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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31 2020, 2022

or

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 000-54295

Sterling Real Estate Trust

d/b/a Sterling Multifamily Trust

(Exact name of registrant as specified in its charter)

North Dakota

90-0115411

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

1711 Gold Drive4340 18th Ave South Suite 100Ste. 200

Fargo, North Dakota

58103

(Address of principal executive offices)

(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Shares of Beneficial Interest, par value $0.01 per share

N/A

N/A

Securities registered pursuant to Section 12(g) of the Act: none

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

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

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

Indicate by checkmark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

There is 0no established public market for the registrant’s shares of common stock.

Indicate the number of shares outstanding of each of the issuer’s classes of common shares, as of the latest practicable date.

Class

    

Outstanding at March 29, 202114, 2023

Common Shares of Beneficial Interest, $0.01 par value per share

9,968,03410,947,790

Documents Incorporated by Reference: Portions of Sterling’s Proxy Statement for its 20212023 Annual Meeting of Shareholders, which Sterling intends to file with the Securities and Exchange Commission within 120 days after the end of Sterling’s fiscal year ended December 31, 2020,2022, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K to the extent described herein. If Sterling does not file its Proxy Statement on or before 120 days after the end of its 20202022 fiscal year, Sterling will file the required information in an amendment to this Annual Report on Form 10-K.

Table of Contents

Sterling Real Estate Trust

INDEX

PAGE

PART I

Item 1. Business

3

Item 1A. Risk Factors

98

Item 1B. Unresolved Staff Comments

24

Item 2. Properties

24

Item 3. Legal Proceedings

3130

Item 4. Mine Safety Disclosures

3130

PART II

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

3130

Item 6. Selected Financial Data

3332

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

33

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

4945

Item 8. Financial Statements and Supplementary Data

4945

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

4945

Item 9A. Controls and Procedures

4945

Item 9B. Other Information

5147

PART III

Item 10. Trustees, Executive Officers and Corporate Governance

5147

Item 11. Executive Compensation

5147

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

5147

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

5147

Item 14. Principal Accountant Fees and Services

5147

PART IV

Item 15. Exhibits and Financial Statement Schedules

5248

Item 16. Form 10-K Summary

5248

Report of Independent Registered Public Accounting Firm and Financial Statements

5551

Signatures

10194

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements regarding our plans and objectives, including, among other things, our future financial condition, anticipated capital expenditures, anticipated dividends and other matters. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.

The forward-looking statements included herein are based on our current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure readers that the forward-looking statements included in this filing will prove to be accurate. The accompanying information contained in this Annual Report on Form 10-K, including, without limitation, the information set forth under the section entitled “Risk Factors” in Item 1A, identifies important additional factors that could materially adversely affect actual results and performance. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of certain unanticipated events or changes to future operating results.

PART I

All dollar amounts in this Form 10-K are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

ITEM 1.  BUSINESS

GENERAL

Sterling Real Estate Trust (“we,” “us,” “our,” “Company,” “Trust” or “Sterling”) is a real estate investment trust (“REIT”). Sterling was registered in North Dakota as an unincorporated business trust in December 2002.  References in this Annual Report on Form 10-K to the “Company,” “Sterling,” “Trust,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our dividends and other factors.  As of December 31, 2020,2022, we owned directly or through our operating partnership, 179185 properties in 1112 states.

UPREIT Structure

The Trust operates as an Umbrella Partnership Real Estate Investment Trust, which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, the Trust conducts substantially all investment activities and holds substantially all of the Trust’s assets through the operating partnership Sterling Properties, LLLP. The Trust controls the operating partnership as the general partner and owns approximately 35.03%36.60% of the operating partnership as of December 31, 2020.2022. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, the proportionate shares of the assets and income of the operating partnership are deemed to be the assets and income of the Trust.

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The UPREIT structure is used to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the

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property for limited partnership units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, the Trust may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in the operating partnership, rather than directly in the Trust, may be more attractive to certain institutional or other investors due to their business or tax structure. If an investor is interested in making a substantial investment in our operating partnership, the structure provides the Trust the flexibility to accommodate different terms for each investment, while applicable tax laws generally restrict a REIT from charging different fee rates among its shareholders. Finally, if the Trust’s shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.

Operating Partnership

Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership in April 2003 to acquire, own and operate properties on the Trust’s behalf. The operating partnership holds a diversified portfolio of multifamily dwellings and commercial properties located principally in the upper and central Midwest United States.

Since formation, the Trust’s focus has consisted of owning and operating income-producing real estate properties. In 2006, the Trust held 23 total properties approximating $56,265 in total assets, in the operating partnership. Between 2007 and 2020,2022, the Trust focused extensively on strengthening the multifamily component of the portfolio, acquiring properties directly or through UPREIT transactions. A majority of these multifamily properties are located in North Dakota. The portfolio has grown to 179185 properties, approximating $743,029$888,723 in total assets, and book equity, including noncontrolling interests, of approximately $291,528$323,466 as of December 31, 2020.2022. As of December 31, 2020,2022, the portfolio contained approximately 10,32811,300 apartment units and 1,642,0001,498,000 square feet of leasable commercial space.

OUR PEOPLE

We do not have any employees. Instead, we rely on our external Advisor to conduct our day-to-day affairs.

Advisor to the Trust

Sterling Management, LLC, a North Dakota limited liability company formed in November 2002, is the external Advisor to the Trust. The Advisor is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.  The Advisor is 100% owned by Trustmark Enterprises, Inc., formerly known as Alloy, a North Dakota corporation (“Trustmark”).  Trustmark is owned in part by Kenneth P. Regan, a trusteeTrustee and Chief Executive Officer of the Trust, by James S. Wieland, also a trusteeTrustee of the Trust, by Joel S. Thomsen, President of the Trust, and by Ryan M. Downs, Chief Investment Officer of the Trust. In addition, Messrs. Regan, Wieland, Thomsen and DownsGleave serve on the Advisor’s Board of Governors of the Advisor. From 2007 to 2020, theGovernors. The Advisor’s employee base has seen considerable growth, both in number and expertise.expertise, since its inception.

On January 1, 2021, the Advisor was purchased by Alloy Enterprises, Inc. in an equity transfer.  The ownership structure, personel, and ownership percentages remain materially consistent with that of the Advisor prior to January 1, 2021. As of January 1, 2021, our Chief Financial Officer, Ms. Chaffee acquired a less than 1% ownership interest in Alloy in connection with the transactions.

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Audit and Disclosure Committee

The Audit and Disclosure Committee was established by the Board of Trustees to assist the Board in fulfilling its fiduciary duties and oversight responsibilities. The Audit and Disclosure Committee assists the Board by overseeing the integrity of the Trust’s financial statements, financial reporting and disclosure processes, internal accounting and financial controls and the annual independent audit of the Trust’s financial statements. The Audit and Disclosure Committee also oversees the establishment and maintenance of processes to assure the Trust’s compliance with all applicable laws, regulations, and Trust policy.policy, including compliance with filing requirements under the Exchange Act and the rules and regulations promulgated thereunder. In performing its work, it is the Audit and Disclosure Committee’s responsibility to foster free and open means of communication between the Trustees, the independent auditors and the Trust’s financial managers. Our Audit and Disclosure Committee is currently comprised of Trustees Timothy A. Hunt (Chair of the Committee), Ann L. Christenson, Timothy L. Haugen, Michelle L. Korsmo, and Mark T. Polovitz.

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Board of Trustees and Executive Officers

The Trust operates under the direction of our Board of Trustees, the members of which are accountable to both the Trust and its shareholders. The Trustees are elected annually by our shareholders.  In addition, the Board has a duty to supervise our relationship with the Advisor and evaluatesevaluate the performance of and fees paid to the Advisor on an annual basis. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on March 26, 2020,24, 2022, effective April 1, 20202022 until March 31, 2021.2023. The Board of Trustees has provided investment guidance for the Advisor to follow and must approve each investment recommended by the Advisor. Currently, the Advisor has eight members on the Board, six of whom are independent.

Although the Trust has executive officers, it does not have any paid employees. The President, Chief Executive Officer, Chief Investment Officer, Chief Financial Officer and Treasurer, and General Counsel and Secretary of the Trust, are also officers, employees, owners, or governors of our Advisor. Among others, such executive officers oversee the Advisor’s day-to-day operations with respect to the Trust. However, when doing so, such executive officers are acting on behalf of the Advisor in performing the Advisor’s obligations under the Advisory Agreement. Generally, the only services performed by the Trust’s executive officers are those required by law or regulation, such as executing documents as required by North Dakota law and providing certifications required by the federal securities laws.

