims that arise in our normalthe ordinary course of business,our business.  These matters are generally covered by insurance.  While the frequency and resolutions of any such matters cannot be predicted with certainty, we may be involved in legal actions arising from the ownershipbelieve that occurrence and administrationoutcomes of real estate. In our opinion, the liabilities, if any, that may ultimately result from such legal actions arethese matters will not expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity. We are not currently involved in any legal actions.

cash flows.

Item 4.  Mine Safety Disclosures.


Not applicable.



PART II


Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Market Information
Common Shares

Our common sharesCommon Shares are quoted on the OTC Bulletin Board and on the pink sheets with the symbol “PRLE”.

The number of holders of record of our Common Shares was 102 as of March 15, 2018, and we estimate we have approximately 304 beneficial holders of Common Shares as of that date. As of March 23, 2018, we had 405,169 Common Shares of beneficial interest outstanding.


Our Class A Cumulative Convertible Preferred Shares (“Class A Preferred Shares”) are quoted on the OTC Bulletin Board with the symbol “PRLEP.”“PRLEP”. The number of holders of record of our Class A Preferred Shares is two. Class A Preferred shareholders have the right to convert each of their shares into Common Shares, as follows: 95,226 Class A Preferred Shares forare each convertible into 0.046 common shares.

Common Shares and 161,410 Class A Preferred Shares are each convertible into 0.305 Common Shares.


Our Class C Convertible Preferred Shares were issued effective September 29, 2006 to the trustees of the Company who contributed cash and/or services for these shares. The Class C Convertible Preferred Shares are not quoted on an exchange.

exchange or the OTC Bulletin Board.


The following table showssets forth the range of thequarterly high and low sale prices per share of our Common Shares for our common sharesthe years ended December 31, 2017 and 2016 as reported on the OTC Bulletin Board. The quotations shown represent inter-dealer prices without adjustment for retail markups, markdowns or commissions, and may not reflect actual transactions.

2015 High  Low 
4thQuarter $1.70  $1.01 
3rdQuarter $1.80  $1.60 
2ndQuarter $1.85  $1.50 
1stQuarter $2.00  $1.25 

2014 High  Low 
4thQuarter $1.80  $1.06 
3rdQuarter $2.35  $1.51 
2ndQuarter $3.00  $1.90 
1stQuarter $3.00  $0.86 


For the Year Ended December 31, 2017 High Low 
      
First Quarter $5.25
 $3.00
 
Second Quarter $3.60
 $3.50
 
Third Quarter $3.50
 $3.24
 
Fourth Quarter $4.05
 $2.78
 
      
For the Year Ended December 31, 2016 High Low 
      
First Quarter $3.00
 $1.40
 
Second Quarter $3.00
 $1.76
 
Third Quarter $2.50
 $2.00
 
Fourth Quarter $5.25
 $1.75
 

On January 28, 2016,March 23, 2018, the last reported salesclosing price of our common sharesCommon Shares reported on the OTC Bulletin Board was $1.40. The number of holders of record of our common shares was 121 as of January 28, 2016 and we estimate we have approximately 1,200 beneficial holders of common shares as of that same date.

4
$2.80 per share.

Dividend Policy


We have not declared or paid dividends on our common sharesCommon Shares since 1999, and we do not anticipate paying dividends on our common sharesCommon Shares in the foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of the board of trustees and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the board of trustees.

Preferred Share Conversions


During 2015, no2017 and 2016, 0 and 1,600 preferred shares were converted to common shares.

into 0 and 73 Common Shares, respectively.

Issuer Purchases of Equity Securities


The Company did not purchase any of its equity securities in 2015.

2017.

Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statements Regarding Forward-Looking Statements

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

●uncertainties related to the national economy, including liquidity in the capital markets and lending requirements imposed by financial institutions;
●changes in values for commercial real estate properties and companies;
●increases in interest rates and in the availability, cost and terms of mortgage funds;
●decreases in market prices of the shares of publicly traded real estate companies;
●adverse changes in governmental rules and fiscal policies; and
●other factors which are beyond our control.

In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

●we have no operating assets;
●our cash resources are limited;
●we have a history of losses;
●we have not raised funds through a public equity offering;
●our trustees control a significant percentage of our voting shares;
●shareholders could experience possible future dilution through the issuance of additional shares;
●we are dependent on a small number of key senior professionals who are part-time employees; and
●we currently do not plan to distribute dividends to the holders of our shares.


Overview

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”)


Pillarstone Capital REIT is a Maryland shell corporation primarily focused on maintaining its corporate existence and SEC reporting history to enable it, in the future, to raise additional capital and make real estate investments.investment trust engaged in investing in, owning and operating commercial properties. Future real estate investments may include (i) acquisition and development of retail, office, office warehouse, industrial, multifamily, hotel and other commercial properties, (ii) acquisition of or merger with a REIT or real estate operating company, and (iii) joint venture investments.

Substantially all of our business is conducted through our operating partnership Pillarstone OP, a Delaware limited partnership organized in 2016. We are the sole general partner of Pillarstone OP. As of December 31, 2015,2017, we owned approximately 18.6% of the outstanding equity in Pillarstone OP and Whitestone OP owned approximately 81.4% of the outstanding equity in Pillarstone OP as of December 31, 2017. We account for Pillarstone OP on our financial statements using the equity method.


As of December 31, 2017, the Company is a corporate shellsmaller reporting company current in its quarterly and annual financial statement filings with the SEC, filings, that may make future real estate investments or be sold to another company.investments. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC.additional transactions.  Even if our management is successful in closing a transaction,additional transactions, investors may not value the transactiontransactions or the current filing status with the SECCompany in the same manner as we did,do, and investors may not value the transactiontransactions as they would value other transactions or alternatives. Failure to obtain externaladditional sources of capital will materially and adversely affect the Company’s ability to continue operations, as well as its liquidity and financial results.


Brief History

Paragon


Pillarstone was formed on March 15, 1994 as a Maryland REIT. WeThe Company operated as a traditional real estate investment trust by buying, selling, owning and operating commercial and residential properties through December 31, 1999. In 2000, the Company purchased a software technology company, resulting in the Company not meeting the qualifications to be a REIT under the Code. In 2002, the Company discontinued the operations of the technology segment.

segment, and from 2003 through 2006, pursued a value-added business plan primarily focused on acquiring well located, under-performing multi-family residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding.


Recent Developments and Executive Overview


During 2015,most of 2016, the Company continuedexisted as a corporate shell current in its SEC filings.

On November 20, 2015 five trusteesDecember 8, 2016, Pillarstone and Pillarstone OP entered into the Contribution Agreement with Whitestone OP, a subsidiary and the operating partnership of Whitestone, both of which are related parties to Pillarstone and Pillarstone OP, pursuant to which Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries: CP Woodland; Industrial-Office; Whitestone Offices; and Uptown Tower that own the Real Estate Assets for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP issued at a price of $1.331 per OP Unit; and (2) the assumption of approximately $65.9 million of liabilities by Pillarstone OP.
As of December 31, 2017, Whitestone OP owns approximately 81.4% of the outstanding equity in Pillarstone OP. We account for Pillarstone OP on our board of trustees loaned $197,780 tofinancial statements using the Company in exchange for convertible notes payable. Excess funds can be invested in cash equivalents depending on market conditions.

equity method.


Results of Operations


The following is a discussion of our results of operations and comprehensive income for the years ended December 31, 20152017 and 20142016 and financial condition, including:

●Explanation of changes in the results of operations in the Consolidated Statements of Operations for the year ended December 31, 2015 compared to the year ended December 31, 2014.
●Our critical accounting policies and estimates that require our subjective judgment and are important to the presentation of our financial condition and results of operations.
●Our primary sources and uses of cash for the year ended December 31, 2015, and how we intend to generate cash for long-term capital needs.
●Our current income tax status.


Explanation of changes in the results of operations in the Consolidated Statements of Operations for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Our critical accounting policies and estimates that require our subjective judgment and are important to the presentation of our financial condition and results of operations.
Our primary sources and uses of cash for the year ended December 31, 2017, and how we intend to generate cash for long-term capital needs.
Our current income tax status.


Comparison of the years ended December 31, 20152017 and 20142016


Revenues from Operations

Total revenues decreased $4 from $4remained flat at $0 for the yearyears ended December 31, 2014 to $0 for2017 and 2016. During 2015 and through December 7, 2016, the year ended December 31, 2015. RevenuesCompany existed as a shell corporation with no revenue producing activities. Historically, the Company's only revenues consisted of interest income for the year ended December 31, 2014. The decrease in interest income was due to having a lower amount invested in a money market account in the year ended December 31, 2015 than in the year ended December 31, 2014.from equity securities. As of December 31, 2015,2017 and 2016, we held no equity securities and our decision to invest in equity securities on a temporary basis in 20162018 is dependent on market conditions and the availability of cash to invest. Accordingly, we anticipate nominal revenue in 2016.

2018.


Expenses from Operations


Total expenses, comprised mostly of general and administrative expenses, increased $9,797,decreased $219,018, from $57,474$511,757 for the year ended December 31, 20142016 to $67,271$292,739 for the year ended December 31, 2015.2017. This net increasedecrease is due to increasesdecreases in director and officer liability insurance of $377, legal fees of $9,548,$333,731 and other professional fees of $51,492 offset by increased accounting fees of $117,145, SEC filing charges and transfer agent fees of $3,773 and interest$10,036, acquisition expense of $2,276 offset by decreased accounting fees of $5,840$19,716 and decreased miscellaneous expenses of $337.

$19,308. The aforementioned decreases in expenses occurred primarily as a result of the completion of the preparation and execution of the Contribution Agreement and other transaction documents executed in connection with the Acquisition.

Loss from operations

Operations


As a result of the above, the loss from operations increased $9,801decreased $219,018 from $57,470$511,757 for the year ended December 31, 20142016 to $67,271$292,739 for the year ended December 31, 2015.

2017.


Equity in Income of Pillarstone OP

The increase of $260,537 in equity in income of Pillarstone OP occurred as a result of a full year of activity under the Contribution Agreement entered into on December 8, 2016 whereby Pillarstone purchased an 18.6% interest in Pillarstone OP. As Pillarstone accounts for this interest purchased as an equity method investment, Pillarstone recognizes a portion of Pillarstone OP's income and loss in its financial statements.

Net loss attributableLoss Attributable to Common Shareholders


Based on the above, the net loss attributable to common shareholders increaseddecreased $479,555 from $57,470$496,981 for the year ended December 31, 20142016 to $67,271$17,426 for the year ended December 31, 2015.

2017.


Liquidity and Capital Resources


Cash provided by operations, equity transactions, and borrowings from affiliates and lending institutions have generally provided the primary sources of liquidity to the Company. Historically, the Company has used these sources to fund operating expenses, satisfy its debt service obligations and fund distributions to shareholders. Presently,During 2016, we arewere dependent on our existing cash which was provided by loans in 2015 of $197,780 from five trustees on our board of trustees in exchange for convertible notes payable. The funds will be usedwere utilized for part of the Company to maintain itsdue diligence costs incurred in connection with the development and execution of the Contribution Agreement and other transaction documents executed in connection with the Acquisition as well as maintaining the Company's status as a corporate shellsmaller reporting company current in its SECquarterly and annual financial statement filings so that it may be used inwith the future for real estate transactions or sold to another company.SEC. We have kept the public entity available for value-added real estate opportunities, including (i) acquisition and development of retail, office, office warehouse, industrial, multifamily, hotel, and other commercial properties, (ii) acquisition of or merger with a REIT or real estate operating company, and (iii) joint venture investments. During 2017, we were dependent on cash distributions from Pillarstone OP generated through Pillarstone OP's ownership of the Real Estate Assets acquired in the Acquisition. Excess funds can be invested in cash equivalents depending on market conditions.


Cash Flows


As of December 31, 2015,2017, our unrestricted cash resources were $174,283. We are$179,385. During 2016, we were dependent on our existing cash loaned during 2015 by five trustees on our board of trusteetrustees in exchange for convertible notes payable, to meet our liquidity needs because we dodid not have cash from operations to meet our operating requirements.

During 2017, we were dependent on cash distributions from Pillarstone OP generated through Pillarstone OP's ownership of the Real Estate Assets acquired in the Acquisition. During 2018, and future years, we will be dependent on these cash distributions from Pillarstone OP to meet our liquidity needs.


During the year ended December 31, 2015,2017, the Company’sCompany's cash balance increased by $163,557$171,940 from $10,726$7,445 at December 31, 20142016 to $174,283$179,385 at December 31, 2015.2017. During 2015,2017, we receivedhad no cash financing activities. Cash provided by investing activities of $19,278$85,482 was primarily from transferring cashregular distributions in connection with the Contribution Agreement from an account at a securities brokerage firm toPillarstone OP in excess of the operating account and $197,780 from issuing convertible notes payable. Company's investment in Pillarstone OP.

Cash provided by operations of $53,501 was used in continuing operations.

Cash used for continuing operations$86,458 included general and administrative costs, primarily for maintaininglegal and professional costs associated with consummating the Company as a corporate shellContribution Agreement and to keep itother transaction documents executed in connection with the Acquisition, and for keeping Pillarstone current in its SEC filings so that it may be used in the future for additional real estate opportunities or sold to another company.

transactions.


Future Obligations

Because the


The Company is a corporate shell that may be useddoes not directly participate in the future for real estate transactions or sold to another company,any revenue generating activities, and as such, we currently have no cash from operations and have reduced our day-to-day overhead expenses and material future obligations. We haveHowever, during December 2016, the Company, through the Contribution Agreement and its resulting 18.6% equity investment in Pillarstone OP, became a party to income generating activities. While the Company is developing strategies for the Real Estate Assets, we maintain reduced overhead expenses by issuing stockshares for our CEO’s salary and trustee fees, placed the only other employeeretaining our employees on a part-time unpaid basis, and have not replacedreplacing employees who have left. We have eliminated our office space and rent,also reduced the use of outside consultants, and negotiated discounts on or eliminated other expenses wherever possible.


Long Term Liquidity and Operating Strategies


Historically, we have financed our long term capital needs, including acquisitions, as follows:

●borrowings from new loans;
●
borrowings from new loans;
additional equity issuances of our common and preferred shares; and
●proceeds from the sales of our real estate, a technology segment, and marketable securities.