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Organizational Structure

On January 1, 2021, the advisor was aquiredacquired by AlloyTrustmark Enterprises, Inc. in an equity transfer.

The following chart shows the relationship structure with the advisor:

GraphicGraphic

(1)As of December 31, 2020,2022, the Advisor was owned 100% by Trustmark Enterprises, Inc. Trustmark was owned in part by the Trust’s Chief Executive Officer and Trustee Mr. Kenneth P. Regan (36.578%(36.23%), by Trustee Mr. James S. Wieland (29.487%(25.15%), by President Joel S. Thomsen (10.00%), and by Chief Investment Officer, Ryan M. Downs (5.091%(20.00%).  In addition, Mr.Messrs. Regan servesand Thomsen, serve as the Executive Chairmanofficers of the Advisor,Advisor. Messrs. Regan, Wieland, and Messrs. Wieland, Thomsen, and Downs serve on the Advisor’s Board of Governors of the Advisor. As a result of the Alloy restructuring transactions effective January 1, 2021, the ownership interests in the Advisor became indirect but remain materially consistent with those prior to January 1, 2021Governors.
(2)Sterling Management, LLC serves as Advisor to both the Trust and the operating partnership. The Advisor does not own any of our shares. Messrs. Regan and Wieland beneficially own approximately 1.57%1.43% and 2.63%2.76%, respectively, of our shares as of December 31, 2020.2022.
(3)The Trust controls the operating partnership as the general partner and owns approximately 35.03%36.60% of the operating partnership as of December 31, 2020. Mr.2022. Messrs. Regan and Mr. Wieland beneficially owned and had voting power over approximately 15.64%16.41% and 4.56%5.12%, respectively, of the operating partnershipOperating Partnership as of December 31, 2020.
(4)Effective January 1, 2021 Ms. Chaffee indirectly owns 0.75% of the Advisor.2022.

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CORE INVESTMENT OBJECTIVES AND STRATEGY

Investment Objectives

The Trust’s primary investment objectives are to:

acquireAcquire quality real estate properties or interests in real estate properties that can provide stable cash flow for distribution to our shareholders, preservation of capital and realization of long-term capital appreciation upon the sale of such properties;properties,
offerOffer an investment option in which the value of the common shares is correlated to real estate as an asset class rather than traditional asset classes such as stocks and bonds; and
provideProvide a hedge against inflation through use of month-to-month rentals or short-term and long-term lease arrangements with rental properties tenants.

The Trust may change the investment objectives only with the approval of holders of a majority of the outstanding common shares.

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Investment Strategy

The current investment strategy is to acquire and hold ownership interests in multifamily residential properties primarily located in the central corridor of the contiguous 48 states.  There is no current plan for the existing commercial properties (industrial, medical, office and retail) regarding retention or disposition.

Most current acquisitions are in or near metropolitan areas. However, there is no limitation on the geographic areas in which we may acquire targeted investments.

The Trust may acquire portfolios of real estate properties held by individual owners and real estate properties held by funds, including hedge funds. It is anticipated that such property owners will primarily sell the properties in exchange for limited partnership interests of the operating partnership.

The Trust may make investments alone or together with other investors, including with affiliates of the Advisor, through holding company structures or joint ventures, real estate partnerships, tenant-in-common deals, REITs, or other collective investment vehicles.

Investment Guidance

The Board of Trustees has provided investment guidance to the Advisor to direct the investment strategy of the Trust. Changes to the investment guidance must be approved by the Board. The Advisor has been authorized to execute (1) commercial and multifamily real estate property acquisitions and dispositions (2) investments in other real estate related assets, in each case so long as such investments are approved by our Board (3) acquisitions of property or land for the purposes of future development and (4) capital investments in the portfolio’s current properties through capital improvements. execute:

Commercial and multifamily real estate property acquisitions and dispositions,
Investments in other real estate related assets, in each case so long as such investments are approved by our Board,
Acquisitions of property or land for the purposes of future development; and
Capital investments in the portfolio’s current properties through capital improvements.

The Board will have ultimate oversight over the Trust’s investments and may change from time to time the scope of authority delegated to the Advisor with respect to acquisition and disposition transactions. The

Investment Strategy

Sterling’s current investment guidancestrategy and focus is that futureon multifamily properties. Our Advisor monitors industry trends and invests in property believed to provide the most favorable return balanced with risk. We attempt to manage our real estate investments be limitedportfolio by evaluating changes or trends in the industries in which our tenants operate, the creditworthiness of our tenants and changes or trends in the area demographics surrounding our properties for evidence that our properties will continue to multifamily apartment properties.meet our investment objectives of cash flow, preservation of capital and capital appreciation. There is no current plan with respect tofor the existing commercial properties (industrial, medical, office and retail) regarding retention, acquisition, or disposition.

Investments in Real Estate Properties

The Trust will primarily invest in existing or newly constructeddeveloped real estate properties andproperties. The Trust may also invest in interests in real estate properties by acquiring direct ownership or ownership interests with other investors, including affiliates of the Advisor, through equity interestsholding company structures or joint ventures, real estate partnerships, tenant-in-common deals, REITs, or other joint venture structures.collective investment vehicles. The Trust may also invest in other real estate property types, including undeveloped land or other development opportunities if the land is acquired for the purpose of producing rental or other operating income in the future. The properties the Trust primarily invests in have existing rent and expense schedules, or the properties are newly constructed with predictable cash flows. The Trust concentrates its efforts on real estate properties located primarily in North Dakota and Minnesota, the central corridor of the contiguous 48 states and

Most current acquisitions are in or near metropolitan areas. However, there is no limitation on the geographic areas in which we may acquire targeted investments.

InvestmentsThe Trust may also acquire portfolios of real estate properties held by individual owners and real estate properties held by funds, including hedge funds. It is anticipated that such property owners will primarily sell the properties in Real Estate Related Assetsexchange for limited partnership interests of the operating partnership.

Guidelines provide the Trust may invest in real estate related assets. These assets include securities of other companies engaged in real estate activities, mortgage-backed securities, and conventional mortgage loans. To date, investment in such assets have been nominal. The Trust does not anticipate such investment amounts to be material or long term.

Receivables

Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, beginning with the adoption of ASC 842 as of January 1, 2019, the operating partnership recognizes an adjustment to rental income.

Notes receivable are issued periodically and are secured and interest bearing. Receivables are included in “Other assets” in the accompanying consolidated balance sheets.

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Investments in Cash, Cash Equivalents and Other Short-Term Investments

We may invest in cash, cash equivalents and other short-term investments. Consistent with the rules applicable to qualification as a REIT, such investments may include investments in the following: money market instruments; short-term debt instruments, such as commercial paper, certificates of deposit, bankers’ acceptances, repurchase agreements, interest-bearing time deposits and corporate debt securities; corporate asset-backed securities; and U.S. government or government agency securities. We do not expect to increase such investments in the near future.

SEGMENT DATA

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multifamily. Our commercial properties include retail, office, industrial and medical properties. We assess and measure operating results based on the non-GAAP financial measurement of net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and certain general and administrative expenses.

COMPETITION

Our properties are located in highly competitive real estate markets. The number of competitive properties in a particular area could have a material adverse effect on our ability to lease space and the amount of rent we can charge at our properties. We compete with many property owners, such as corporations, limited partnerships, individual owners, other real estate investment trusts, insurance companies and pension funds.

Our competition also consists of other owners and developers of multifamily and commercial properties who are trying to attract tenants to their properties. We also compete with other real estate investors such as individuals, partnerships, corporations and other REITs to acquire properties that meet our investment objectives. This competition influences our ability to acquire properties and the prices that we may pay for those properties. We believe, however, that the diversity of our investments, the experience and abilities of our management and the quality of our assets affords us some competitive advantages that have in the past, and should in the future, allow us to operate our business successfully despite the competitive nature of our business.

Generally, there are multifamily and other similar commercial properties within relatively close proximity to each of our properties. RegardingThe majority of our retail properties inare restaurants and pharmacies. In addition to competitor retail properties with similar business models, we and our tenants face increasing competition from outlet malls, internet shopping websites, discount shopping clubs, catalog companies, direct mail and telemarketing.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

As an owner of real estate, we are subject to various environmental laws, rules and regulations adopted by various governmental bodies or agencies. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations, and some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Some of these laws and regulations may impose joint and several liability on residents, owners, or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In

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addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us.

In addition, we are subject to many other laws and governmental regulations applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1991, to be accessible to the handicapped and prohibits housing discrimination based upon familial status.

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The Housing for Older Persons Act (“HOPA”) provides age-based discrimination exceptions for housing developments qualifying as housing for older persons. Non-compliance with ADA, FHAA or HOPA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation. We believe our properties which are subject to ADA, FHAA and/or HOPA are substantially in compliance with their present requirements.

Compliance with these laws, rules, and regulations has not had a material adverse effect on our business, assets, or results of operations, financial condition, or ability to pay dividends. We do not believe our existing portfolio as of December 31, 20202022 will require us to incur material expenditures to comply with these laws and regulations. However, we cannot assure that future laws, ordinances, or regulations will not impose any material liability, or that the current environmental condition of our properties will not be affected by the operations of tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

AVAILABLE INFORMATION

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to these filings with the Securities and Exchange Commission (“SEC”). The public may read any materials filed by us with the SEC on the internet site maintained by the SEC at www.sec.gov. We also maintain an internet site at www.smftrust.com, which includes the reports and other documents we file with the SEC. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. This reference to our website is not intended to incorporate information found on the website into this filing.

ITEM 1A. RISK FACTORS

Risks Related to Sterling Real Estate Trust

Our results are dependent on amounts received from the leasing and resale of investments, which are subject to market and economic changes. If income is insufficient to meet our capital needs, our ability to carry out our business plans could be adversely affected.

Our purpose is to acquire and hold real estate investments as long-term investments. The primary income that will be generated by us will be the profits, if any, from the operation or holding of the real estate and upon the resale of the investments. If circumstances arise which cause an investment to become undesirable or remain at its current value or decrease in value, we may generate less income than anticipated.

Our success is based on continuing to locate and hold suitable real estate investments, and failure of our Advisor to locate additional suitable properties or the unsuccessful operation of our existing real estate investments could adversely affect our operations and our ability to pay dividends.

Our ability to achieve our investment objectives and to pay dividends to our shareholders and distributions to unitholders is dependent upon the performance of our Advisor in locating suitable investments and appropriate financing arrangements

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for us as well as on the successful management of our properties after acquisition. We currently own, through the operating partnership, the properties described under Item 2 — Properties.  We cannot be sure our Advisor will be successful in locating suitable investments on financially attractive terms, or be certain that operation of the properties will avoid the risks attendant to real estate acquisitions, such as:

The risk properties may not perform in accordance with expectations, including projected occupancy and rental rates;rates.
The risk we may have underestimated the cost of improvements or repairs required to bring or keep an acquired property up to or at standards established for its intended use or its intended market position.

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We may have to make expedited decisions on whether to invest in certain properties, including prior to receipt of detailed information.

We may be required to make expedited decisions in order to effectively compete for the acquisition of desirable properties and other assets. In such cases, our Advisor and Board of Trustees may not have access to detailed information regarding real estate investments at the time of making an investment decision to pay a non-refundable deposit and to proceed with an acquisition. In addition, the actual time period during which our Advisor will be allowed to conduct due diligence may be limited. Therefore, there can be no assurance our Advisor and Board of Trustees will have knowledge of all circumstances that may adversely affect an investment.

We may change our investment and operational policies without shareholder consent, and such changes could increase our exposure to additional risks.

Generally, the Board of Trustees may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our shareholders, which could result in our making investments different from, and possibly riskier than investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

There can be no assurance dividends or distributions will be paid or increase over time.

There are many factors that can affect the availability and timing of cash dividends to our shareholders and distributions to unitholders.  Dividends and distributions will be based principally on cash available from our real estate and other investments. The amount of cash available for dividends will be affected by many factors, such as our ability to acquire profitable real estate investments, successfully manage our real estate properties, our operating expenses, and general economic conditions. We can give no assurance we will be able to pay or maintain dividends or distributions or that dividends or distributions will increase over time.

Dividends may include a return of capital, and shareholders may be required to recognize capital gain on distributions.

Dividends payable to shareholders may include a return of capital. To the extent dividends exceed cash flow from operations, a shareholder’s basis in our shares will be reduced and, to the extent dividends exceed a shareholder’s basis, the shareholder may recognize capital gain and be required to make tax payments.

We depend on certain executive officers and trustees, and the loss of such persons may delay or hinder our ability to carry out our investment strategies.

Our future success substantially depends on the active participation of James Wieland, one of our trustees, Kenneth Regan, Chief Executive Officer and a trustee, Joel Thomsen, President, Damon Gleave, Chief Financial Officer and Ryan Downs,Treasurer, and Barry Schmiess, Chief Investment Officer. Messrs. Wieland, Regan, Downs and Thomsen are also governors and owners of our Advisor. Messrs. Wieland, and Regan, have over 3940 years of extensive experience each in the commercial real estate industry, and have been instrumental in setting our strategic direction, operating our business and arranging necessary financing, and through the Advisor, in locating

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desirable real estate investments and were serving as property manager, managing our properties. Losing the services of Messrs. Wieland, Regan, Thomsen, Gleave, or DownsSchmiess without replacing their position with someone of the same competence and experience, could have a material adverse effect on our ability to successfully carry out our investment strategies and achieve our investment objectives. There can be no guarantee they will remain affiliated with us. See “Risks Related to Conflicts of Interest.”Interest”.

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Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data, or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation, and damage to our investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by Sterling Management and service providers.   Our and Sterling Management’s processes, procedures and internal controls that are designed to mitigate cybersecurity risks and cyber intrusions do not guarantee that a cyber incident will not occur or that our financial results, operations, or confidential information will not be negatively impacted by such an incident.

We are not required to comply with certain reporting requirements, including those relating to auditor’s attestation reports on the effectiveness of our system of internal control over financial reporting, accounting standards and disclosure about our executive compensation, that apply to other public companies.

So long as our shares of common stock are not traded on a securities exchange, we will be deemed to be a “non-accelerated filer” under the Exchange Act, and as a non-accelerated filer, we will be exempt from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In addition, so long as we are externally managed by the Advisor and we do not directly compensate our executive officers, or reimburse the Advisor or its affiliates for salaries, bonuses, benefits and severance payments for persons who also serve as one of our executive officers or as an executive officer of the Advisor, we do not have any executive compensation.

Many of our costs, such as operating and general and administrative expenses, real estate acquisition, and constructions costs, could be adversely impacted by period of heightened inflation.

COVID-19 ImpactA sustained or further increase in inflation could have an adverse impact on our operating expenses incurred in connection with, among others, the property-related services such as repairs and maintenance, janitorial, utilities, security and insurance. Our operating expenses may be recoverable through commercial lease arrangements.

The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. Several uncertainties continue to exist at this time including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the surge in COVID-19 cases in many states. While the Trust did not incur significant disruptions during the year ended December 31, 2020 from the COVID-19 pandemic, the effects of the ongoing COVID-19 pandemic could have material adverse effects on our business and results of operations so long as COVID-19 continues to impact the U.S. economy. The extent to which the economic disruption associated with the COVID-19 pandemic impacts our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.  During the year ended December 31, 2020, the Trust continued to monitor state and federal legislative actions and efforts regarding the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen several tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that COVID-19 and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.

During the year ended December 31, 2020, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the

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aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.

Risks Related to Our Structure

Our shareholders may experience dilution if we or our operating partnership issues additional securities.

Our shareholders do not have preemptive rights to any shares issued by us in the future. If we sell or issue additional shares in the future to raise capital, pursuant to a dividend reinvestment plan or in exchange for limited partnership units pursuant to our operating partnership’s Limited Liability Limited Partnership Agreement (“LLLP Agreement”), our shareholders will experience dilution of their equity investment. In addition, if our operating partnership sells additional securities or issues additional securities in connection with a property acquisition transaction, we would, and indirectly our shareholders would, experience dilution in their equity position.

Our securityholders have limited control over our operation, and the Board of Trustees has the sole power to appoint and terminate the Advisor.