Because our unrestricted cash is not sufficient to allow us to continue operations, we have been reviewing other alternatives, including sellingcommon and preferred shares; and

proceeds from the corporate entitysales of our real estate, a technology segment, and seeking additional investors. Inmarketable securities.

From 2006 and 2007,until December 2016, the Company received total payments ofcontinued its existence as a corporate shell filing its quarterly and annual reports with the SEC so that it could be used for future real estate transactions or sold to another company. During this time, the Company was funded by the trustees who contributed $500,000 from three independent trustees on our board of trustees in exchange for 125,000 Class C Convertible Preferred Shares. In November 2015 five trustees on our board of trustees loanedShares and $197,780 to the Company in exchange for convertible notes payable. These funds
Subsequent to the Acquisition through which Pillarstone OP acquired the Real Estate Assets, Pillarstone intends to develop strategies for the properties in order to create value for the enterprise and our shareholders. As part of the Acquisition, Pillarstone OP and Whitestone OP have been and continueagreed that Pillarstone OP may require Whitestone OP to purchase up to an aggregate of $3.0 million of additional OP Units from Pillarstone OP at $1.331 per unit over a two year period. To implement the strategy to create value with the Real Estate Assets, additional capital will need to be used to maintain the Company as a corporate shell current in its SEC filings while it searches for and reviews other value added real estate opportunities. Excess funds can be invested in cash equivalents depending on market conditions.

raised.


Current Tax Status


At December 31, 2015,2017, we have a net operating loss carryovercarryforwards of $2,575,000.$2,510,000. While these losses created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty as to whether we will be able to use these loss carryovers,carryforwards, which will expire in varying amounts through the year 2035.2038. In the event of a change of ownership of the Company, our ability (or the ability of any company that acquires or merges with us) to use our net operating loss carryovercarryforwards will be limited by federal tax regulations.


We and our subsidiary are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in general and administrative expense in the consolidated statements of operations and has not been separately stated due to its insignificance.


Interest Rates and Inflation

Interest rates fell during 2008 as the Federal Reserve Bank lowered the discount rate which remained low through 2015. Due to record low interest rates, capital markets were generally not accessible by small real estate companies like Paragon from 2009 through 2011 and debt financing was only available to larger creditworthy companies. Financial institutions tightened financial covenant tests, decreased loan-to-value ratios, and charged higher fees for loans, which has reduced the number of real estate transactions. While credit markets have been more active since 2013, Paragon has not participated in any transactions to raise capital.


The Company was not significantly affected by inflation during the periods presented in this report due primarily to the relative low nationwide inflation rates and the Company being a corporate shell with minimal expenses.


Off-Balance Sheet Arrangements


We have no off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Application of Critical Accounting Estimates


Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”),GAAP, which require us to make certain estimates and assumptions. The following section is a summary of certain estimates that both require our most subjective judgment and are most important to the presentation of our financial condition and results of operations. It is possible that the use of different estimates or assumptions in making these judgments could result in materially different amounts being reported in our consolidated financial statements.

Valuation Allowance of Deferred Tax Asset


We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. At December 31, 2015,2017, we had a net operating loss carryovercarryforwards totaling $2,575,000.

$2,510,000.


While these losses created a deferred tax asset of $1,031,000,$571,000, a valuation allowance of $1,031,000$571,000 was applied against this asset because of the uncertainty of whether we will be able to use these loss carryovers,carryforwards, which will expire in varying amounts through the year 2035.2038. Pursuant to current Code regulations, we will be limited to using $797,000$651,600 of the prior net operating losses of $11,100,000,$11,246,000, and these same regulations also limit the amount of loss used in any one year. Additionally, use of our net operating loss carryovercarryforwards will be limited in the event of a change in ownership of the Company.


Item 8.  Financial Statements and Supplementary Data.


The required audited consolidated financial statements of the Company are included herein commencing on page F-1.


Item 9.  Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure.

None.

As previously disclosed in the Company's Current Report on Form 8-K filed on January 20, 2017, upon the recommendation of the Company’s Audit Committee, our board of trustees dismissed Boulay PLLP (“Boulay”) as the Company’ independent registered public accounting firm and engaged Pannell Kerr Forster of Texas, P. C. (“PKF”) as the Company’s independent registered public accounting firm, beginning with the period ended December 31, 2016.

During the Company’s fiscal years ended December 31, 2015 and 2016 and through January 19, 2017 (the “Engagement Date”) (1) there were no disagreements with Boulay on any matter of accounting principles or practices, financial statement disclosure or auditing scope and procedure which, if not resolved to the satisfaction of Boulay, would have caused Boulay to make reference to the matter in its reports on the Company’s consolidated financial statements for the fiscal years ended December 31, 2014 and December 31, 2015 and (2) there were no “reportable events” as that term is defined in Item 304 of Regulation S-K promulgated under the Exchange Act.

During the Company’s two most recent fiscal years as of the Engagement Date, the subsequent interim periods thereto, and through the Engagement Date, neither the Company nor anyone on its behalf consulted PKF regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements; or (2) any matter regarding the Company that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).

Item 9A.  Controls and Procedures.


Evaluation of Disclosure Controls and Procedures


As of December 31, 2015,2017, we evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Act. Based upon this evaluation, our principal
executive officer and principal financial officer each concluded that, as of December 31, 2015,2017, our disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act RulesRule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP defined in the Exchange Act.

Our principal executive officer and principal financial officer carried out an evaluation of the effectiveness of our internal control over financial reporting. In making this evaluation, management used the COSO (the Committee of Sponsoring Organizations) 19922013 framework of the Treadway Commission. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.

2017.


Changes in Internal Control over Financial Reporting


There was no change in the fourth fiscal quarter of 20152017 in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 9B.  Other Information.

None.


PART III


Item 10.  Directors,Trustees, Executive Officers and Corporate Governance.

The names, ages and positionsinformation required by Item 10 of Form 10-K is incorporated herein by reference to such information as set forth in the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the SEC not later than 120 days after the close of our trustees and executive officers are as follows:

NameAgePositionExpiration of Term(1)
James C. Mastandrea72President, Chief Executive Officer and Chairman of Board of Trustees2006(1)
John J. Dee64Senior Vice President, Chief Financial Officer and Trustee2007(1)
Daryl J. Carter60Trustee2008(1)
Daniel G. DeVos57Trustee2006(1)
Paul T. Lambert63Trustee2007(1)
Michael T. Oliver72Trustee2008(1)

(1)Because the trustees own a significant number of the voting shares and the Company is reducing expenses to conserve its limited cash, an annual meeting of shareholders has not been held since 2006. The trustees will continue to serve until an election of trustees is held.

Board of Trustees and Executive Officers

The business experience, principal occupations and employment, as well as the periods of service, of each of our trustees and executive officers during at least the last five years are set forth below.

James C. Mastandrea has been our Chairman, President and Chief Executive Officer since 2003. Mr. Mastandrea has over 35 years of experience in the real estate industry and 19 years serving in high level positions of publicly traded companies. Since 2006, he has served as the President, Chief Executive Officer and Chairman of the Board of Trustees of Whitestone REIT, a publicly traded REIT listed on the New York Stock Exchange (“NYSE”) focused on Community Centered PropertiesTM (“Whitestone REIT”). In addition, since 1978, Mr. Mastandrea has served as the Chief Executive Officer/Founder of MDC Realty Corporation, Chicago, Illinois, a privately held residential and commercial real estate development company (“MDC Realty Corporation”). From 1994 to 1998, Mr. Mastandrea served as Chairman and Chief Executive Officer of First Union Real Estate Investments, a NYSE-listed real estate investment trust. Mr. Mastandrea also served in the U.S. Army as a Military Police Officer. Mr. Mastandrea is a director of Cleveland State University Foundation Board and a member of the investment committee. He regularly lectures to MBA students at the University of Chicago and has been teaching for five years as Adjunct Professor in the MBA program at Rice University in Houston, TX, and also presents to institutional investors in the U.S. and Europe. Mr. Mastandrea’s significant experience in the commercial and residential real estate business, capital markets, and private and public companies as a real estate expert allows him to provide insight into various aspects of the economy and commercial real estate, which is of significant value to our board of trustees.

John J. Dee has served as a trustee, Senior Vice President and Chief Financial Officer since 2003. Since October 2006, Mr. Dee has also been Chief Operating Officer, Executive Vice President, and Director of Finance at Whitestone REIT (NYSE). Prior to Mr. Dee’s joining Paragon, from 2002 to 2003, he was Senior Vice President and Chief Financial Officer of MDC Realty Corporation, Cleveland, Ohio, an affiliate of MDC Realty Corporation. From 2000 to 2002, Mr. Dee was Director of Finance and Administration for a Cleveland, Ohio law firm. From 1978 to 2000, Mr. Dee held various management positions with First Union Real Estate Investments (NYSE), including Senior Vice President and Chief Accounting Officer from 1996 to 2000. Mr. Dee is licensed as a CPA (non-practicing) in the State of Ohio. Mr. Dee has a significant number of years of experience with publicly listed REITs and exceptional experience and skills of value to our management team and board.

Daryl J. Carter has served as a trustee since June 2003. Mr. Carter founded and since 2007 has served as Chairman and Chief Executive Officer of Avanath Capital Management, LLC, an investment firm focused on urban-themed real estate and mortgage investments. He is also a Managing Partner of McKinley-Avanath, a property management company focused on the affordable apartment sector. From 2005 to 2007, Mr. Carter was an Executive Managing Director of Centerline Capital Group (“Centerline”), a subsidiary of Centerline Holding Company (NYSE), and head of the Commercial Real Estate Group. From 2005 to 2007, he was also the President of American Mortgage Acceptance Corporation, a then publicly-held, commercial mortgage lender that was externally managed by Centerline. Mr. Carter became part of Centerline when his company, Capri Capital Finance (“CCF”) was acquired by Centerline in 2005 and stayed with Centerline until 2006. Mr. Carter co-founded and served as Co-Chairman of both CCF and Capri Capital Advisors (“Capri”) in 1992. He was instrumental in building Capri into a diversified real estate firm with $8 billion in real estate equity and debt investments under management. Prior to Capri, Mr. Carter was Regional Vice President at Westinghouse Credit Corporation in Irvine and a Second Vice President at Continental Bank in Chicago. Mr. Carter serves as a trustee of Whitestone REIT (NYSE) since 2009, a director of Silver Bay Realty Trust Corp. (NYSE) since July 2013, a trustee of the Urban Land Institute, Executive Committee Member and Chairman of the National Multifamily Housing Council, and on the Visiting Committee of the M.I.T. Sloan School of Management. He is also a Past Chairman of the Mortgage Bankers Association. Mr. Carter brings to our board of trustees significant management experience and demonstrated leadership skills with financial and real estate entities.

Daniel G. DeVos has served as a trustee since March 2003. Since 1993, Mr. DeVos has served as Chairman of the Board and Chief Executive Officer of DP Fox Ventures, LLC, a diversified management enterprise with investments in real estate, transportation, fashion, sports, and entertainment. Since 1999, Mr. DeVos has served as the President and Chief Executive Officer of Fox Motors, based in Grand Rapids, Michigan. He is the majority owner of the Grand Rapids Griffins (AHL), has been a board member since 1991 and Chairman since 2011 of RDV Sports, Inc., the parent company of the Orlando Magic (NBA), and is a partner in CWD Real Estate Investments. Since 2004, he has served as a director and currently serves on the Audit Committee of Alticor, Inc., the parent of Amway Corporation, located in Ada, Michigan. From 2009 to 2013, Mr. DeVos served as a trustee of Whitestone REIT (NYSE) and in May 2013 became trustee emeritus. From 1994 to 1998, he served as a trustee of First Union Real Estate Investments (NYSE). Mr. DeVos has extensive and diverse business experience within and outside the real estate industry and possesses exceptional leadership skills in business and non-profit management.

Paul T. Lambert has served as a trustee since November 1998. Mr. Lambert serves as the Chief Executive Officer of Lambert Capital Corporation. He served on the Board of Directors and was the Chief Operating Officer of First Industrial Realty Trust, Inc. (NYSE) (“First Industrial”) from its initial public offering in October 1994 to the end of 1995. Mr. Lambert was one of the largest contributors to the formation of First Industrial and one of its founding shareholders. Prior to forming First Industrial, Mr. Lambert was managing partner for The Shidler Group, a national private real estate investment company. Prior to joining The Shidler Group, Mr. Lambert was a commercial real estate developer with Dillingham Corporation and, prior to that, was a consultant with The Boston Consulting Group. Mr. Lambert serves as a trustee of Whitestone REIT (NYSE) since March 2013. Mr. Lambert is an entrepreneur with significant experience in commercial real estate and financing of development projects.

Michael T. Oliver has served as a trustee since March 2003. Mr. Oliver was Director of New Business Development at Concierge Asset Management from December 2005 to April 2010.

Mr. Oliver was the State Investment Officer of Real Estate and Private Equity Investments of the Alaska State Pension Board of the Alaska State Pension Fund, Juneau, Alaska, a position he held from August 2000 through September 2005. Mr. Oliver was a consultant from March 1998 to July 2000 to MPAC Capital Markets, Seattle, Washington, and a consultant to several Asian governments concerning laws governing real estate investment trusts. From April 1996 to March 1998, Mr. Oliver was Chairman of RERC Capital Markets, LLC, Chicago, Illinois. From March 1987 to February 1996, he was founder and Chairman of PRA Securities Advisors, Inc., which was sold and became Heitman/PRA Securities Advisors, Inc. and President of its Real Estate Fund. Prior to March 1987 and since 1967, Mr. Oliver held positions at real estate companies raising capital and making direct investments in real estate, and at investment banking firms analyzing real estate companies and raising capital. Mr. Oliver has been involved with REITs, commercial real estate, and capital markets for a significant number of years.

The board of trustees has determined that each of Messrs. Carter, DeVos, Lambert, and Oliver do not have a material relationship with Paragon that would interfere with the exercise of independent judgment and are independent as defined by the applicable rules of the SEC. Mr. Oliver is the chairman of Paragon’s audit committee and serves as the committee’s financial expert. Mr. Carter is the chairman of the management, organization and compensation committee. All four independent trustees are on the audit committee and the management, organization and compensation committee.