Our Board of Trustees has the authority to determine our major policies, including our policies regarding financing, growth, investment strategies, debt capitalization, REIT qualification, distribution, and to take certain actions including acquiring or disposing of real estate and real estate related investments, dividend declaration and the election or removal of the Advisor. Our securityholders do not have the right to remove the Advisor but have the right to elect and remove trustees.

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Under theour Third Amended and Restated Declaration of Trust, our trustees may not do the following without the approval of the holders of a majority of the outstanding common shares of beneficial interest:

Amend the Third Amended and Restated Declaration of Trust, except for amendments which do not adversely affect the rights, preference and privileges of shareholders;shareholders.
Sell all or substantially all of our assets other than in the ordinary course of business or in connection with a liquidation and dissolution;dissolution.
Conduct a merger or other reorganization of the trust; or
Dissolve or liquidate us.

Our shareholders have the right, without the concurrence of the Board of Trustees, to terminate the trust and liquidate our assets or amend the Third Amended and Restated Declaration of Trust.

Shareholders have no role in determining our investments and must rely on our Advisor and oversight by the Board of Trustees.

For future acquisitions or dispositions, the Board of Trustees has the authority to approve investment acquisitions or dispositions without shareholder approval. Therefore, shareholders will not be able to evaluate the terms of future investment acquisitions or dispositions, their economic merit or other relevant financial data before we acquire or sell investments. Shareholders must rely entirely on the oversight of our Board of Trustees, the management ability of our Advisor and the performance of the property managers.

We may issue securities with more favorable terms than the outstanding shares without shareholder approval.

Under our Third Amended and Restated Declaration of Trust, our Board of Trustees has the authority to establish more than one class or series of shares and to fix the relative preferences and rights regarding conversion, voting powers, restrictions, limitations as to dividends and other distributions, and terms or conditions of redemption of such different classes or series without shareholder approval. Thus, our Board could authorize the issuance of a class or series of shares with terms and conditions that could have priority as to dividends and amounts payable upon liquidation over the rights of the holders of our outstanding common shares of beneficial interest. Such class or series of shares could also have the

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effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our shares, even if it would be in the best interest of our shareholders.

Shareholders could incur current tax liability on dividends they elect to reinvest in our shares, and may have to use separate funds to pay their tax liability.

Shareholders that participate in our dividend reinvestment plan will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional dividend to the extent the shares are purchased at a discount to fair market value. As a result, unless shareholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the shares received.

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There may be conflicts of interest between us and our shareholders on one side and our operating partnership and its limited partners on the other side.

Our trustees and officers have duties to us and our shareholders in connection with their management of us. At the same time, we, as general partner will have duties to our operating partnership and its limited partners in connection with the management of the operating partnership. Our duties as general partner of the operating partnership may come into conflict with the duties of our trustees and officers to us and our shareholders. The LLLP Agreement of our operating partnership expressly limits our liability for monetary damages by providing we will not be liable for losses sustained, liabilities incurred or benefits not derived if we acted in good faith. In addition, our operating partnership is required to indemnify us and our trustees and officers from and against any and all claims arising from operations of our operating partnership, unless it is established: (1) the act or omission was material and committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe the act or omission was unlawful. The LLLP Agreement also provides that we will not be held responsible for any misconduct or negligence on the part of any agent appointed by us in good faith.

There is no public trading market for our shares, nor do we expect one to develop, which may negatively impact our shareholders’ ability to sell their shares and the price at which shares may be sold.

There is no public market for our shares and there is no assurance one may develop. In addition, the price shareholders may receive for the sale of their shares is likely to be less than the proportionate value of our investments. If our shareholders are able to find a buyer for their shares, they may have to sell them at a substantial discount from the price they purchased the shares. Consequently, shareholders may not be able to liquidate their investments in the event of emergency or for any other reason. Therefore, shareholders should consider our securities as illiquid and a long-term investment and should be prepared to hold their shares for an indefinite period of time.

The estimated value of our common stock is based on a number of assumptions and estimates that may not be accurate and is also subject to a number of limitations.

The current estimated value of our common stock equals $20.00as of January 1, 2023, is approximately $23.00 per share. The methodology used by our Board to determine this value was based on estimates of the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain and certain additional information. No formal valuation has been undertaken by us. Our valuation process involves a number of estimates, assumptions and subjective judgments that may not be accurate and complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated value per share may not represent current market values or fair values as determined in accordance with U.S. generally accepted accounting principles. A shareholder should not rely on the estimated value per share as being an accurate or precise measure of the then-current value of the shares of our common stock in making a decision to buy or sell shares of our common stock, including whether to reinvest dividends by participating in the dividend reinvestment plan and whether to request redemption pursuant to our share redemption program.

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Risks Related to Our Status as a REIT and Related Federal Income Tax Matters

If we fail to continue to qualify as a REIT, we would incur additional tax liabilities that would adversely affect our operations and our ability to make distributions and could result in a number of other negative consequences.

Although our management believes we are organized, have operated, and will be able to continue to be organized and to operate in such a manner to qualify as a real estate investment trust (REIT), as that term is defined under the Internal Revenue Code, we may not have been organized, may not have operated, or may not be able to continue to be organized or to operate in a manner to have qualified or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status.

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The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control, regarding our organization and ownership, distributions of our income and the nature and diversification of our income and assets. The fact we hold substantially all of our assets through our operating partnership and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.

If we lose our REIT qualification, we will face income tax consequences that will reduce substantially our available cash for dividends and investments for each of the years involved because:

We would be subject to federal corporate income taxation on our taxable income, including any applicable alternative minimum tax, and could be subject to increased state and local taxes;taxes.
We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income; and
Unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

The increased taxes could reduce the value of the shares as well as cash available for dividends to shareholders and investments in additional assets. In addition, if we fail to continue to qualify as a REIT, we will not be required to pay dividends to shareholders. Our failure to continue to qualify as a REIT also could impair our ability to expand our business and to raise capital.

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal and state taxes on our income or property, including the following:

To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gains) to our shareholders. If we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on the undistributed income. In such situation, shareholders will be treated as having received the undistributed income and having paid the tax directly, but tax-exempt shareholders, such as charities or qualified pension plans, will receive no benefit from any deemed tax payments.
We may be subject to state and local taxes on our income or property, either directly or indirectly, because of the taxation of our operating partnership or of other entities through which we indirectly own our assets.
If we have net income from the sale of foreclosure property we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
If we sell a property, other than foreclosure property, we hold primarily for sale to customers in the ordinary course of business, our gain will be subject to the 100% “prohibited transaction” tax.

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We will be subject to a 4% nondeductible excise tax on the amount, if any, by which the distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

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We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.

To qualify as a REIT, in general, we must distribute to our shareholders at least 90% of our net taxable income each year, excluding capital gains. However, we could be required to include earnings in our net taxable income before we actually receive the related cash. If we do not have sufficient cash to pay the necessary dividends to preserve our REIT status for any year or to avoid taxation, we may need to borrow funds, to sell assets or to issue additional securities even if the then-prevailing market conditions are not favorable for such actions.  In addition, we will require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

If our operating partnership does not qualify as a partnership, its income may be subject to taxation, and we would no longer qualify as a REIT.

The Internal Revenue Code classifies “publicly traded partnerships” as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. We structured our operating partnership to be classified as a partnership for federal income tax purposes. However, no assurance can be given the IRS will not challenge our position or will classify our operating partnership as a “publicly traded partnership” for federal income tax purposes. To minimize this risk, we have placed certain restrictions on the transfer and/or redemption of partnership units in the LLLP Agreement. If the IRS would assert successfully our operating partnership should be treated as a “publicly traded partnership” and substantially all of the operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat the operating partnership as an association taxable as a corporation. In such event, we would cease to qualify as a REIT. In addition, the imposition of a corporate tax on the operating partnership would reduce the amount of distributions the operating partnership could make to us and, in turn, reduce the amount of cash available to us to pay dividends to our shareholders.

We have transfer restrictions on our shares that may limit offers to acquire substantial amounts of the Trust’s shares at a premium.

To qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Currently, ourThird Amended and Restated Declaration of Trust prohibits transfers of our shares that would result in: (1) our shares being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our shares, applying broad attribution rules imposed by the federal income tax laws, or (3) before our shares qualify as a class of publicly-offered securities, 25% or more of our shares being owned by ERISA investors. If a shareholder acquires shares in excess of the ownership limits or in violation of the restrictions on transfer, we:

May consider the transfer to be void ab initio.
May not reflect the transaction on our books.
May institute legal action to enjoin the transaction.
May redeem such excess shares.
Automatically transfer any excess shares to a charitable trust for the benefit of a charitable beneficiary.