Code of Conduct and Ethics

Our board of trustees has adopted a Code of Conduct and Ethics that applies to all officers, trustees and employees of Paragon, including our principal executive officer, principal financial officer, principal accounting officer and any person performing similar functions. Our Code of Conduct and Ethics is filed as Exhibit 14 to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, as filed with the SEC on March 30, 2004. Upon written request to the Company, we will provide a copy of our Code of Conduct and Ethics without charge.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, trustees and persons who own more than 10% of our common shares to file reports of ownership and changes in ownership with the SEC. Officers, trustees and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of Form 4s filed by trustees reporting share transactions, grants of restricted shares and options furnished to us, or written representations that no Annual Statements of Beneficial Ownership of Securities on Form 5 were required to be filed, we believe that for the fiscal year ended December 31, 2015, all Section 16(a) filing requirements applicable to our officers, trustees and greater than 10% shareholders were complied with.

2017.

Item 11.  Executive Compensation.

Because the Company has not had substantial operations, James C. Mastandrea did not receive any compensation for serving


The information required by Item 11 of Form 10-K is incorporated herein by reference to such information as our Chief Executive Officer, President and Chairman during the years ended December 31, 2015 and December 31, 2014. John J. Dee did not receive any compensation for serving as our Senior Vice President and Chief Financial Officer during the years ended December 31, 2015 and December 31, 2014. There were no other officers or employees of the Companyset forth in the past two fiscal years.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth the status of equity awards as of December 31, 2015:

  Number of  Number of        Number of  Value of  Unearned 
  Securities  Securities        Shares or  Shares or  Shares, Units 
  Underlying  Underlying        Units of  Units of  or Other 
  Unexercised  Unexercised  Option  Option  Stock That  Stock That  Rights That 
  Options  Options  Exercise  Expiration  Have Not  Have Not  Have Not 
Name Exercisable  Unexercisable  Price  Date  Vested  Vested  Vested 
                      
James C. Mastandrea  —   —   —   —   2,000(1) $2,800.00   (2)
Chief Executive Officer, President and Chairman                            
                             
John J. Dee  —   —   —   —   2,000(1) $2,800.00   (2)
Senior Vice President and Chief Financial Officer                            

(1)Represents restricted common shares issued January 2, 2004. Half of the restricted shares vested on the fifth anniversary of the issuance date. The remaining half will vest when funds from operations has doubled or when Paragon’s share price is 50% higher compared to the average trading price for the five days preceding the grant date.
(2)In June 2003, our shareholders approved an agreement to issue additional common shares to Paragon Real Estate Development, LLC of which Mr. Mastandrea is the managing member and Mr. Dee is a member. In September 2006,Paragon amended this agreement to include each of the Trustees so that if a Trustee brings a new transaction to Paragon, he would receive additional common shares of Paragon in accordance with a formula in the agreement. In January 2016, the non-employee trustees and Mr. Mastandrea agreed to make this agreement for only non-employee trustees. This agreement is intended to serve as an incentive for our trustees to increase the asset base, net operating income, funds from operations, and share value of Paragon. The exact number of common shares that would be issued will be calculated in accordance with a formula in the agreement based on future acquisition, development or redevelopment transactions. Any of these transactions would be subject to approval by the members of our Board who are not receiving the additional common shares. We would issue our common shares only upon the closing of the transaction. The maximum number of common shares to be issued under the agreement is limited to a total value of $26 million based on the average closing price of our common shares for 30 calendar days preceding the closing of the transaction. The common shares will be restricted until we achieve the five-year pro forma income target for the acquisition, as approved by the Board, and an increase of 5% in Paragon’s net operating income and funds from operations. The restricted shares would vest immediately upon any “shift in ownership,” as defined in the agreement.

Employment Agreements

On April 3, 2006, the board of trustees authorized modificationsCompany’s definitive proxy statement pursuant to the employment agreement of Mr. Mastandrea. The modification agreement allows Mr. Mastandrea to devote time to other business and personal investments while performing his duties for Paragon. The original employment agreement with Mr. Mastandrea provides for an annual salary of $60,000 effective as of March 4, 2003. The initial term of Mr. Mastandrea’s employment is for two years and may be extended for terms of one year. Mr. Mastandrea’s base annual salary may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. MastandreaRegulation 14A, which proxy statement will be entitled to base salary and bonus atfiled with the rate in effect before any termination for a periodSEC not later than 120 days after the close of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Mastandrea. Effective September 29, 2006, in lieu of an annual salary of $100,000, Mr. Mastandrea received 44,444 Class C Preferred Shares for his services as an officer of Paragon through September 29, 2008. This agreement was amended to extend the service period and vesting period restriction dates to September 30, 2016, though the shares were fully amortized by the original date in 2008.

Effective June 30, 2003, we issued 696,078 preferred shares valued at approximately $2.4 million to Messrs. Mastandrea and Dee pursuant to separate restricted share agreements. On June 30, 2003, 534,668 preferred shares were converted at a factor of 0.305 into 163,116 common shares. Under the restricted share agreement for each of Mr. Mastandrea and Mr. Dee, the restricted shares vest upon the later of the following dates:

●the date our gross assets exceed $50.0 million, or
●50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005, and the remaining 25% of the shares on March 4, 2006.

The number of common shares and the conversion factor have been revised to reflect the 1-for-75 reverse split of the common shares that occurred in July 2006.

Compensation of Trustees

During theour fiscal year ended December 31, 2015, trustees were not paid any compensation.

In lieu of cash payments for trustee fees, effective September 29, 2006, each trustee of the Company received 12,500 restricted Class C Preferred Shares for service as a trustee until September 29, 2008. The shares are restricted until the latest to occur of: (a) a public offering by the Company sufficient to liquidate the shares, (b) an exchange of the Company’s existing shares for new shares, and (c) September 29, 2008. These agreements were amended to extend the service period and vesting period restriction dates to September 30, 2016, though the shares were fully amortized by the original date in 2008.

In June 2003, our shareholders approved an agreement to issue additional common shares to Paragon Real Estate Development, LLC of which Mr. Mastandrea is the managing member and Mr. Dee is a member. In September 2006,Paragon amended this agreement to include each of the trustees so that if a trustee brings a new transaction to Paragon, he would receive additional common shares of Paragon in accordance with a formula in the agreement. In January 2016, the non-employee trustees and Mr. Mastandrea agreed to make this agreement for only non-employee trustees. The agreement is intended as an incentive for our trustees to increase the asset base, net operating income, funds from operations, and share value of Paragon. The exact number of common shares that would be issued will be calculated in accordance with a formula in the agreement based on future acquisition, development or redevelopment transactions. Any of these transactions would be subject to approval by the members of our board of trustees who are not receiving the additional common shares. We would issue our common shares only upon the closing of a transaction. The maximum number of common shares to be issued under the agreement is limited to a total value of $26 million based on the average closing price of our common shares for 30 calendar days preceding the closing of a transaction. The common shares will be restricted until we achieve the five-year pro forma income target for the acquisition, as approved by the board of trustees, and an increase of 5% in Paragon’s net operating income and funds from operations. The restricted shares would vest immediately upon any “shift in ownership,” as defined in the agreement.

2017.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related StockholderShareholder Matters.


The following table includes certain information required by Item 12 of Form 10-K is incorporated herein by reference to such information as set forth in the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with respect to the beneficial ownershipSEC not later than 120 days after the close of our shares by: (i) each person known by us to own more than 5% in interest of the outstanding shares; (ii) each of the trustees; (iii) each of our executive officers; and (iv) all of the trustees and executive officers as a group. Except as otherwise noted, the person or entity named has sole voting and investment power over the shares indicated.

The table shows ownership as of February 1, 2016.

 Common Shares(2)  Preferred A Shares(3)  Preferred C Shares(4)  Total Common Shares
and Preferred Shares(5)		 
Name and Address(1) Number  Percent(6)  Number  Percent(6)  Number  Percent  Number  Percent(6) 
                         
James C. Mastandrea  215,496(7)  47.6%  161,410(17)  62.5%  56,944   23.3%  834,166(19)  77.9%
Paragon Real Estate Development, LLC  163,117(8)  40.3%  161,410(17)  62.5%  —   —   212,347(20)  46.7%
Paul T. Lambert  83,248(9)  18.7%  —   —   62,500   25.6%  708,248(21)  66.2%
John J. Dee  17,842(10)  4.3%  —(18)  —   12,500   5.1%  142,842(22)  26.3%
Daryl J. Carter  24,494(11)  5.7%  —   —   37,500   15.3%  399,494(23)  49.8%
Daniel G. DeVos  39,205(12)  8.9%  —   —   62,500   25.6%  664,205(24)  62.2%
Michael T. Oliver  —   —   —   —   12,500   5.1%  125,000(25)  23.6%
                                 
Timothy D. O’Donnell 90 Broad Street New York, NY 10004  25,000(13)  6.2%  —   —   —   —   25,000   * 
                                 
Mark Schurgin 9841 Airport Boulevard Los Angeles, CA 90045  76,598(14)  18.9%  —   —   —   —   76,598   2.7%
                                 
All trustees and current executive officers as a group(15)  380,285(16)  67.1%  161,410   62.5%  244,444   100.0%  2,873,955(26)  93.9%

* Indicates less than one percent

(1)Unless otherwise indicated, the address of all beneficial owners is our corporate address at 10011 Valley Forge Drive, Houston, Texas 77042.
(2)Percentages based on 405,096 common shares outstanding, not including 38,130 shares held in treasury. For each individual trustee and executive officer, also includes common shares he has the right to acquire through share options and convertible notes payable. The options that are currently exercisable as of March 31, 2016 for all named persons is 667, and the common shares issuable upon conversion of notes payable as of March 31, 2016 for all named persons is 154,007. Percentages also include 6,667 restricted shares issuable to an independent third party that Mr. Mastandrea has the right to vote.
(3)Percentages based on 258,236 preferred A shares outstanding as of February 1, 2016, which convert to 53,683 common shares as follows: 161,410 preferred A shares are each convertible into 0.305 common shares and 96,826 preferred A shares are each convertible into 0.046 common shares.
(4)Percentages based on 244,444 preferred C shares outstanding as of February 1, 2016, which convert to 2,444,440 common shares. Each preferred C share is convertible into 10 common shares.

(5)Percentages based on 405,096 common shares outstanding, not including 38,130 shares held in treasury, and including 258,236 preferred A shares which convert to 53,683 common shares and 244,444 preferred C shares which convert to 2,444,440 common shares. For each individual trustee and executive officer, also includes common shares he has the right to acquire through share options that are currently exercisable as of March 31, 2016 and common shares that are issuable upon conversion of notes payable as of March 31, 2016. Mr. Mastandrea’s percentage is calculated using a denominator that includes (i) 405,096 common shares, not including 38,130 shares held in treasury; (ii) 56,944 preferred C shares that convert to 569,440 common shares; (iii) 161,410 preferred A shares, which convert to 49,230 common shares; (iv) 6,667 restricted common shares issuable to an independent third party that Mr. Mastandrea has the right to vote; and (v) 40,666 common shares issuable upon the conversion of notes payable due Mr. Mastandrea.
(6)The ownership percents may total more than 100% due to more than one person or entity being considered the beneficial owner of the same shares, in accordance with SEC regulations for this table.
(7)Includes: (i) 6,667 restricted common shares issuable to an independent third party that Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 2,000 common shares; (iv) 2,000 restricted common shares; (v) 1,046 common shares and (vi) 40,666 common shares issuable upon conversion of notes payable.
(8)Mr. Mastandrea is the managing member of Paragon Real Estate Development, LLC and these shares are also included in Mr. Mastandrea’s common shares.
(9)Includes: (i) 667 options; (ii) 5,930 common shares held by Lambert Equities II, LLC, of which Mr. Lambert is the controlling majority member and sole manager; (iii) 36,852 common shares; and (iv) 39,799 common shares issuable upon conversion of notes payable.
(10)Includes: (i) 2,000 common shares (ii) 2,000 restricted commons shares and (iii) 13,842 common shares issuable upon conversion of notes payable. Does not include 163,117 common shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.
(11)Includes: (i) 2,000 common shares and (ii) 22,494 common shares issuable upon conversion of notes payable.
(12)Includes: (i) 2,000 common shares and (ii) 37,205 common shares issuable upon conversion of notes payable.
(13)Includes: 25,000 common shares. Based solely on verbal confirmation provided by Mr. O’Donnell.
(14)Includes: 76,598 common shares. Based solely on information on the Form 4 filed on January 26, 2016 with the SEC by Mr. Schurgin.
(15)Includes six named persons.
(16)Includes: (i) 6,667 restricted common shares issuable to an independent third party that Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 4,000 common shares; (iv) 4,000 restricted common shares; (v) 667 options; (vi) 47,827 common shares; and (vii) 154,007 common shares issuable upon conversion of notes payable.
(17)Represents shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the managing member. Each preferred A share is convertible into 0.305 common shares.
(18)Does not include 161,410 preferred A shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.
(19)Includes: (i) 6,667 restricted common shares issuable to an independent third party that Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 2,000 common shares; (iv) 2,000 restricted common shares; (v) 49,230 common shares issuable upon conversion of 161,410 preferred A shares held by Paragon Real Estate Development, LLC; (vi) 569,440 common shares issuable upon conversion of 56,944 preferred C shares; (vii) 40,666 common shares issuable upon conversion of notes payable; and (viii) 1,046 common shares.
(20)Includes (i) 163,117 common shares and (ii) 49,230 common shares issuable upon conversion of 161,410 preferred A shares. These shares are also included in Mr. Mastandrea’s total shares.

(21)Includes: (i) 667 options; (ii) 625,000 common shares issuable upon conversion of 62,500 preferred C shares; (iii) 39,799 common shares issuable upon conversion of notes payable; and (iv) 42,782 common shares.
(22)Includes: (i) 2,000 common shares (ii) 2,000 restricted common shares; (iii) 125,000 common shares issuable upon conversion of 12,500 preferred C shares; and (iv) 13,842 common shares issuable upon conversion of notes payable. Does not include 163,117 common shares or 161,410 preferred A shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.
(23)Includes: (i) 2,000 common shares; (ii) 375,000 common shares issuable upon conversion of 37,500 preferred C shares; and (iii) 22,494 common shares issuable upon conversion of notes payable.
(24)Includes: (i) 2,000 common shares; (ii) 625,000 common shares issuable upon conversion of 62,500 preferred C shares; and (iii) 37,205 common shares issuable upon conversion of notes payable.
(25)Includes: (i) 125,000 common shares issuable upon conversion of 12,500 preferred C shares.
(26)

Includes: (i) 6,667 restricted common shares issuable to an independent third party that Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 4,000 common shares; (iv) 4,000 restricted common shares; (v) 667 options; (vi) 49,230 common shares issuable upon conversion of 161,410 preferred A shares held by Paragon Real Estate Development, LLC; (vii) 2,444,440 common shares issuable upon conversion of 244,444 preferred C shares; (viii) 154,007 common shares issuable upon conversion of notes payable; and (ix) 47,827 common shares. 

Equity Compensation Plan Informationfiscal year ended December 31, 2017.

Equity Compensation Plans Approved/
Not Approved by Security Holders		 Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)		  Weighted-average exercise price of outstanding options, warrants and rights
(b)		  

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)

 
Equity compensation plans approved by security holders            
             
2004 Share Option Plan            
Restricted common shares  5,333  $—     
Options for common shares  667  $33.75     
   6,000  $3.75   28,665 
             
Equity compensation plans not approved by security holders            
Common shares  6,667  $—     
             
   6,667  $—   — 
             
Total all plans – Common shares  12,667  $1.78   28,665 

In addition to the above plans, in June 2003, our shareholders approved an agreement to issue additional common shares to Paragon Real Estate Development, LLC of which Mr. Mastandrea is the managing member and Mr. Dee is a member. In September 2006, Paragon amended this agreement to include each of the trustees so that if a trustee brings a new transaction to Paragon, he would receive additional common shares of Paragon in accordance with a formula in the agreement. In January 2016, the non-employee trustees and Mr. Mastandrea agreed to make this agreement for only non-employee trustees. This agreement is intended as an incentive for our trustees to increase our asset base, net operating income, funds from operations, and share value. The exact number of common shares that would be issued will be calculated in accordance with a formula in the agreement based on future acquisition, development or redevelopment transactions. We would issue our common shares only upon the closing of the transaction. The maximum number of common shares to be issued under the agreement is limited to a total value of $26 million based on the average closing price of our common shares for 30 calendar days preceding the closing of the transaction. The common shares will be restricted until we achieve the five-year pro forma income target for the acquisition, as approved by the board of trustees, and an increase of 5% in Paragon’s net operating income and funds from operations. The restricted shares would vest immediately upon any “shift in ownership,” as defined in the agreement.



Item 13.  Certain Relationships and Related Transactions, and Director Independence.

Relationships and Related Transactions

Under

The information required by Item 13 of Form 10-K is incorporated herein by reference to such information as set forth in the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the SEC rules, a related person transaction is any transaction or any currently proposed transaction in whichnot later than 120 days after the Company was or is to be a participant, the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest. A “related person” is a director, officer, nominee for director or a more than 5% shareholder since the beginningclose of our last completed fiscal year and their immediate family members.

Under our Declaration of Trust, we may enter into any contract or transaction with our trustees, or between us and any other entity in which any trustee is a trustee or director or has a material financial interest, provided that in the case of any such contract or transaction (1) the existence of the relationship is disclosed or known to the following: (a) the board, and the board shall approve or ratify the contract or transaction by the affirmative vote of a majority of disinterested trustees, even if the disinterested trustees constitute less than a quorum, or (b) the shareholders entitled to vote, and the contract or transaction is authorized, approved or ratified by a majority of the votes cast by the shareholders entitled to vote other than the votes of shares owned of record or beneficially by the interested party; or (2) the contract or transaction is fair and reasonable to us. Any trustee who is a trustee or director of such other party or has such material financial interest may be counted in determining the existence of a quorum at any meeting of the board considering such matter.

Issuance of Convertible Notes to Trustees

In November 2015, five trustees of Paragon loaned funds to Paragon, each pursuant to a Convertible Note Purchase Agreement (the “Agreement”). Each trustee loaned the following amounts, which can be converted into common shares of Paragon, as follows:

Trustee Amount  Convertible
into Common
Shares		 
Daryl J. Carter $28,888   21,703 
Daniel G. DeVos $47,780   35,897 
Paul T. Lambert $51,112   38,401 
James C. Mastandrea $52,224   39,236 
John J. Dee $17,776   13,355 

The convertible notes were issued effective November 20, 2015, have a maturity date of three years, and accrue interest at 10% per annum.

The convertible notes can be called by Paragon after six months, at which time the noteholder can choose to receive either the amount of the note plus any accrued but unpaid interest or the number of common shares determined by dividing the amount of the note plus any accrued but unpaid interest by the conversion price of $1.331. The noteholder has the option at any time to convert the note plus any accrued but unpaid interest into common shares based on the conversion price of $1.331.

In 2006, three trustees, Messrs. Carter, DeVos and Lambert, contributed $500,000 cash in exchange for Preferred C Shares. Mr. Mastandrea received Preferred C Shares in lieu of his $100,000 annual salary for 2006 and 2007. Each of our trustees received 12,500 Preferred C Shares in lieu of their annual trustee fees in 2006 and 2007, including Messrs. Mastandrea and Dee.

Trustee Independence

Our common shares are currently traded on the OTC Bulletin Board. Accordingly, we are not subject to the rules of any national securities exchange that require a majority of a listed company’s trustees and specified committees of the board of trustees meet independence standards prescribed by such rules. However, the board has affirmatively determined that each of Messrs. Carter, DeVos, Lambert, and Oliver do not have a material relationship with Paragon that would interfere with the exercise of independent judgment and are “independent” as under NYSE MKT listing standards, applicable SEC rules and the standards prescribed by our Declaration of Trust. Messrs. Mastandrea and Dee are also executive officers of the Company and therefore are not considered to be independent according to these standards.

ended December 31, 2017.

Item 14.  Principal Accountant Fees and Services.


The aggregate fees billedinformation required by Item 14 of Form 10-K is incorporated herein by reference to such information as set forth in the principal independent registered public accounting firm (Boulay PLLP)Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Company forSEC not later than 120 days after the close of our fiscal yearsyear ended December 31, 2015 and 2014 are as follows:

Category Year  Fees  % Approved by Audit Committee 
          
Audit Fees(1) 2015  $19,910   100%
  2014  $25,600   100%
            
Audit-Related Fees 2015  $—     
  2014  $—     
            
Tax Fees(2) 2015  $1,650   100%
  2014  $1,800   100%
            
All Other Fees 2015  $—     
  2014  $—     

(1)Audit fees include audits and reviews of required SEC filings.
(2)Tax fees include the preparation of the Federal tax return.

Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

Before the independent auditors are engaged by Paragon to render audit or permissible non-audit services, the audit committee of the board of trustees approves the engagement. The audit committee also reviews the scope of any audit and other assignments given to our auditors to assess whether such assignments would affect their independence. The audit committee approved the payment by us of all fees billed to us by Boulay PLLP in 2014 and 2015.

2017.



PART IV


Item 15. Exhibits and Financial Statement Schedules.

Exhibit Number Exhibit Description
2.1
 
2.1
Additional Contribution Agreement between the Company and Paragon Real Estate Development, LLC (filed as Exhibit 2.7 withto the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
2.2
 
2.2
Amendment to Additional Contribution Agreement between the Company, the Board of Trustees and each Trustee individually dated September 29, 2006. (filed as Exhibit 2.1 withto the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)
3.1
 
2.3Modification Agreement between
Articles of Amendment and Restatement of the Declaration of Trust of the Company and Paragon Real Estate Development, LLC (filed as Exhibit 2.8 with3.1 to the Company's Current Report on Form 8-K filed on March 29, 2016 and incorporated herein by reference)
3.2
Third Amended and Restated Amendment No. 2 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.1
Employment Agreement of James C. Mastandrea (filed as Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1)
10.2
 
3.1Articles
Employment Agreement of Amendment and Restatement of the Declaration of Trust of the CompanyJohn J. Dee (filed as Exhibit 3.1 with the Company’s Registration Statement on Form SB-2/A filed on October 14, 1999 and incorporated herein by reference)  
3.2Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 2.3 with2.4 to the Company’s Current Report on Form 8-K filed on July 15,March 5, 2003 and incorporated herein by reference) (1)
10.3
 
3.3Articles Supplementary to the Declaration
Restricted Share Agreement of Trust of the CompanyJames C. Mastandrea (filed as Exhibit 3.1 with2.5 to the Company’s Current Report on Form 8-K filed on July 23, 2004March 5, 2003 and incorporated herein by reference) (1)
10.4
 
3.4Articles
Restricted Share Agreement of Amendment of Declaration of Trust of the CompanyJohn J. Dee (filed as Exhibit 3.1 with2.6 to the Company’s Current Report on Form 8-K filed on July 17, 2006March 5, 2003 and incorporated herein by reference) (1)
10.5
 
3.5Articles Supplementary to the Declaration
Form of Trust of the CompanyRestricted Share Agreement for Trustees dated September 26, 2006 (filed as Exhibit 3.1 with10.3 to the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference) (1)
10.6
 
3.6Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with the Company’s Registration Statement on Form SB-2/A filed on October 14, 1999 and incorporated herein by reference)  
3.7Amendment No. 1 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.4 with the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003 and incorporated herein by reference)
3.8Amendment No. 2 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with the Company’s Current Report on Form 8-K filed on October 19, 2005 and incorporated herein by reference)

Exhibit NumberExhibit Description
4.1Voting and Stock Restriction Agreement among the Company, Steven B. Hoyt, Duane H. Lund, Paul T. Lambert, John J. Dee, James C. Mastandrea, and Paragon Real Estate Development, LLC (filed as Exhibit 2.2 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)  
10.1Employment Agreement of James C. Mastandrea (filed as Exhibit 2.3 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)(1)
10.2Employment Agreement of John J. Dee (filed as Exhibit 2.4 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)(1)
10.3Restricted Share Agreement of James C. Mastandrea (filed as Exhibit 2.5 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)(1)
10.4Restricted Share Agreement of John J. Dee (filed as Exhibit 2.6 with the Company’s Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)(1)
10.5Form of Restricted Share Agreement for Trustees dated September 26, 2006 (filed as Exhibit 10.3 with the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)(1)
10.6Agreement of Limited Partnership of Paragon Real Estate, L.P. (filed as Exhibit 2.2 with the Company’s Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by reference)  
10.7
2004 Share Option Plan of the Company (filed as Exhibit 4.1 withto the Company’s Registration Statement on Form S-8 filed on July 23, 2004 and incorporated herein by reference)
10.7
 
10.8
Stock Subscription Agreement between James C. Mastandrea and the Company dated as of September 29, 2006 (filed as Exhibit 10.2 withto the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)
10.8
 
10.9
Form of Stock Subscription Agreement between Investors and the Company dated as of September 29, 2006 (filed as Exhibit 10.1 withto the Company’s Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)
10.9
 
10.10
Modification Agreement between the Company and John J. Dee dated April 3, 2006 (filed as Exhibit 10.2 withto the Company’s Current Report on Form 8-K filed on April 6, 2006 and incorporated herein by reference)
10.10
 
10.11
Modification Agreement between the Company and James C. Mastandrea dated April 3, 2006 (filed as Exhibit 10.1 withto the Company’s Current Report on Form 8-K filed on April 6, 2006 and incorporated herein by reference)
10.11
 
10.12
Form of First Amendment to Restricted Share Agreement for Trustees dated September 25, 2008 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference)

Exhibit Number
10.12
 Exhibit Description
10.13
First Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 25, 2008 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference)
10.13
 
10.14
Form of Second Amendment to Restricted Share Agreement for Trustees dated September 21, 2009 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference)
10.14
 
10.15
Second Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 21, 2009 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference)
10.15
 
10.16
Form of Third Amendment to Restricted Share Agreement for Trustees dated September 28, 2010 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference)
10.16
 
10.17
Third Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 28, 2010 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference)

Exhibit Number Exhibit Description
10.18
10.17
 
Form of Fourth Amendment to Restricted Share Agreement for Trustees dated September 29, 2011 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and incorporated herein by reference)
10.18
 
10.19
Fourth Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 29, 2011 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and incorporated herein by reference)
10.19
 
10.20
Form of Fifth Amendment to Restricted Share Agreement for Trustees dated September 28, 2012 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference)
10.20
 
10.21
Fifth Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 28, 2012 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference)
10.21
 
10.22
Form of Sixth Amendment to Restricted Share Agreement for Trustees dated September 30, 2013 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference)
10.22
 
10.23
Sixth Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 30, 2013 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference)

Exhibit Number
10.23
 Exhibit Description
10.24
Form of Seventh Amendment to Restricted Share Agreement for Trustees dated September 30, 2014 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference)
10.24
 
10.25
Seventh Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 30, 2014 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference)
10.25
 
10.26
Form of Eighth Amendment to Restricted Share Agreement for Trustees dated September 30, 2015 (filed as Exhibit 10.1 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference)
10.26
 
10.27
Eighth Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 30, 2015 (filed as Exhibit 10.2 withto the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference)
10.27
 
14Code of Conduct
Contribution Agreement among Whitestone REIT Operating Partnership, Pillarstone Capital REIT Operating Partnership LP and Ethicsthe Company dated December 8, 2016 (filed as Exhibit 14 with10.1 to the Company’s AnnualCompany's Current Report on Form 10-KSB for the year ended8-K filed on December 31, 200313, 2016 and incorporated herein by reference)
10.28
 
OP Unit Purchase Agreement among Whitestone REIT Operating Partnership, Pillarstone Capital REIT Operating Partnership LP and the Company dated December 8, 2016 (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
31.1
10.29
 
Tax Protection Agreement among Whitestone REIT Operating Partnership, Pillarstone Capital REIT Operating Partnership LP and the Company dated December 8, 2016 (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.30
Amended and Restated Limited Partnership Agreement of Pillarstone Capital REIT Operating Partnership LP, dated December 8, 2016 (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.31
Form of Management Agreement dated December 8, 2016 (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.33
Second Amendment to Amended and Restated Credit Agreement, Joinder and Reaffirmation of Guaranties, dated December 8, 2016, among Whitestone REIT Operating Partnership, L.P., Whitestone REIT, Pillarstone Capital REIT Operating Partnership LP, et al., as guarantors, the lenders party thereto, and Bank of Montreal, as Administrative Agent (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.34
Limited Guaranty, dated December 8, 2016, between Pillarstone Capital REIT Operating Partnership LP and Bank of Montreal, as Administrative Agent (filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.35
Loan Agreement, dated September 26, 2013, by and between Whitestone Uptown Tower, LLC and Morgan Stanley Mortgage Capital Holdings LLC, as amended (filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.36
Promissory Note by Whitestone Uptown Tower, LLC to Morgan Stanley Mortgage Capital Holdings LLC, dated September 23, 2013 (filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)

Exhibit NumberExhibit Description
10.37
Loan Agreement, dated November 26, 2013, by and between Whitestone Industrial-Office LLC and Jackson National Life Insurance Company (filed as Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.38
Fixed Rate Promissory Note by Whitestone Industrial-Office LLC to Jackson National Life Insurance Company, dated November 26, 2013 (filed as Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
31.1
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 –- Chief Executive Officer(2)
31.2
 
31.2
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 –- Chief Financial Officer(2)
32.1
 
32.1
CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002(2)
99.1
 
Consolidated Financial Statements of Pillarstone Capital REIT Operating Partnership LP as of December 31, 2017 and for the period September 23, 2016 (Inception) to December 31, 2016 (2)
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document


* The following financial information of the Registrant for the years ended December 31, 20152017 and 2014,2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, and Net Comprehensive Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.