If such excess shares are transferred to a trust for the benefit of a charitable beneficiary, the charitable trustee shall sell the excess shares and the shareholder will be paid the net proceeds from the sale equal to the lesser of: (1) the price paid by

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the shareholder or the “market price” of our shares if no value was paid or (2) the price per share received by the charitable trustee.

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If shares are acquired in violation of the ownership limits or the restrictions on transfer described above:

Transferee may lose its power to dispose of the shares; and
Transferee may incur a loss from the sale of such shares if the fair market price decreases.

These limitations may have the effect of preventing a change of control or takeover of us by a third party, even if the change in control or takeover would be in the best interest of our shareholders.

Complying with REIT requirements may restrict our ability to operate in a way to maximize profits.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders, and the ownership of our common shares. For example, we may be required to pay dividends to our shareholders at disadvantageous times, including when we do not have readily available funds. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to forego or liquidate otherwise attractive investments which could negatively impact shareholder value.

To qualify as a REIT, at the end of each calendar quarter, at least 75% of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets), in general, cannot include more than 10% of the voting securities of any one issuer or more than 10% of the value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries. Therefore, we may be required to liquidate otherwise attractive investments or may be forced to forego attractive investments to satisfy these requirements. Such action or inaction could be adverse to our shareholder interests.

Gains from asset sales may be subject to a 100% prohibited transaction tax, which tax could reduce the Trust’s available assets and reduce shareholder value.

We may have to sell assets from time to time to satisfy our REIT distribution requirements and other REIT requirements or for other purposes. The IRS may posit one or more asset sales may be “prohibited transactions.” If we are deemed to have engaged in a “prohibited transaction,” our gain from such sale would be subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax, but we cannot assure you we will be able to qualify for the safe harbor. We will use reasonable efforts to avoid the 100% tax and we do not intend to hold assets in a manner to cause their dispositions to be treated as “prohibited transactions,” but we cannot assure you the IRS will not challenge our position, especially if we make frequent sales or sales of assets in which we have short holding periods. Payment of a 100% tax would adversely affect our results of operations.

Ordinary dividends payable by REITs generally are taxed at the higher ordinary income rate which could reduce the net cash received by shareholders.

The maximum U.S. federal income tax rate for “qualified dividends” payable by U.S. corporations to individual U.S. shareholders currently is 20%.  In addition, the 3.8% tax on net investment income may apply to such dividends. In general, ordinary dividends payable by REITs to its individual U.S. shareholders, however, are generally not eligible for the reduced rates and generally are taxed at ordinary income rates (for REIT dividends received after December 31, 2017, the maximum individual income tax rate currently is 37%, but the current maximum, effective federal income tax rate as to REIT dividends may be reduced to 29.6% because of a partial deduction that may apply with respect to REIT dividends; in addition, the 3.8% tax on net investment income may apply to REIT dividends). It is possible also thatpossible tax legislation

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enacted in 2019 that has or subsequent yearsmay be enacted might increase this rate differential. The differing treatment of dividends received from REITs and other corporations might cause individual investors to view an investment in REITs as less attractive related to other corporations which might be detrimental to our ability to raise additional funds through the sale of our common shares.

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Changes in legislative or other actions affecting REITs may adversely affect our status as a REIT.

The rules dealing with U.S. federal income taxation are constantly under review by the legislative process, the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may apply retroactively) could adversely affect us or our shareholders. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the federal income tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification. We cannot predict whether, when, in what forms, or with what effective dates, the laws applicable to us or our shareholders may be changed.

Our Board of Trustees may revoke our REIT election without shareholder approval, and we would no longer be required to make distributions of our net income.

Our Board of Trustees can revoke or otherwise terminate our REIT election without the approval of our shareholders if our Board determines it is not in our best interest to continue to qualify as a REIT. In such case, we would become subject to U.S. federal income tax on our taxable income, and we no longer would be required to distribute most of our net income to our shareholders, which may reduce the total return to our shareholders and affect the value of the shares.

Risks Related to Tax-Exempt Investors

Common shares may not be a suitable investment for tax-exempt investors.

There are special considerations that apply to investing in common shares on behalf of a trust, pension, profit sharing or 401(k) plans, health or welfare plans, trusts, individual retirement accounts (IRAs), or Keogh plans. If you are investing the assets of any of the above in common shares, you should satisfy yourself:

Your investment is consistent with your fiduciary obligations under applicable law, including common law, ERISA and the Internal Revenue Code;Code.
Your investment is made in accordance with the documents and instruments that govern the trust, plan or IRA, including any investment policy;policy.
Your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;Code.
Your investment will not impair the liquidity of the trust, plan or IRA;IRA.
Your investment will not produce “unrelated business taxable income” for the trust, plan or IRA;IRA.
You will be able to value the assets of the trust, plan or IRA annually in accordance with ERISA requirements and applicable provisions of the trust, plan, or IRA; and
Your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

We have not evaluated, and will not evaluate, whether an investment in us is suitable for any particular trust, plan, or IRA.

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Under certain circumstances, tax-exempt shareholders may be subject to unrelated business taxable income, which could adversely affect such shareholders.

Neither ordinary nor capital gain distributions with respect to our common shares nor gain from the sale of our common shares, in general, should constitute unrelated business taxable income to tax-exempt shareholders. The following, however, are some exceptions to this rule:

Under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our common shares may be treated as unrelated business taxable income if our common shares are held predominately by qualified employee pension trusts (which we do not expect to be the case);.
Part of the income and gain recognized by a tax-exempt shareholder with respect to common shares would constitute unrelated business taxable income if the tax-exempt shareholder incurs debt to acquire the common shares; and
Part or all of the income or gain recognized with respect to our common shares held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Internal Revenue Code may be treated as unrelated business taxable income.

Therefore, tax-exempt shareholders are not assured all dividends received from the trust will be tax-exempt.

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Risks Related to Our Relationship with the Advisor and Its Affiliates

We depend on our Advisor for the successful operations of the REIT, and if required, we may not be able to find a suitable replacement advisor.

Our ability to achieve our investment objectives is dependent upon the successful performance of our Advisor in locating attractive acquisitions, advising on dispositions of real estate properties and other real estate related assets, advising on any financing arrangements and other administrative tasks to operate our business. If the Advisor suffers or is distracted by adverse financial and operational problems in connection with its operations unrelated to us or for any reason, it may be unable to allocate a sufficient amount of time and resources to our operations. If this occurs, our ability to achieve our investment objectives or pay dividends to our shareholders may be adversely affected. Any adversity experienced by the Advisor or problems in our relationship with the Advisor could also adversely impact the operation of our properties and, consequently, our cash flow and ability to pay dividends to shareholders.

Either we or the Advisor can terminate the Advisory Agreement upon 60 days written notice to the other party for any reason, or we can terminate the Advisory Agreement immediately for cause or material breach of the Advisory Agreement. In addition, the Board of Trustees may determine not to renew the Advisory Agreement in any year. If this occurs, we would need to find another advisor to provide us with day-to-day management services or engage employees to provide these services directly to us, which would likely be difficult to do and may be costly. There can be no assurances we would be able to find a suitable replacement advisor or suitable employees or enter into agreements for such services on acceptable terms.

The termination or replacement of the Advisor could trigger a default or repayment event under financings.

Lenders providing financing for our acquired properties may include provisions in the mortgage loan documentation that state the termination or replacement of the Advisor is an event of default or an event triggering acceleration of the repayment of the loan in full. Even though we will attempt to have such provisions excluded from the loan documents, the lenders may still require them to be included. In addition, the termination or replacement of the Advisor could trigger an event of default under any credit agreement governing a line of credit we may obtain. If an event of default or repayment event occurs with respect to any of our properties, our ability to achieve our investment objectives could be materially adversely affected.

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The Advisor may not be able to retain its key employees, which could adversely affect our ability to carry out our investment strategies.

We depend on the Advisor’s key officers, employees and governors. However, none of these individuals have an employment agreement with the Advisor and the loss of any or all of such person’s services and the Advisor’s inability to find, or any delay in finding, replacements with equivalent skills and experience, could adversely impact our ability to successfully carry out our investment strategies and achieve our investment objectives.