(1)Indicates a management contract or compensatory plan or arrangement
(2)Filed or furnished herewith

24


SIGNATURES

SIGNATURES

In accordance with the requirements of the Exchange Act, of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 Paragon real estate equity
PILLARSTONE CAPITAL REIT
Date:March 29, 2018 By:
/s/ James C. Mastandrea
James C. Mastandrea, Chairman and investment trustCEO
  
 By:/s/ James C. Mastandrea
PILLARSTONE CAPITAL REIT
Date: February 5, 2016March 29, 2018 By: James C. Mastandrea
/s/ John J. Dee
  Chief Executive Officer
(principal executive officer)

Paragon real estate equity and investment trust
By:/s/ John J. Dee
Date: February 5, 2016 John J. Dee,
Chief Financial Officer
(principal financial officer) CFO


POWER OF ATTORNEY

KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John J. Dee, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to beby done by virtue hereof.


In accordance with Section 13 or 15(d) of the Securities Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST


PILLARSTONE CAPITAL REIT

Signature
Title
SignatureTitleDate
   
/s/ James C. Mastandrea
James C. Mastandrea
Trustee, Chief Executive Officer and
   President
March 29, 2018
 
James C. Mastandrea(Principal Executive Officer) PresidentFebruary 5, 2016
   
/s/ John J. Dee
John J. Dee
Trustee, Senior Vice President and
John J. Dee
Chief Financial Officer
March 29, 2018
 February 5, 2016(Principal Finance and Principal Accounting Officer)
   
/s/ Daryl J. Carter
Daryl J. Carter
TrusteeMarch 29, 2018
   
Daryl J. Carter
/s/ Daniel G. DeVos
Daniel G. DeVos
TrusteeFebruary 5, 2016March 29, 2018
   
/s/ Paul T. Lambert
Paul T. Lambert
TrusteeMarch 29, 2018
/s/ Daniel G. DeVos   
Daniel G. DeVos
/s/ Dennis H. Chookaszian
Dennis H. Chookaszian
TrusteeFebruary 5, 2016March 29, 2018
/s/ Paul T. Lambert
Paul T. LambertTrusteeFebruary 5, 2016
/s/ Michael T. Oliver
Michael T. OliverTrusteeFebruary 5, 2016

25
   

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Page
 
Report of Independent Registered Public Accounting Firm
F-2
  
Consolidated Balance Sheets as of December 31, 20152017 and December 31, 20142016
F-3
  
Consolidated Statements of Operations –for the Years endedEnded December 31, 20152017 and December 31, 20142016
F-4
  
Consolidated Statements of Shareholders’Changes in Equity (Deficit) –for the Years ended Ended
December 31, 20152017 and December 31, 20142016
F-5
  
Consolidated Statements of Cash Flows –for the Years endedEnded December 31, 20152017 and December 31, 20142016
F-6
  
Notes to Consolidated Financial Statements
F-7



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of DirectorsTrustees and Shareholders of
Pillarstone Capital REIT:

Stockholders of Paragon Real Estate Equity and Investment Trust

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Paragon Real Estate EquityPillarstone Capital REIT and Investment Trustsubsidiary (the Company)“Company”) as of December 31, 20152017 and 2014,2016, and the related consolidated statements of operations, shareholders’changes in equity (deficit), and cash flows for each of the years then ended. Paragon Real Estate Equityin the two-year period ended December 31, 2017, and Investment Trust’s management is responsiblethe related notes and schedules (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for these consolidated financial statements.each of the years in the two-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statementsthe 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 Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statementsConsolidated Financial Statements are free of material misstatement.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. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes

Our audits included performing procedures to assess the risks of material misstatement of the Consolidated 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 supportingregarding the amounts and disclosures in the consolidated financial statements, assessingConsolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion,



/s/ Pannell Kerr Forster of Texas, P.C.

We have served as the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Paragon Real Estate Equity and Investment Trust as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the lack of revenue generating operations, the Company’s recurring net losses, negative cash flow from operations and accumulated deficit raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

/s/ Boulay PLLP
Certified Public Accountants
Minneapolis, Minnesota
February 5, 2016

Company's auditor since 2016.


Houston, Texas
Paragon Real Estate Equity and Investment TrustMarch 29, 2018

Consolidated Balance Sheets

December 31, 2015 and December 31, 2014

  December 31, 2015 December 31, 2014
Assets        
Cash $174,283  $10,726 
Marketable securities  100   19,378 
Other assets  9,952   9,953 
Total Assets $184,335  $40,057 
         
Liabilities        
Accounts payable and accrued expenses $14,010  $2,517 
Convertible notes payable – related parties  197,780   — 
Accrued interest payable  2,276   — 
Total Liabilities  214,066   2,517 
         
Commitments and Contingencies        
         
Shareholders’ Equity (Deficit)        
Preferred A Shares – $0.01 par value, 10,000,000 authorized: 258,236 Class A cumulative convertible shares issued and outstanding, $10.00 per share liquidation preference  2,583   2,583 
Preferred C Shares – $0.01 par value, 300,000 authorized: 244,444 Class C cumulative convertible shares issued and outstanding, $10.00 per share liquidation preference  2,444   2,444 
Common Shares - $0.01 par value, 100,000,000 authorized: 443,226 shares issued and 405,096 outstanding.  4,051   4,051 
Additional paid-in capital  28,146,971   28,146,971 
Accumulated deficit  (27,385,045)  (27,317,774)
Treasury stock, at cost, 38,130 shares  (800,735)  (800,735)
Total Shareholders’ Equity (Deficit)  (29,731)  37,540 
Total Liabilities and Shareholders’ Equity $184,335  $40,057 


Pillarstone Capital REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
   
  December 31,
  2017 2016
ASSETS
Cash and cash equivalents $179,385
 $7,445
Marketable securities 100
 100
Equity investment in Pillarstone Capital REIT Operating Partnership LP —
 14,776
Other assets 9,679
 14,499
Fixed assets 3,398
 —
Total assets $192,562
 $36,820
LIABILITIES AND EQUITY (DEFICIT)
Liabilities:    
Accounts payable and accrued expenses $92,105
 $27,541
Accounts payable - related party 316,103
 316,103
Convertible notes payable - related parties
 197,780
 197,780
Accrued interest payable - related parties 41,832
 22,108
Negative equity investment in Pillarstone Capital REIT Operating Partnership LP 88,880
 —
Total liabilities 736,700
 563,532
Commitments and contingencies —
 —
Shareholders' Equity (Deficit):    
Preferred A Shares - $0.01 par value, 1,518,000 authorized: 256,636 Class A cumulative convertible shares issued and outstanding at December 31, 2017 and 2016, $10.00 per share liquidation preference 2,567
 2,567
Preferred C Shares - $0.01 par value, 300,000 authorized: 244,444 Class C cumulative convertible shares issued and outstanding at December 31, 2017 and 2016, $10.00 per share liquidation preference 2,444
 2,444
Common Shares - $0.01 par value, 400,000,000 authorized: 443,299 shares issued and 405,169 outstanding at December 31, 2017 and 2016 4,052
 4,052
Additional paid-in capital 28,146,986
 28,146,986
Accumulated deficit (27,899,452) (27,882,026)
Treasury shares, at cost, 38,130 shares (800,735) (800,735)
Total Pillarstone Capital REIT shareholders' deficit (544,138) (526,712)
     
Total liabilities and equity (deficit) $192,562
 $36,820




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

Paragon Real Estate Equity and Investment Trust

Consolidated Statements of Operations

  For the year ended December 31,
  2015 2014
     
Revenues        
Interest/dividend income $—  $4 
Total revenues  —   4 
Expenses        
General and administrative  64,995   57,474 
Interest  2,276   — 
Total expenses  67,271   57,474 
Income (loss) from operations  (67,271)  (57,470)
         
Net income (loss) attributable to Common Shareholders  (67,271)  (57,470)
Net income (loss) attributable to Common Shareholders per Common Share: Basic and Diluted $(0.17) $(0.14)
Weighted average number of Common Shares outstanding: Basic and Diluted  405,096   405,096 

Pillarstone Capital REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
     
     
  Year Ended December 31,
  2017 2016
Revenues    
Interest and dividend income $—
 $—
Total revenues —
 —
     
Expenses    
General and administrative 273,015
 491,925
Interest 19,724
 19,832
Total expenses 292,739
 511,757
     
Loss from operations (292,739) (511,757)
     
Equity in income of Pillarstone Capital REIT Operating Partnership LP 275,313
 14,776
     
Net loss attributable to common shareholders (17,426) (496,981)
     
Net loss attributable to common shareholders per common share: Basic and Diluted $(0.04) $(1.23)
     
Weighted average number of common shares outstanding: Basic and Diluted 405,169
 405,169





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

Paragon Real Estate Equity and Investment Trust


Consolidated Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2015 and 2014

  Class A Class C          
  Preferred Preferred Common Additional Paid- Accumulated Cost of Shares  
  Shares Shares Shares in Capital Deficit held in Treasury Total
Balance at December 31, 2013 $2,583  $2,444  $4,051  $28,146,971  $(27,260,304) $(800,735) $95,010 
Net income (loss)                  (57,470)      (57,470)
Balance at December 31, 2014 $2,583  $2,444  $4,051  $28,146,971  $(27,317,774) $(800,735) $37,540 
Net income (loss)                  (67,271)      (67,271)
Balance at December 31, 2015 $2,583  $2,444  $4,051  $28,146,971  $(27,385,045) $(800,735) $(29,731)

Pillarstone Capital REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
               
               
  Class A Class C   Additional   Cost of  
  Preferred Preferred Common Paid-in Accumulated Shares held Total
  Shares Shares Shares Capital Deficit in Treasury Deficit
Balance, December 31, 2015 $2,583
 $2,444
 $4,051
 $28,146,971
 $(27,385,045) $(800,735) $(29,731)
               
Conversion of Class A Preferred Shares to Common Shares (16) —
 1
 15
 —
 —
 —
               
Net loss —
 —
 —
 —
 (496,981) —
 (496,981)
               
Balance, December 31, 2016 2,567
 2,444
 4,052
 28,146,986
 (27,882,026) (800,735) (526,712)
               
Net loss —
 —
 —
 —
 (17,426) —
 (17,426)
               
Balance, December 31, 2017 $2,567
 $2,444
 $4,052
 $28,146,986
 $(27,899,452) $(800,735) $(544,138)




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


Paragon Real Estate Equity and Investment Trust

Consolidated Statements of Cash Flows

  For the year ended December 31,
  2015 2014
Cash flows from operating activities:        
Net income (loss) $(67,271) $(57,470)
Net change in assets and liabilities:        
Other assets  —   (1,127)
Accounts payable and accrued expenses  13,770   1,684 
Net cash from (used in) continuing operations  (53,501)  (56,913)
         
Cash flows from investing activities:        
Cash used for the purchase of marketable securities  —   (4)
Proceeds from the sale of marketable securities  19,278   58,000 
Net cash from (used for) investing activities  19,278   57,996 
         
Cash flows from financing activities:        
Issuance of convertible notes payable – related parties  197,780   — 
Net cash from (used for) financing activities  197,780   — 
         
Net increase (decrease) in cash  163,557   1,083 
Cash        
Beginning of period  10,726   9,643 
End of period $174,283  $10,726 

Pillarstone Capital REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
     
     
  Year Ended December 31,
  2017 2016
Cash flows from operating activities:    
Net loss $(17,426) $(496,981)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Equity in income of Pillarstone Capital REIT Operating Partnership LP (275,313) (14,776)
Distributions received from Pillarstone Capital REIT Operating Partnership LP 290,089
 —
Changes in operating assets and liabilities:    
Other assets 4,820
 (4,547)
Accounts payable and accrued expenses 84,288
 33,363
Accounts payable - related party —
 316,103
Net cash provided by (used in) operations 86,458
 (166,838)
     
Cash flows from investing activities:    
Excess distributions received from Pillarstone Capital REIT Operating Partnership LP 88,880
 —
Purchases of fixed assets (3,398) —
Net cash provided by investing activities 85,482
 —
  
  
Cash flows from financing activities:    
Net cash provided by financing activities —
 —
     
Net increase (decrease) in cash and cash equivalents 171,940
 (166,838)
Cash and cash equivalents at beginning of year 7,445
 174,283
Cash and cash equivalents at end of year $179,385
 $7,445
     
Non cash investing and financing activities:    
Conversion of Preferred A Shares to common shares $—
 $16
Investment in Pillarstone Capital REIT Operating Partnership LP $—
 $4,121,312
Distribution in kind from Pillarstone Capital REIT Operating Partnership LP $—
 $(4,121,312)




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

F-6

Paragon Real Estate Equity and Investment Trust


PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements

December 31, 2015

2017




1.ORGANIZATION

Note 1 – Organization

Paragon Real Estate Equity and Investment TrustPillarstone Capital REIT (the “Company,” “Paragon,“Pillarstone,” “we,” “our,” or “us”) is a Maryland shell corporation primarily focused on maintaining its corporate existence and Securities and Exchange Commission (“SEC”) reporting history to enable it, in the future, to raise additional capital and make real estate investments.investment trust (“REIT”) engaged in investing in, owning and operating commercial properties. In 2016, the shareholders of Pillarstone approved changing the Company's name from Paragon Real Estate Equity and Investment Trust to Pillarstone Capital REIT. Future real estate investments may include (i) acquisition and development of retail, office, office warehouse, industrial, multifamily, hotel, and other commercial properties, (ii) acquisition of or merger with a real estate investment trust (“REIT”) or real estate operating company and (iii) joint venture investments. Excess funds can be investedWe serve as the general partner of Pillarstone Capital REIT Operating Partnership LP (“Pillarstone OP”), which was formed on September 23, 2016 as a Delaware limited partnership. We are the sole general partner of Pillarstone OP and we conduct substantially all operations and activities through Pillarstone OP. As of December 31, 2017, we owned 18.6% of the outstanding equity in cash equivalents depending on market conditions.

Pillarstone OP.


2. BASIS OF PRESENTATION

Note 2 – Basis of Presentationconsolidation

Consolidated Financial Statement Presentation

. We have prepared the consolidated financial statements pursuant to the rules and regulations of the SEC. In our opinion, all adjustments (consisting solely of normal recurring items) necessary for a fair presentation of our financial position as of December 31, 20152017 and 2014,2016, the results of our operations for the years ended December 31, 20152017 and 2014,2016, and of our cash flows for the years ended December 31, 20152017 and 20142016 have been included.

The Company presents its financial statements on a consolidated basis because it combines its accounts with a wholly-owned subsidiary that discontinued operations in 2002. All significant inter-company balances are eliminated in the consolidated financial statements.

The Company's consolidated financial statements include equity in income of Pillarstone OP based on the Company's percentage of ownership in Pillarstone OP, an investment for which the Company accounts using the equity method.


Going Concernconcern.

The financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the continued operations as a public company and paying liabilities in the normal course of business. The Company, is being maintained as a corporate shell that is currentthrough Pillarstone OP, acquired an equity investment in its SEC filings. Operations consist only of investments on a temporary basis in publicly traded14 real estate companiesassets in December 2016 and its distributions of cash equivalents while management and the board of trustees evaluate real estate opportunities to put into the Company or decide to sell the entity to a party that needs a public shell.

At December 31, 2015, our cash in the operating account was $174,283. The increase in cash during 2015 was $163,557. We made redemptions from a money market investment account of $19,278 and received $197,780 from issuing convertible notes payable, which has been and will continuePillarstone OP are expected to be used to pay expenses to keepsufficient for the Company currently filed as a public company. Expenses, such as salaries and rent, have been eliminated so that the only expenses being incurred are to keep the Company current in its SEC filings, such as accounting, audit, legal, and filing fees. Our ability to continue as a going concern will be dependent upon acquiring assets to generate cash flow because marketable securitiesconcern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting.  Our financial records are our only revenue generating assetsmaintained on the accrual basis of accounting whereby revenues are recognized when earned and will not generate enough cash flow to allow us to continue as a going concern.

There can be no assurance that the Company will be able to acquire an operating company, be acquired by or merge with another company, raise capital or otherwise continue to exist as a going concern. Even if our management is successful in closing a transaction, investors may not value the transaction in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially and adversely affect the Company’s ability to continue operations.

Note 3 – Summary of Significant Accounting Policiesexpenses are recorded when incurred.


Use of Estimates in the Preparation of Financial Statementsestimates.

In order to conform with generally accepted accounting principles in the United States (“GAAP”), management, in preparation of our consolidated financial statements, is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 20152017 and December 31, 2014,2016, and the reported amounts of revenues and expenses for the years ended December 31, 20152017 and 2014.2016. Actual results could differ from those estimates. Significant estimates include deferred taxes and the related valuation allowance for deferred taxes, and these significant estimates, as well as other estimates and assumptions, may change in the near term.


Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  Cash and cash equivalents as of December 31, 2017 and 2016 consisted of demand deposits at commercial banks and brokerage accounts. We maintain our cash in bank accounts that are federally insured.

Marketable Securities. We classify our existing marketable equity securities as available-for-sale in accordance with the Financial Accounting Standards Board's (“FASB”) Investments-Debt and Equity Securities guidance. These securities are carried at fair value with unrealized gains and losses reported in equity as a component of accumulated other comprehensive income or loss. The fair value of the marketable securities is determined using Level 1 inputs under FASB Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” Level 1 inputs represent quoted prices available in an active market for identical investments as of the reporting date. Gains and losses on securities sold are based on the specific identification method, and are reported as a component of interest, dividend and other investment income.

PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017



Equity method investment. The Company accounts for its investment in Pillarstone OP in accordance with ASC 323, “Investments - Equity Method and Joint Ventures,” which addresses the accounting for investments in entities over which the investor is deemed to exercise significant influence. The Company serves as the general partner of Pillarstone OP, with a 18.6% equity ownership interest and is a party to the Amended and Restated Agreement of Limited Partnership of Pillarstone OP, as described in Note 5 herein, which gives the general partner, subject to certain protective rights of the limited partners as described in Note 5, the responsibility and discretion for the management of Pillarstone OP, including the ability to cause Pillarstone OP to enter into certain major transactions including a merger of Pillarstone OP or a sale of substantially all of the assets of Pillarstone OP. As such, the Company is deemed to exercise significant influence but not complete control over Pillarstone OP. Additionally, we determined that we are not the primary beneficiary and thus the investment in Pillarstone OP qualifies for usage of the equity method of accounting.

Investments in Equipmentequipment.

Our investments in equipment assets are reported at cost.

Depreciation expense is computed using the straight-line method based on the following useful lives:

Years
Furniture, fixtures and equipment3-7


Furniture, fixtures and equipment        3-7 years

There was no depreciation expense for the yearyears ended December 31, 2015 because the equipment assets of $5,370 are fully depreciated.

Cash

We maintain our cash in bank accounts that are federally insured.

2017 and December 31, 2016.


Other Assetsassets

. As of December 31, 2015,2017, other assets totaled $9,679 for director and officer liability insurance. As of December 31, 2016, other assets of $9,952$14,499 are prepaid expenses for director and officer liability insurance of $9,202 and $750$5,297 of prepaid SEC filing charges.

As of December 31, 2014, other assets of $9,953 are prepaid expenses for director and officer liability insurance of $9,203 and $750 of prepaid SEC filing charges.


Revenue Recognitionrecognition

. Revenues are interest earned on cash balances.

balances and equity in earnings of an investee, and are recognized during the period in which they are earned.


Stock-Based CompensationStock-based compensation

. The Company accounts for stock-based compensation in accordance with Accounting Standards CodificationASC 718, (“ASC 718”), Compensation – “Compensation - Stock Compensation,” which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 generally requires that these transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.


Income Taxestaxes

. Because we have not elected to be taxed as a REIT for federal income tax purposes, we account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.


The Company evaluates potential uncertain tax positions on an annual basis in conjunction with the board of trustees and its tax accountants. Authoritative literature provides a two-step approach to recognize and measure tax benefits when realization of the benefits is uncertain. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. The Company has no uncertain tax positions that required adjustments to our consolidated financial statements in 20152017 or 2014.

2016.


At December 31, 2015,2017, we have net operating lossesloss carryforwards totaling $2,575,000.$2,510,000. While these losses created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty of whether we will be able to use these loss carryovers,carryforwards, which will expire in varying amounts through the year 2035.2038. Pursuant to regulationregulations set forth in the Internal Revenue Code of 1986 as amended (the “Code”), ParagonPillarstone will be limited to using $797,000$651,600 of the prior net operating losses of $11,100,000.$11,246,000. These same regulations also limit the amount of loss used in any one year.


We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in general and administrative expense in the consolidated statements of operations and has not been separately stated due to its insignificance.

The Company is no longer subject


PILLARSTONE CAPITAL REIT
Notes to U.S. federal income tax examinations for the years before 2012 and, with few exceptions, is no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2012.

Consolidated Financial Statements

December 31, 2017


Fair Valuevalue of Financial Instrumentsfinancial instruments

. We adopted Accounting Standards CodificationASC 820, (“ASC 820”), “Fair Value Measurements and Disclosures,” as it applies to our financial instruments, and Accounting Standards CodificationASC 825, (“ASC 825”), “Financial Instruments.” ASC 820 defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. ASC 825 permits companies to irrevocably choose to measure certain financial instruments and other items at fair value. ASC 825 also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.


Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. ASC 820 establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. ASC 820 requires the utilization of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.


Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our Consolidated Balance Sheets, we have elected not to record any other assets or liabilities at fair value, as permitted by ASC 825. No events occurred during 20152017 which would require adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.


The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

  Fair Value Measurement Using
  Level 1 Level 2 Level 3
Marketable Securities            
             
December 31, 2015:            
Money Market Investment $100         
             
December 31, 2014:            
Money Market Investment $19,378         

 Fair Value Measurement Using
 Level 1 Level 2 Level 3
Marketable Securities     
      
December 31, 2017     
Money Market Investment$100
 $—
 $—
      
December 31, 2016     
Money Market Investment$100
 $—
 $—

The fair value of the marketable securities is based on quoted market prices in an active market.


Recent Accounting Pronouncements accounting pronouncements

. Management has reviewed recently issued accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Company’sCompany's consolidated financial statements.

Note 4 – Marketable Securities


4. MARKETABLE SECURITIES

We did not have anyhad $100 of investments in marketable securities as of December 31, 2015.2017 and 2016. All of the Company’s investments were in an insured deposit account at a securities brokerage firm. During 2015,2017 and 2016, the Company transferred $19,278made no transfers from the account at the securities brokerage firm to the operating account. There was no interest earned on the cash balances during 2015.

We did2017 and 2016.



PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


5. EQUITY METHOD INVESTMENT

On December 8, 2016, Pillarstone and Pillarstone OP, entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT (“Whitestone”), both of which are related parties to Pillarstone and Pillarstone OP, pursuant to which Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”, and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that own fourteen real estate assets (the “Real Estate Assets” and, together with the Entities, the “Property”) for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP (“OP Units”), issued at a price of $1.331 per OP Unit; and (2) the assumption of approximately $65.9 million of liabilities by Pillarstone OP. Pursuant to the Contribution Agreement, Pillarstone became the general partner of Pillarstone OP with an equity ownership interest in Pillarstone OP totaling approximately a 18.6% valued at $4,121,312 as of the date of the agreement.
In connection with the Contribution Agreement, on December 8, 2016, the Company, as the general partner of Pillarstone OP, entered into an Amended and Restated Agreement of Limited Partnership of Pillarstone OP (as amended and restated, the “Amended and Restated Agreement of Limited Partnership”). Pursuant to the Amended and Restated Agreement of Limited Partnership, subject to certain protective rights of the limited partners described below, the general partner has responsibility and discretion in the management of Pillarstone OP, including the ability to cause Pillarstone OP to enter into certain major transactions including a merger of Pillarstone OP or a sale of substantially all of the assets of Pillarstone OP. Management agreements are in place delegating the management of the Real Estate Assets to Whitestone OP. The responsibilities delegated include property management, leasing and day-to-day advisory and administrative services. The limited partners have no power to remove the general partner without the general partner's consent. In addition, pursuant to the Amended and Restated Agreement of Limited Partnership, the general partner may not conduct any outside business without the consent of a majority of the limited partners other than in connection with certain actions described therein. As such, the Company is deemed to exercise significant influence but not complete control over Pillarstone OP. Additionally, we determined that we are not the primary beneficiary and thus the investment in Pillarstone OP qualifies for usage of the equity method of accounting.

The Amended and Restated Agreement of Limited Partnership designates two classes of units of limited partnership interest in Pillarstone OP: the OP Units and LTIP units. In general, LTIP units are similar to the OP Units and will receive the same quarterly per-unit profit distributions as the OP Units. The rights, privileges, and obligations related to each series of LTIP units will be established at the time the LTIP units are issued. As profits interests, LTIP units initially will not have any investmentsfull parity, on a per-unit basis, with OP Units with respect to liquidating distributions. Upon the occurrence of specified events, LTIP units can over time achieve full parity with the OP Units and therefore accrete to an economic value for the holder equivalent to OP Units. If such parity is achieved, vested LTIP units may be converted on a one-for-one basis into OP Units, which in marketable securitiesturn are redeemable by the holder for cash or, at the Company’s election, exchangeable for Common Shares on a one-for-one basis.

The equity method of accounting requires our investment in Pillarstone OP be shown on our Balance Sheets as a single amount. Pillarstone's investment in Pillarstone OP amounted to an 18.6% ownership interest and carrying values of $(88,880) and $14,776 as of December 31, 2014. All2017 and December 31, 2016, respectively. As of December 31, 2017, the $(88,880) carrying value of our equity investment exceeded our equity in the underlying net assets of Pillarstone OP by approximately $78,000 and included equity in earnings of Pillarstone OP of $275,313 for the twelve month periods then ended, offset by distributions totaling $378,969 for the twelve month period ended December 31, 2017. This difference arose due to the $4,121,312 distribution in kind we received during December 2016, and the difference between the carrying value attributed to the assets and liabilities transferred to Pillarstone OP under common control accounting rules and their fair values. We are amortizing the difference over 25 years based on the estimate of the Company’s investmentsremaining useful lives of the properties acquired. Amortization of the difference is $3,120 for the twelve months December 31, 2017. There was no amortization during 2016. Pillarstone's investment in marketable securities were sold during 2013 and the funds were deposited in an insured deposit account at a securities brokerage firm. Since the Company did not have any investments in marketable securities during 2015 and 2014, the Company had no other comprehensive income (loss). During 2014, the Company transferred $58,000 from the account at the securities brokerage firmPillarstone OP is negative as of December 31, 2017 due to the operating account. The interest earned onreductions in the cash balances during 2014 of $4 is shown as purchasesbalance from distributions received from Pillarstone OP and amortization offset by increases in marketable securities.

Note 5 – Convertible the balance from equity in earnings from Pillarstone OP.



PILLARSTONE CAPITAL REIT
Notes Payable – related parties

to Consolidated Financial Statements

December 31, 2017


6. CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

On November 20, 2015, five trustees on our board of trustees loaned $197,780 to the Company in exchange for convertible notes payable. The convertible notes payable accrue interest at 10% per annum and mature on November 20, 2018. The convertible notes payable can be converted by the noteholder into common sharesCommon Shares at the rate of $1.331 per common shareCommon Share at any time. After six months, the Company can convert the notes payable into common shares.Common Shares. At maturity or when the Company chooses to convert the convertible notes payable into common shares,Common Shares, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable into Common Shares.