Our future success also depends on the Advisor’s and its affiliates’ ability to identify, hire, train and retain highly qualified real estate, managerial, financial, marketing, and technical personnel to provide the services to us pursuant to the Advisory Agreement and any other written services agreement, including any property management agreements. Competition for such personnel is intense, and the Advisor or its affiliates may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary personnel could have a material adverse effect on our business and results of operations.

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Risks Related to Investments in Real Estate

Insufficient geographic diversity of our real estate investments could adversely affect our operating results if economic changes impact real estate markets where we own significant assets.

Geographic concentration of our properties may expose us to economic downturns in those areas where our properties are located. A recession in any area where we own several properties or interests in properties could adversely affect our ability to generate or increase operating revenues, locate, and retain financially sound tenants or dispose of unproductive properties. In addition, it could have an adverse impact on our tenant’s ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Currently, the majority of our properties are located in North Dakota and Minnesota, and we hold several properties in Fargo, North Dakota and Moorhead, Minnesota. To the extent weak economic or real estate conditions affect North Dakota, Minnesota, or other markets in which we own properties more severely than other areas of the country, our financial performance could be negatively impacted.

We may invest in and develop undeveloped real property, which requires us to pay expenses prior to receiving any income on the property.

We have the discretion to invest up to 10% of our total assets in undeveloped property. When we invest in undeveloped property, such property does not generate operating revenue while costs are incurred to develop the property and may generate other expenses including property taxes and insurance. In addition, construction and development of such properties may not be completed within budget or as scheduled and projected rental levels may not be achieved. In addition to the risks of real estate investments in general, an investment in undeveloped property is subject to additional risks, including the expense and delay which may be associated with rezoning the land for a higher use and the development and environmental concerns of governmental entities and/or community groups. Therefore, we will not generate income on such property until development is completed and we begin leasing the property.

We may acquire multiple properties in a single transaction, which may adversely affect our operations through the inclusion of less desirable investments or financing requirements greater than we would otherwise be willing to incur.

Periodically, we may acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single property acquisitions, and the risk a multiple property acquisition does not close may be greater than in a single property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns we can earn on such

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cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for dividends. Any of the foregoing events may increase the risk of adverse business results and negatively affect our results of operations.

We may invest in co-ventures, where our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of a real estate investment and lower our overall return.

We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with our Advisor, its affiliates, our trustees, or third parties having investment objectives similar to ours in the acquisition of real estate investments. In such arrangements, we may be acquiring non-controlling interests in or sharing responsibility for managing the affairs of the joint venture.investment. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture.authority. Investments in joint venturessuch as these may, under certain circumstances, involve risks not present where another party is not involved, including the possibility that partners or co-venturersco-investees might become bankrupt or fail to fund their required capital contributions. Co-venturersCo-investees may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.

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Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturerco-investee would have full control over the joint venture. Disputes between us and co-venturersco-investees may result in litigation or arbitration that would increase our expenses and prevent our management and the Advisor from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturersco-investees might result in subjecting additional risk to properties owned by the joint venture to additional risk.investment. In addition, we may in certain circumstances be liable for the actions of our co-venturers.co-investees. Any of these risks could subject us to liabilities in excess of those contemplated and reduce our returns on that investment.

We could experience difficulties or delays renewing leases or re-leasing space, which will increase our costs to maintain such properties without receiving income.

We derive a significant portion of our net income from rent received from our tenants. Our properties include both residential as well as commercial properties. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. If lease defaults occur, we may experience delays in enforcing our rights as landlord. Also, if our tenants decide not to renew their leases, terminate early or default on their lease, we may not be able to re-let the space or may experience delays in finding suitable replacement tenants. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, particularly commercial tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay dividends to shareholders could be materially adversely affected. Further, if one of our properties cannot be leased on terms and conditions favorable to us, the property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all.

We could face potential adverse effects if a commercial tenant is unable to make timely rental payments, declares bankruptcy or become insolvent.

If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Delayed rental payments could adversely affect cash flow available for dividends. If a commercial tenant declares bankruptcy or becomes insolvent, it may adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. However, if a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy. If a court authorizes the commercial tenant to reject and terminate its lease with us, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In addition, it is unlikely a bankrupt tenant would pay in full amounts it owes us under a lease. Additionally, we may be required to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as lower our rental rates to reflect any decline in market rents. This shortfall could adversely affect our cash flow and results of operations.

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Investments in real estate are illiquid, and we may not be able to resell a property on terms favorable to us.

We intend to hold real estate properties until such time as our Advisor determines a sale or other disposition appears to be advantageous or when our shareholders approve our termination and liquidation. Because real estate investments are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may be a result of economic conditions, availability of financing, interest rates and other factors beyond our control. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate investments by their nature are often difficult or time consuming to liquidate. In addition, federal tax laws imposing a 100% excise tax on gains from sales of certain types of property sales by a REIT (generally, property viewed as being purchased for resale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our shareholders. These restrictions could adversely affect our ability to achieve our investment objectives.

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Valuations and appraisals of our investments may not necessarily correspond to realizable value.

We value our real estate properties initially at cost, which we expect to represent fair value at that time. After acquisition, valuations may include appraisals of our properties periodically. The valuation methodologies used to value our real estate properties will involve subjective judgments regarding such factors as comparable sales, rental and operating expense data, the capitalization and/or discount rate and projections of future rent and expenses based on appropriate analysis. Although we believe our valuation procedures are designed to determine the accurate fair value of our assets, appraisals and valuations of our real estate properties and other investments assets will be only estimates of fair value and therefore may not correspond to realizable value upon a sale of those assets.

Uninsured losses related to real estate investments may adversely affect our results of operation.

We purchase, and we may be required by lenders of mortgage loans or other financings to obtain, certain insurance coverage on our real estate investments. Either the property manager or the Advisor selects policy specifications and insured limits which it believes to be appropriate and adequate given the risk of loss, the cost of the coverage and industry practice. The nature of the tenants at the properties we hold may expose us and our operations to an increase in liability for personal injuries or other losses. There can be no assurance that such insurance will be sufficient to cover potential liabilities. Some of our policies may be subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. Furthermore, insurance against certain risks, such as terrorism, flood, and toxic mold, may be unavailable or available at commercially unreasonable rates or in amounts less than the full market value or replacement cost of the properties. There can be no assurance particular risks that are currently insurable, will continue to be insurable on an economical basis or current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment in a property as well as the anticipated future cash flows from such properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. We may also be liable for any uninsured or underinsured personal injury, death, or property damage claims, which could result in decreased dividends to shareholders.

We may acquire a property or properties “AS IS,” which increases the risk of an investment that requires us to remedy defects or costs without recourse to the prior owner.

We may acquire real estate properties “as is” with only limited representations and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. As a result, if defects in the property (including any building on the property) or other matters adversely affecting the property are discovered, we may not be able to pursue a claim for any or all damage against the property seller. Such a situation could negatively affect our results of operations.

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We rely on affiliated and outside property managers to properly manage and lease our properties.

The Advisor and an affiliate of the Advisor serve as our principal property managers, and the Advisor has hired and intends to hire other affiliates and/or third parties to serve as additional property managers, to manage our properties and act as leasing agents to lease vacancies in our real estate properties. These property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not, and the Advisor will not as to its affiliates and third partythird-party property managers, supervise any of the property managers or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in large part on the ability of our property managers to manage the day-to-day operations and their ability to lease vacancies in our properties. Any adversity experienced by our property managers could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives.

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Risks Related with Our Indebtedness and Financing

Market conditions could adversely affect our ability to obtain financing.

As a REIT, we are required to distribute at least 90% of our taxable income (excluding net capital gains) to our shareholders in each taxable year, and thus our ability to retain internally generated cash is limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties can depend on our ability to obtain debt or equity financing from third parties or the sellers of properties or to sell other properties. Market fluctuations and disruptions in the credit markets could significantly affect our ability to access capital. Reductions in our available borrowing capacity, or inability to establish a credit facility when required or when business conditions warrant, could then limit the number, size and quality of properties we could acquire or the amount of improvements we could make on acquired properties, which could materially affect our ability to achieve our investment objectives and may result in price or value decreases of our real estate assets.