7. SHAREHOLDERS' EQUITY

Recent developments. Our common shares.

shareholders, Preferred Class A shareholders, and Preferred Class C shareholders approved changes to our declaration of trust, as amended and restated, in March 2016. We presently have authority to issue up to 450,000,000 shares of beneficial interest, $0.01 par value per share, of which 400,000,000 are classified as Common Shares of beneficial interest, $0.01 par value per share and 50,000,000 are classified as preferred shares of beneficial interest, $0.01 par value per share. Of the 50,000,000 preferred shares of beneficial interest, 1,518,000 shares are designated as Preferred Class A Shares and 300,000 shares are designated as Preferred Class C Shares. Previously, we had authority to issue up to 110,000,000 shares of beneficial interest, $0.01 par value per share, of which 100,000,000 were classified as Common Shares of beneficial interest, $0.01 par value per share, and 10,000,000 were classified as preferred shares of beneficial interest, $0.01 par value per share, with 1,518,000 shares designated as Preferred Class A Shares and 300,000 shares designated as Preferred Class C Shares.


Note 6 – Shareholders’ EquityConversion of OP Units by limited partners.

At any time on or after six months following the date of the initial issuance thereof, limited partners in Pillarstone OP holding OP Units have the right to convert their OP Units for cash, or at the option of the general partner, common shares of the Company. As of December 31, 2017 and 2016, there were 16,688,167 OP Units outstanding.


Preferred Sharesshares

. The Company has outstanding 96,82695,226 Class A Cumulative Convertible Preferred Shares (“Class A Preferred Shares”) that were issued to the public. The Class A Preferred Shares bear a liquidation value of $10.00 per share. The Class A Preferred Shares are each convertible into 0.046 common sharesCommon Shares subject to certain formulas. We have the right to redeem the Class A Preferred Shares.

F-10

Effective June 30, 2003, we issued 696,078 Class A Preferred Shares valued at approximately $2.4 million to James C. Mastandrea, our Chairman, Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, pursuant to separate restricted share agreements. Under each restricted share agreement, the restricted shares vest upon the later of the following dates:

●the date our gross assets exceed $50.0 million, or
●50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005 and the remaining 25% of the shares on March 4, 2006.

the date our gross assets exceed $50 million, or

50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005 and the remaining 25% of the shares on March 4, 2006.

In conjunction with a one-time incentive exchange offer for Class A Preferred shareholders, Messrs. Mastandrea and Dee exchanged 534,668 of these restricted Class A Preferred Shares into 163,116 restricted common shares.Common Shares. The restrictions described above are also applicable to their common shares.Common Shares. The remaining 161,410 restricted Class A Preferred Shares held by Messrs. Mastandrea and Dee can each be converted into 0.305 restricted common shares.

Common Shares. The market value of 161,410 restricted Class A Preferred Shares and 163,116 restricted Common Shares is approximately $590,000 at December 31, 2017 and there is limited trading volume of the Common Shares on OTC Bulletin Board.

The number of Common Shares and the conversion factor have been revised to reflect the 1-for-75 reverse split of the Common Shares that occurred in July 2006.

During 2015 and 2014,2017, no Class A Preferred Shares were converted into Common Shares, and during 2016, 1,600 Class A Preferred Shares were converted into 73 Common Shares.


PILLARSTONE CAPITAL REIT
Notes to common shares.

Consolidated Financial Statements

December 31, 2017


Effective September 29, 2006, ParagonPillarstone filed articles supplementary to its Declaration of Trust, as amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland designating 300,000 Class C Convertible Preferred Shares (“Class C Preferred Shares”). The Class C Preferred Shares have voting rights equal to the number of common sharesCommon Shares into which they are convertible. Each Class C Preferred Share is convertible into common sharesCommon Shares by dividing by the sum of $10.00 and any accrued but unpaid dividends on the Class C Preferred Shares by the conversion price of $1.00. The Class C Preferred Shares have a liquidation preference of $10.00 per share, plus any accrued but unpaid dividends, and can be redeemed by the board of trustees at any time, with notice, at the same price per share.

Effective September 29, 2006, three independent trustees of ParagonPillarstone signed subscription agreements to purchase 125,000 Class C Preferred Shares for an aggregate contribution of $500,000 to maintain ParagonPillarstone as a corporate shell current in its SEC filings.


In addition, on September 29, 2006, Mr.MastandreaMr. Mastandrea signed a subscription agreement to purchase 44,444 restricted shares of Class C Preferred Shares. The consideration for the purchase was Mr. Mastandrea’s services as an officer of ParagonPillarstone for the period beginning September 29, 2006 and ending September 29, 2008. The Class C Preferred Shares are subject to forfeiture and are restricted from being sold by Mr. Mastandrea until the latest to occur of a public offering by ParagonPillarstone sufficient to liquidate the Class C Preferred Shares, an exchange of Paragon’sPillarstone’s existing shares for new shares, or September 29, 2008. This agreement was amended to extendThese shares were fully amortized by the service period and vesting period restriction dates to September 30, 2016.

original date in 2008.

Each of the trustees of ParagonPillarstone signed a restricted share agreement with Paragon,Pillarstone, dated September 29, 2006, to receive a total of 12,500 restricted Class C Preferred Shares in lieu of receiving fees in cash for service as a trustee for the two years ending September 29, 2008. The restrictions on the Class C Preferred Shares wereare to be removed upon the latest to occur of a public offering by ParagonPillarstone sufficient to liquidate the Class C Preferred Shares, an exchange of Paragon’sPillarstone's existing shares for new shares, or September 29, 2008. These agreementsshares were amended to extend the service period and vesting period restriction dates to September 30, 2016. No compensation expense was recognized due to the modification as it did not increase the value offully amortized by the original grant.

date in 2008.

Shares Heldheld in Treasurytreasury

. On October 1, 2003, we completed the sale of our 92.9% general partnership interest in our four commercial properties. A portion of the proceeds from the sale was paid in 38,130 of our common sharesCommon Shares at an average closing price for the 30 calendar days prior to June 27, 2003 of $21.00 or approximately $801,000. These shares are recorded at cost in the accompanying consolidated balance sheets under treasury shares.

Restricted Common Shares

. The following table summarizes the activity of our unvested restricted common sharesCommon Shares for the years ended December 31, 20152017 and 2014:

  Unvested Restricted Common Shares
  Number of
Shares		 Weighted-Average
Grant-Date
Fair Value
     
Unvested at December 31, 2013   168,449  $11.44 
Vested   —   — 
Unvested at December 31, 2014   168,449  $11.44 
Vested   —   — 
Unvested at December 31, 2015   168,449  $11.44 

2016:

 Unvested Restricted Common Shares
   Weighted-Average
 Number of Grant-Date
 Shares Fair Value
    
Unvested at December 31, 2015168,449 $11.44
Vested— —
Unvested at December 31, 2016168,449 $11.44
Vested— —
Unvested at December 31, 2017168,449 $11.44

In the above table, 163,116 restricted shares vest upon meeting performance goals as discussed under “Preferred Shares.” Since the grant date, we have determined that meeting these performance goals is not probable, and no compensation expense has been recognized related to this grant. The grant date fair value of $1,847,000 would be recognized upon meetingat the point we deem it probable that we would meet the performance goals. The balance of 5,333 restricted shares had grant date fair values totaling $79,000, which was recognized in prior periods though the restrictions remain on the shares.



PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


On June 30, 2003, our shareholders approved the issuance of an agreement to issue additional common sharesCommon Shares to Paragon Real Estate Development, LLC of which Mr. Mastandrea is the managing member, and Mr. Dee is a member. In September 2006, ParagonPillarstone amended this agreement to include each of the trustees to the agreement so that if a trustee brings a new transaction to Paragon,Pillarstone, he would receive additional common sharesCommon Shares of ParagonPillarstone in accordance with a formula in the agreement. In January 2016, the non-employee trustees and Mr. Mastandrea agreed to make this agreement for only non-employee trustees. The agreement is intended to serve as an incentive for our trustees to increase the asset base, net operating income, funds from operations, and share value of Paragon.Pillarstone. The exact number of common sharesCommon Shares that would be issued will be calculated in accordance with a formula in the agreement based on future acquisition, development or redevelopment transactions. Any of these transactions would be subject to approval by the members of our board of trustees who are not receiving the additional common shares.Common Shares. We would issue our common sharesCommon Shares only upon the closing of a transaction. The maximum number of common sharesCommon Shares a trustee may receive to be issued under the additional contribution agreement is limited to a total value of $26 million based on the average closing price of the our common sharesCommon Shares for 30 calendar days preceding the closing of any acquisition transaction. The common sharesCommon Shares will be restricted until we achieve the five-yearfive year pro forma income target for the acquisition, as approved by the board of trustees, and an increase of 5% in Paragon’sPillarstone's net operating income and funds from operations. The restricted shares would vest immediately upon any “shift in ownership,” as defined in the agreement.

Options

. On November 16, 1998, we adopted the 1998 Share Option Plan. In 2004, the board of trustees unanimously recommended and the shareholders approved amendments to our 1998 Share Option Plan to increase the number of shares available for grant from 42,222 to 46,666 and to conform with then current tax regulations (“2004 Plan”). The 2004 Plan provides for the grant of “incentive stock options,” as defined under Section 422(b) of the tax code, options that are not qualified under the tax code (referred to in this annual report as “non-statutory options”), share appreciation rights (“SARs”) and restricted share grants and performance share awards and dividend equivalents. The 2004 Plan is administered by our management, organization and compensation committee of the board of trustees. The committee has the authority, subject to approval by our board, to determine the terms of each award, to interpret the provisions of the 2004 plan and to make all other determinations for the administration of the 2004 Plan. The 2004 Plan expired in 2014; the one outstanding grantsgrant of shares and667 options remainremains effective until the terms of their individual agreements expire.

The 2004 Plan provided for the granting of share options to officers, trustees and employees at a price determined by a formula in the 2004 Plan agreement. The options are to be exercisable over a period of time determined by the management, organization and compensation committee, but no longer than ten years90 days after the grant date. Compensation resulting from the share options was initially measured at the grant date based on fair market valueterm ends of the shares. The assumptions made in estimating the fair value of the options on the grant date are based upon the Black-Scholes option-pricing model. There were no option grants during 2015 and 2014.

individual trustee.


The following table summarizes the activity for outstanding stock options:

  Options Outstanding
  Number of
Shares		 Weighted-
Average
Exercise
Price		 Weighted-
Average
Remaining
Contractual
Term
(in years)		 Aggregate
Intrinsic Value
(1)
Balance at December 31, 2013   3,333  $16.35   1.0     
Granted   -   -         
Exercised   -   -         
Canceled/forfeited/expired   (1,333) $13.50         
Balance at December 31, 2014   2,000  $18.25   0.7  $0.00 
Granted   -   -         
Exercised   -   -         
Canceled/forfeited/expired   (1,333) $10.50         
Balance at December 31, 2015   667  $33.75   1.25  $0.00 
Vested and exercisable as Of December 31, 2015   667  $33.75   1.25  $0.00 

 Options Outstanding
     Weighted-Average  
   Weighted-Average Remaining  
 Number of Exercise Contractual Term Aggregate
 Shares Price (in years) 
Intrinsic Value (1)
        
Balance at December 31, 2015667
 $33.75
 1.25 $—
Granted—
 —
    
Exercised—
 —
    
Canceled / forfeited / expired—
 $—
    
Balance at December 31, 2016667
 $33.75
 1.25 $—
Granted—
 —
    
Exercised—
 —
    
Canceled / forfeited / expired—
 —
    
Balance at December 31, 2017667
 $33.75
 1.25 $—
Vested and exercisable as of December 31, 2017—
 $—
 0 $—

(1)
The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2015.2017. Because the weighted average exercise price exceeds fair market value at December 31, 2015,2017, there is no aggregate intrinsic value for the options.


The Company did not recognize any stock-based compensation expense during the years ending December 31, 20152017 and 2014.2016. As of December 31, 20152017 and December 31, 2014,2016, there was no remaining unrecognized cost related to stock options. To


PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


8. INCENTIVE EQUITY PLAN

At the extent2016 Annual Meeting of Shareholders, our shareholders approved the forfeiture rate is different than we have anticipated, stock-based compensation related2016 Equity Plan (“2016 Plan”).
The 2016 Plan provides that awards may be made in Common Shares of the Company or units in the Company’s operating partnership, which may be converted into Common Shares. Subject to theseadjustment as provided by the terms of the 2016 Plan, the maximum aggregate number of Common Shares with respect to which awards may be granted under the 2016 Plan will be different from our expectations.

increased based on future issuances of Common Shares and units of the operating partnership, including issuances pursuant to the 2016 Plan, so that at any time the maximum number of shares that may be issued under the 2016 Plan shall equal 12.5% of the aggregate number of Common Shares and units of the operating partnership issued and outstanding (other than treasury shares and/or units issued to or held by the Company).

The Management, Organization and Compensation Committee (the “Committee”) administers the 2016 Plan, except with respect to awards to non-employee trustees, for which the 2016 Plan is administered by the board of trustees. Subject to the terms of the 2016 Plan, the Committee is authorized to select participants, determine the type and number of awards to be granted, determine and later amend (subject to certain limitations) the terms and conditions of any award, interpret and specify the rules and regulations relating to the 2016 Plan, and make all other determinations which may be necessary or desirable for the administration of the 2016 Plan. The 2016 Plan includes the types of awards for grants and the types of financial performance measures.
As of December 31, 2017, the maximum number of Common Shares or OP Units available to be granted is 2,356,426, and no grants have been issued under the 2016 Plan.

9. LOSS PER SHARE

Note 7 – Loss Per Share

The Company applies the guidance of Accounting Standards CodificationASC 260, (“ASC 260”), “Earnings Per Share, (“EPS”) ” for all periods presented herein. Net loss per weighted average common share outstanding - basic and diluted - are computed based on the weighted average number of common sharesCommon Shares outstanding for the period. The weighted average number of common sharesCommon Shares outstanding for the years ended December 31, 20152017 and 20142016 was 405,096.405,169. Common share equivalents of 2,599,1943,083,284 as of December 31, 20152017 and 2,448,8923,068,358 as of December 31, 20142016 include outstanding convertible preferred shares, convertible notes payable and stock options, and are not included in net loss per weighted average common share outstanding—dilutedoutstanding-diluted as they would be anti-dilutive.

  For the year ended December 31,
  2015 2014
Numerator        
Net loss attributable to common shareholders $(67,271) $(57,470)
Denominator        
Weighted average common shares outstanding at December 31, 2015 and December 31, 2014 - basic and diluted  405,096   405,096 
Basic and Diluted EPS        
Net loss attributable to common shareholders – basic and diluted $(0.17) $(0.14)

 Year ended December 31,
 2017 2016
Numerator   
Net loss attributable to common shareholders(17,426) $(496,981)
    
Denominator   
Weighted average Common Shares outstanding at December 31, 2017 and December 31, 2016 - basic and diluted405,169
 405,169
    
Basic and Diluted EPS   
Net loss attributable to common shareholders - basic and diluted$(0.04) $(1.23)

10. DIVIDENDS AND DISTRIBUTIONS

Note 8 – Dividends/Distributions

No cash distributions were declared during 20152017 and 20142016 with respect to the common or preferred shares.


11. INCOME TAXES

Note 9 – Income Taxes

There was no income tax provision for the years ended December 31, 20152017 and 2014.

  For the year ended December 31,
  2015 2014
Current $—  $— 
Deferred tax benefit  (27,000)  (23,000)
Change in valuation allowance  27,000   23,000 
Total tax provision $—  $— 

2016.



PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


 For the year ended December 31,
 2017 2016
Deferred benefit$(6,000) $(40,000)
Change in deferred rate (1)
350,000
 156,000
Change in valuation allowance(344,000) (116,000)
Total tax provision$—
 $—

The tax provision differs from the expense that would result from applying Federal statutory rates as follows:

  For the year ended December 31,
  2015 2014
Tax / (benefit) at Federal statutory rate $(23,000) $(20,000)
State income tax / (benefit), net of Federal tax effect  (4,000)  (3,000)
Change in valuation allowance  27,000   23,000 
Tax provision $—  $— 


 For the year ended December 31,
 2017 2016
Benefit at Federal statutory rate$(6,000) $(40,000)
Change in deferred rate (1)
350,000
 156,000
Change in valuation allowance(344,000) (116,000)
Tax provision$—
 $—


(1)
The deferred tax rate decreased from 40% to 34% during 2016 and decreased from 34% to 21% during 2017.        

PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


Deferred tax assets and liabilities consist of the following:

  At December 31,
  2015 2014
Deferred tax assets:        
Net operating loss carryovers $1,031,000  $1,003,000 
Valuation allowance  (1,031,000)  (1,003,000)
Net deferred tax assets $—  $— 


 At December 31,
 2017 2016
Deferred tax assets:   
Net operating loss carryforwards$571,000
 $915,000
Valuation allowance(571,000) (915,000)
Net deferred tax assets$—
 $—
Realization of deferred tax assets is dependent upon generation of sufficient future taxable income and the effects of other loss utilization provisions. Management has determined that sufficient uncertainty exists regarding the realizability of the net deferred tax assets and has provided a full valuation allowance of $1,031,000$571,000 and $1,003,000,$915,000, against the net deferred tax assets of the Company as of December 31, 20152017 and 2014,2016, respectively. A valuation allowance is considered to be a significant estimate that may change in the near term.


At December 31, 2015,2017, the Company had net operating loss carryoverscarryforwards of $2,575,000$2,510,000 available to be carried to future periods. Net operating loss carryoverscarryforwards of $1,778,000$1,859,000 are available for ParagonPillarstone to use without any limitation or restriction imposed by tax regulations. Changes in the ownership of Paragon’sPillarstone’s shares that occurred in 2001, 2003 and 2006 have limited the amount of net operating losses to be used to approximately $72,500$72,400 per year for another 119 years, or a total of $797,000.$651,600. Prior net loss carryoverscarryforwards of approximately $11,100,000$10,642,000 cannot be used due to the limitations imposed by Section 382 of the Code related to the 2001, 2003 and 2006 changes of share ownership.


The loss carryoverscarryforwards expire as follows:

Year Expiring Net Operating Loss
2026  $1,551,000 
2027   364,000 
2028   248,000 
2029   81,000 
2030   52,000 
2031   39,000 
2032   61,000 
2033   54,000 
2034   57,000 
2035   68,000 
Total loss carryovers  $2,575,000 


Year Expiring Net Operating Loss
2027 $1,551,000
2028 364,000
2029 248,000
2030 81,000
2031 52,000
2032 39,000
2033 61,000
2034 54,000
2035 57,000
2036 68,000
2037 95,000
2038 (160,000)
Total loss carryforwards $2,510,000

12. RELATED PARTY TRANSACTIONS

During the year ended December 31, 2016, the Company incurred certain general and administrative expenses which were paid by Pillarstone OP on the Company's behalf, with the intent that the amount would be repaid in full at a later date, resulting in a related party payable as of December 31, 2016 totaling $316,103. This payable balance represented 77% and 92% of the Company's total accounts payable as of December 31, 2017 and December 31, 2016, respectively. These expenses represented 64.3% of the Company's total general and administrative expenses incurred during the year ended December 31, 2016. No such amounts were paid by Pillarstone OP during the year ended December 31, 2017 and the payable balance as of December 31, 2016 remains outstanding.


PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


On December 8, 2016, the Company entered into the Contribution Agreement with Pillarstone OP and Whitestone OP, both of which are related parties, resulting in the contribution of an equity ownership interest in Pillarstone OP to the Company valued at $4,121,312 and representing approximately 18.6% of the outstanding equity in Pillarstone OP. The terms of the Contribution Agreement were determined through arm's-length negotiations and were recommended to the board of trustees by a special committee of the board of trustees consisting solely of disinterested trustees of the Company and approved by the full board. During the period of December 8, 2016 through December 31, 2016, Pillarstone received a distribution in kind totaling $4,121,321 from Pillarstone OP and recognized equity in income of Pillarstone OP totaling $14,776, resulting in an ending equity investment balance in Pillarstone OP of $14,776 as of December 31, 2016. During the year ended December 31, 2017, the Company received distributions from Pillarstone OP totaling $378,969 and recognized equity in income of Pillarstone OP totaling $275,313, resulting in an ending negative equity investment balance in Pillarstone OP of $88,880 as of December 31, 2017.

Pursuant to the Contribution Agreement, the Company has agreed to file with the SEC on or prior to June 8, 2018, a shelf registration statement to register for sale under the Securities Act, the issuance of the Common Shares that may be issued upon redemption of the OP Units issued pursuant to each of the Contribution Agreement and the OP Unit Purchase Agreement (as defined below) and the offer and resale of such Common Shares by the holders thereof. In addition, pursuant to the Contribution Agreement, in the event of a Change of Control (as defined therein) of Whitestone, Pillarstone OP shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit.

In connection with the Contribution Agreement, on December 8, 2016, the Company and Pillarstone OP entered into an OP Unit Purchase Agreement (the “OP Unit Purchase Agreement”) with Whitestone OP pursuant to which Pillarstone OP may require Whitestone OP to purchase up to an aggregate of $3.0 million of OP Units at a price of $1.331 per OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. In addition, pursuant to the OP Unit Purchase Agreement, in the event of a Change of Control (as defined therein) of Whitestone, Pillarstone OP shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit.

In connection with the Contribution Agreement, on December 8, 2016, the Company and Pillarstone OP entered into a Tax Protection Agreement (the “Tax Protection Agreement”) with Whitestone OP pursuant to which Pillarstone OP agreed to indemnify Whitestone OP for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the property acquired in the Contribution Agreement or if Pillarstone OP fails to maintain and allocate to Whitestone OP for taxation purposes minimum levels of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and Whitestone incurs taxes that must be paid to maintain its REIT status for federal tax purposes. The provisions of the Tax Protection Agreement would not apply if there were a Change of Control (as defined in the Purchase Agreement) and the Operating Partnership were to repurchase the OP Units issued under the Purchase Agreement from Whitestone OP at their initial issue price of $1.331 per OP Unit.

As detailed further in Note 10 – Commitments and Contingencies

13 below, in February 2017, the Company leased office space from Whitestone in Houston, Texas to support the day-to-day operations of Pillarstone OP. The termination date for the leased space is June 30, 2020.



PILLARSTONE CAPITAL REIT
Notes to Consolidated Financial Statements
December 31, 2017


13. COMMITMENTS AND CONTINGENCIES

Employment Agreements


On April 3, 2006, the board of trustees authorized modifications to Mr. Mastandrea’s employment agreement. The modification agreement allows Mr. Mastandrea to devote time to other business and personal investments while performing his duties for Paragon.Pillarstone. The original employment agreement with Mr. Mastandrea provides for an annual salary of $60,000 effective as of March 4, 2003. The initial term of Mr. Mastandrea’s employment is for two years and may be extended for terms of one year. Mr. Mastandrea’s base annual salary may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. Mastandrea will be entitled to base salary and bonus at the rate in effect before any termination for a period of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Mastandrea. Effective September 29, 2006, in lieu of an annual salary of $100,000 and to conserve cash, Mr. Mastandrea agreed to receive 44,444 Class C Preferred Shares for his services as an officer of ParagonPillarstone through September 29, 2008. This agreement was amended to extend the service period and vesting period restriction dates to September 30, 2016, though theThe shares were fully amortized by the original date in 2008.


Mr. Dee’s employment agreement was also modified on April 3, 2006 in a similar way to Mr. Mastandrea’s employment agreement as explained above, except Mr. Dee does not receive any Class C Preferred Shares for his services as an officer of Paragon.Pillarstone. Mr. Dee’s base annual salary may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. Dee will be entitled to base salary and bonus at the rate in effect before any termination for a period of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Dee. On September 29, 2006, the board of trustees approved compensation to Mr. Dee of $125 per hour, up to a maximum of $5,000 per month. However, Mr. Dee has received noforgone receiving any cash compensation under this arrangement in order to preserve the Company’s cash.


In February 2017, the Company leased office space from Whitestone in Houston, Texas to support the day-to-day operations of Pillarstone OP. For the year ended December 31, 2017, we expensed $12,634 in rent expense. A summary of the minimum future rents payable under our lease as of December 31, 2017 is as follows:

Years Ended December 31, Amount Due
2018 14,178
2019 14,604
2020 7,410
  Total 36,192


PILLARSTONE CAPITAL REIT
Schedule II - Valuation and Qualifying Accounts
December 31, 2017



   
  Balance at Charged to Deductions Balance at
  Beginning Costs and from End of
Description of Year Expense Reserves Year
Deferred tax asset allowance:        
Year ended December 31, 2017 $915,000
 $(344,000) $—
 $571,000
Year ended December 31, 2016 1,031,000
 (116,000) —
 915,000
Year ended December 31, 2015 1,004,000
 27,000
 —
 1,031,000


PILLARSTONE CAPITAL REIT
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2017


      Costs Capitalized Subsequent Gross Amount at which Carried at
  Initial Cost (in thousands) to Acquisition (in thousands) 
End of Period (in thousands)(1) (2)
    Building and Improvements Carrying   Building and  
Property Name Land Improvements (net) Costs��Land Improvements Total
               
Pillarstone OP Properties:  
    
  
  
  
  
9101 LBJ Freeway $1,597
 $6,078
 $1,128
 $—
 $1,597
 $7,206
 $8,803
Corporate Park Northwest 1,534
 6,306
 2,268
 —
 1,534
 8,574
 10,108
Corporate Park West 2,555
 10,267
 1,615
 —
 2,555
 11,882
 14,437
Corporate Park Woodland 652
 5,330
 830
 —
 652
 6,160
 6,812
Corporate Park Woodland II 2,758
 —
 26
 —
 2,758
 26
 2,784
Dairy Ashford 226
 1,211
 49
 —
 226
 1,260
 1,486
Holly Hall Industrial Park 608
 2,516
 395
 —
 608
 2,911
 3,519
Holly Knight 320
 1,293
 402
 —
 320
 1,695
 2,015
Interstate 10 Warehouse 208
 3,700
 495
 —
 208
 4,195
 4,403
Main Park 1,328
 2,721
 1,113
 —
 1,328
 3,834
 5,162
Plaza Park 902
 3,294
 1,141
 —
 902
 4,435
 5,337
Uptown Tower 1,621
 15,551
 4,794
 —
 1,621
 20,345
 21,966
Westbelt Plaza 568
 2,165
 958
 —
 568
 3,123
 3,691
Westgate Service Center 672
 2,776
 1,175
 —
 672
 3,951
 4,623
Total - Pillarstone OP Properties $15,549
 $63,208
 $16,389
 $—
 $15,549
 $79,597
 $95,146

PILLARSTONE CAPITAL REIT
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2017



    Accumulated Depreciation Date Depreciation
Property Name Encumbrances (in thousands) Acquired Life
Pillarstone OP Properties:        
9101 LBJ Freeway   $2,634
 12/8/2016 5-39 years
Corporate Park Northwest   3,679
 12/8/2016 5-39 years
Corporate Park West (3) 4,959
 12/8/2016 5-39 years
Corporate Park Woodland (3) 3,331
 12/8/2016 5-39 years
Corporate Park Woodland II   5
 12/8/2016 5-39 years
Dairy Ashford (3) 686
 12/8/2016 5-39 years
Holly Hall Industrial Park (3) 1,356
 12/8/2016 5-39 years
Holly Knight   1,090
 12/8/2016 5-39 years
Interstate 10 Warehouse (3) 2,852
 12/8/2016 5-39 years
Main Park (3) 1,957
 12/8/2016 5-39 years
Plaza Park (3) 2,352
 12/8/2016 5-39 years
Uptown Tower (4) 7,384
 12/8/2016 5-39 years
Westbelt Plaza (3) 1,981
 12/8/2016 5-39 years
Westgate Service Center (3) 1,714
 12/8/2016 5-39 years
Total - Pillarstone OP Properties   $35,980
    

(1)
Reconciliations of total real estate carrying value for the years ended December 31, 2017 and 2016 follows:
  ( in thousands)
  2017 2016
Balance at beginning of period $92,338
 $—
Additions during the period:  
  
Acquisitions 2,550
 92,338
Improvements 1,265
 —
  3,815
 92,338
Deductions - cost of real estate sold or retired (1,007) —
Balance at close of period $95,146
 $92,338

(2)
The aggregate cost of real estate (in thousands) for federal income tax purposes is $84,646.
(3)
These properties secure a $37.0 million mortgage note.
(4)
This property secures a $16.5 million mortgage note.

F-21