Derivatives and hedging activity could adversely affect cash flow.

In the normal course of business, we use derivatives to manage our exposure to interest rate volatility on debt instruments, including hedging for future debt issuances. At other times we may utilize derivatives to decrease our exposure to floating interest rates. There can be no assurance that these hedging arrangements will have the desired beneficial impact.  These arrangements, which can include a number of counterparties, may expose us to additional risks, including failure of any of our counterparties to perform under these contracts, and may involve extensive costs, such as transaction fees or breakage costs, if we terminate them.  No strategy can completely insulate us from the risks associated with interest rate.rate volatility.

The phase out of LIBOR and transition to SOFR as a benchmark interest rate could have adverse effects.

In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2021,2023, it is expected that no new contracts will reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including the Company, are impacted by the risks associated with this transition and therefore it could adversely affect our operations and cash flows.

We could face difficulties in refinancing loans involving balloon payment obligations.

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or our ability to sell the particular property. If we try and refinance the debt, we may not be able to obtain terms as favorable as the original loan. Based on historicalcurrent market interest rates, current interest rates are low and, as a result, the interest rate obtained upon refinancing in subsequent years may be higher than the original loan. If we are not able to refinance the debt, or obtain acceptable terms, we may be required to sell the mortgaged property at a time which may not permit

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realization of the maximum return on such property. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets.

Lenders may require restrictive covenants relating to our operations, which may adversely affect our flexibility and our ability to achieve our investment objectives.

Mortgage loans obtained by us could impose restrictions that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in the property. Loan documents may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, replace the Advisor or the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

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Increases in interest rates on variable rate debt incurred and new financings by us will reduce cash available for dividends.

Increases in interest rates on any variable rate debt incurred or new financings would increase our interest costs, which could reduce our cash flows and our ability to pay dividends to our shareholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

Complying with REIT requirements may limit our ability to hedge liabilities through tax-efficient means, which may adversely affect our results of operations.

We have entered into a number of hedging transactions and may enter into additional such transactions. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments. The REIT provisions of the Code substantially limit our ability to hedge liabilities. Because we conduct substantially all of our operations through our operating partnership, any income from a hedging transaction entered into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets will not constitute gross income to us for purposes of the 75% or 95% gross income test. As a result, we may be required to limit the operating partnership’s use of advantageous hedging techniques or to implement hedges through certain taxable corporations. This could increase the costs and risks of hedging activities. We intend to structure any hedging transaction in a manner that does not jeopardize our ability to qualify as a REIT.

Risks Related to Other Investments

Investments in other real estate related investments could involve higher risks than investment in real estate properties, which could adversely affect our operations and ability to make dividend payments.

We are permitted to invest in other real estate assets.  We can invest in real estate equity, debt, and derivative securities.  These assets can be quite risky, illiquid, and volatile and the value of these assets could cause the value of our shares to fluctuate and could result in losses that materially adversely affect our results of operations.

Risks Related to Conflicts of Interest

We are subject to several conflicts of interest arising out of our relationships with our affiliates, including our Advisor and its affiliates.

There are conflicts of interest in our relationship with the Advisor and its affiliates and several trustees, which could adversely affect our operations and business operations.

We are subject to potential conflicts of interest arising out of our relationships with the Advisor, its affiliates, and certain trustees. Conflicts of interest may arise among a trustee or the Advisor and its respective affiliates, on the one hand, and

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us and our shareholders, on the other hand. As a result of these conflicts, the trustee or Advisor may favor its own interests or the interests of its affiliates over the interest of our shareholders or operating partnership.

Division of Loyalty/Allocation of time and effort

Several of our officers and/or trustees serve as officers, governors, and owners of one or more entities (certain of which are affiliated with our Advisor or trustees), property managers, tenants of our properties, brokerage companies and other real estate entities owning real estate investments. As a result, these individuals owe duties to these other entities and their investors, which may conflict with the duties that they owe to us and our shareholders. Their loyalties to these other entities and investors could result in action or inaction detrimental to our business or result in conflicts relating to the allocation of their time and services, which could harm implementation of our business strategy and investment and leasing opportunities.

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Allocation of investment opportunities

The Advisor and its affiliates are or may become committed to the management of other business ventures. Accordingly, there may be conflicts of interest between our investments and other investments or business ventures in which the Advisor and its affiliates are participants. In addition, the Advisor and its officers will advise other investment programs that invest in commercial real estate properties and real estate related assets in which we may be interested. Therefore, the Advisor could face conflicts of interest in allocating and determining which programs will have the opportunity to acquire and participate in such investments as they become available. As a result, other investment programs advised by the Advisor may compete with us with respect to investors and certain investments we may want to acquire.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

General

As of December 31, 2020, we owned 179 properties, containing approximately 10,328 apartment units and 1,642,000 square feet of leasable commercial space.

ItOur policy is our policy to acquire assets with an intention to hold these assets as long-term investments seeking income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rent. These types of investments are the core of our strategy of creating shareholder value. We currently own and maintain a portfolio of real estate diversified by geographical location and by type and size.  Sterling’s current acquisition strategy and focus is on multifamily apartment properties. Our Advisor monitors industry trends and invests in property believed to provide the most favorable return balanced with risk. We attempt to manage our real estate portfolio by evaluating changes or trends in the industries in which our tenants operate, the creditworthiness of our tenants and changes or trends in the area demographics surrounding our properties for evidence that our properties will continue to meet our investment objectives of cash flow, preservation of capital and capital appreciation.

With the exception of single tenant buildings, theThe majority of our real estate investments are managed by a third party. Property management firms usually receive between 2% and 5% of gross rent collection for their services. Substantially all of our commercial revenues consist of base rents received under leases having terms ranging from month-to-month to over 25 years. More than half of our existing commercial property leases as of December 31, 20202022 contain “step up” rental clauses providing for annual increases in the base rental payments of approximately 1.0% to 3.0% each year during the term of the lease.

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Properties

The Trust’s 179As of December 31, 2022, we owned 185 properties are located in 1112 states, primarily in North Dakotacontaining approximately 11,300 apartment units and Minnesota with others located in 1,498,000 square feet of leasable commercial space.Arkansas, Colorado, Iowa, Louisiana, Michigan, Mississippi, Missouri, Nebraska and Wisconsin. The residential and commercial portfolio of properties includes a diversified mixture of multifamily, single, and multi-tenant retail and office buildings as well as industrial and medical facility properties. The majority of the properties are located in the largest cities in the states of North Dakota and Minnesota. Please see Notes 2 and 3 to the consolidated financials included in this report for more information.

As of December 31, 2020,2022, approximately 74.4%78.8% (based on cost) of the properties were apartment communities located primarily in North Dakota and Minnesota with others located in Missouri and Nebraska.communities. Most multifamily dwelling properties are leased to a variety of tenants under short-term leases of less than a year.

As of December 31, 2020,2022, approximately 25.6%21.2% (based on cost) of the properties were comprised of industrial, office, retail and medical commercial properties located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin.properties. Most commercial properties are leased to a variety of tenants under long-term leases.

The following table sets forth certain information regarding each of our properties owned, including unconsolidated affiliates, as of December 31, 2020 (in thousands, except units or leasable sq. ft.).

# of

Physical

Units or

Occupancy

Year

Leasable

Total

at December

Property

    

Location

    

Acquired

    

Sq. Ft

    

Investment

    

31, 2020

32nd Avenue Office

Fargo, ND

2004

31,750

$

4,356

100.00

%

Amberwood

Grand Forks, ND

2016

95

4,081

96.85

%

Applebee’s Neighborhood Bar & Grill

Bloomington, MN

2010

5,043

2,208

100.00

%

Applebee’s Neighborhood Bar & Grill

Coon Rapids, MN

2010

5,576

2,442

100.00

%

Applebee’s Neighborhood Bar & Grill

Savage, MN

2010

4,936

1,518

100.00

%

Arbor

Bismarck, ND

2013

12

696

99.77

%

Arbor II

Bismarck, ND

2013

12

700

97.76

%

Arbor III

Bismarck, ND

2013

12

696

99.17

%

Ashbury

Fargo, ND

2013 & 2016

61

4,139

97.39

%

Auburn II

Fargo, ND

2007

24

1,111

98.65

%

Autumn Ridge

Grand Forks, ND

2004

144

10,381

98.43

%

Barrett Arms

Crookston, MN

2014

24

1,258

93.40

%

Bayview

Fargo, ND

2007

100

5,760

96.00

%

Becker Furniture

Waite Park, MN

2006

30,200

1,578

100.00

%

Bell Plaza* (FKA Northland Plaza)

Bloomington, MN

2015

299,660

52,020

75.50

%

Belmont

Bismarck, ND

2020

26

1,592

95.60

%

Berkshire

Fargo, ND

2008

12

474

99.16

%

Betty Ann

Fargo, ND

2009

24

1,012

91.10

%

Biolife Plasma Center

Bismarck, ND

2008

11,671

2,881

100.00

%

Biolife Plasma Center

Grand Forks, ND

2008

13,190

2,944

100.00

%

Biolife Plasma Center

Janesville, WI

2008

12,225

2,388

100.00

%

Biolife Plasma Center

Mankato, MN

2008

13,181

4,149

100.00

%

Biolife Plasma Center

Marquette, MI

2008

11,737

3,215

100.00

%

Biolife Plasma Center

Onalaska, WI

2008

12,180

2,531

100.00

%

Biolife Plasma Center

Oshkosh, WI

2008

12,191

2,297

100.00

%

Biolife Plasma Center

Sheboygan, WI

2008

13,230

2,654

100.00

%

Biolife Plasma Center

Stevens Point, WI

2008

13,190

2,595

100.00

%

Birchwood I

Fargo, ND

2017

18

468

99.13

%

Birchwood II

Fargo, ND

2017

48

2,826

95.40

%

Bradbury

Bismarck, ND

2018

96

6,057

94.14

%

Bridgeport

Fargo, ND

2016

120

8,337

97.01

%

Bristol Park

Grand Forks, ND

2016

80

5,742

94.82

%

Brookfield

Fargo, ND

2008

72

2,620

95.82

%

Cambridge (FKA 44th Street)

Fargo, ND

2013

42

2,479

95.06

%

Candlelight

Fargo, ND

2012

66

2,031

93.63

%

Carling Manor

Grand Forks, ND

2008

12

837

94.52

%

Carlton Place

Fargo, ND

2008

213

8,874

97.61

%

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Carr

Fargo, ND

2017

18

874

99.20

%

Cedars 4

Fargo, ND

2018

18

1,225

97.93

%

Chandler 1802

Grand Forks, ND

2014

24

1,357

95.28

%

Chandler 1834

Grand Forks, ND

2018

12

670

98.20

%

Chandler 1866

Grand Forks, ND

2005

12

354

96.10

%

Cherry Creek (FKA Village)

Grand Forks, ND

2008

35

1,865

96.78

%

Cityside

Fargo, ND

2018

36

1,328

96.92

%

Columbia Park Village

Grand Forks, ND

2020

12

648

90.86

%

Columbia West

Grand Forks, ND

2008

70

4,435

95.21

%

Country Club

Fargo, ND

2011

40

1,826

94.68

%

Countryside

Fargo, ND

2011

24

932

98.76

%

Courtyard

St. Louis Park, MN

2013

151

9,237

97.03

%

Dairy Queen

Dickinson, ND

2012

2,811

1,330

100.00

%

Dairy Queen

Moorhead, MN

2011

2,712

1,185

100.00

%

Dairy Queen

Apple Valley, MN

2018

5,348

3,079

100.00

%

Dakota Manor

Fargo, ND

2014

54

2,788

92.41

%

Danbury

Fargo, ND

2007

135

7,550

97.46

%

Dellwood Estates

Anoka, MN

2013

132

11,935

97.91

%

Eagle Run

West Fargo, ND

2010

144

7,030

96.93

%

Eagle Sky I

Bismarck, ND

2016

20

1,604

99.39

%

Eagle Sky II

Bismarck, ND

2016

20

1,680

92.83

%

East Bridge

Fargo, ND

2017

58

6,444

94.01

%

Eastbrook

Bismarck, ND

2020

24

1,381

96.43

%

Echo Manor

Hutchinson, MN

2014

30

1,183

99.24

%

Eide Bailly Building***

Fargo, ND

2007

74,646

9,302

100.00

%

Emerald Court

Fargo, ND

2008

24

1,124

90.42

%

Essex

Fargo, ND

2017

18

928

97.66

%

Evergreen Terrace

Omaha, NE

2020

144

8,636

97.36

%

Fairview

Bismarck, ND

2008

84

5,436

96.78

%

Family Dollar Store

Mandan, ND

2010

9,100

820

100.00

%

First International Bank & Trust

Moorhead, MN

2011

3,510

1,014

100.00

%

Flickertail

Fargo, ND

2008

180

7,793

95.36

%

Forest Avenue

Fargo, ND

2013

20

815

99.31

%

Four Points Office Building

Fargo, ND

2007

12,383

1,471

100.00

%

Foxtail Creek Townhomes

Fargo, ND

2020

30

1,488

89.81

%

Galleria III

Fargo, ND

2010

18

1,143

92.89

%

Garden Grove

Bismarck, ND

2016

95

7,221

96.70

%

Gate City Bank

Grand Forks, ND

2008

17,406

1,951

100.00

%

Georgetown

Fridley, MN

2014

468

34,139

95.88

%

Glen Pond

Eagan, MN

2011

528

44,184

91.64

%

Goldmark Office Park

Fargo, ND

2007

124,613

24,143

94.42

%

Grand Forks Marketplace**

Grand Forks, ND

2003

182,522

21,484

52.18

%

Granger Court

Fargo, ND

2013

59

3,225

98.61

%

Great American Insurance Building

Fargo, ND

2005

15,000

2,247

73.82

%

Griffin Court

Moorhead, MN

2014

128

5,221

90.51

%

Guardian Building Products

Fargo, ND

2012

100,600

3,754

100.00

%

Hannifin

Bismarck, ND

2013

14

789

97.16

%

Harrison Richfield

Grand Forks, ND

2007

140

7,907

96.75

%

Hartford

Fargo, ND

2018

30

1,421

92.06

%

Hawn

Fargo, ND

2020

48

2,557

95.51

%

Highland Meadows

Bismarck, ND

2011

144

10,485

96.01

%

Hunter’s Run I

Fargo, ND

2007

12

481

97.46

%

Hunter’s Run II

Fargo, ND

2008

12

518

94.07

%

Huntington

Fargo, ND

2015

10

435

99.89

%

Islander

Fargo, ND

2011

24

1,208

90.15

%

Jadestone

Fargo, ND

2017

18

895

92.53

%

Kennedy

Fargo, ND

2013

12

813

97.59

%

Library Lane

Grand Forks, ND

2007

60

3,002

92.32

%

Madison (FKA Columbine)

Grand Forks, ND

2015

12

693

88.21

%

Maple Ridge

Omaha, NE

2008

174

10,702

95.58

%

Maplewood

Maplewood, MN

2014

240

16,757

97.62

%

Maplewood Bend

Fargo, ND

2009 and 2010

182

7,469

92.56

%

Martha Alice

Fargo, ND

2009

24

955

94.61

%

Mayfair (FKA Colony Manor)

Grand Forks, ND

2008

24

1,319

94.07

%

Midtown Plaza

Minot, ND

2004

17,808

1,347

87.49

%

Monticello

Fargo, ND

2013

18

903

99.16

%

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Montreal Courts

Little Canada, MN

2013

444

30,391

97.20

%

Morningside

Fargo, ND

2018

17

761

95.74

%

Oak Court

Fargo, ND

2008

81

3,080

91.47

%

Oakview Townhomes (FKA Arrowhead)

Grand Forks, ND

2017

82

5,931

98.60

%

O'Reilly Auto Store

Mandan, ND

2010

6,300

679

100.00

%

Pacific Park I

Fargo, ND

2013

30

999

94.47

%

Pacific Park II

Fargo, ND

2013

39

1,089

���

94.38

%

Pacific South

Fargo, ND

2013

15

553

91.13

%

Park Circle

Fargo, ND

2017

18

937

97.29

%

Parkview Arms

Bismarck, ND

2015

62

4,621

97.04

%

Parkway Office (FKA Echelon Building)

Fargo, ND

2006

17,000

1,938

100.00

%

Parkwest Gardens

West Fargo, ND

2014

142

8,196

94.44

%

Parkwood

Fargo, ND

2008

40

1,389

94.21

%

Pebble Creek

Bismarck, ND

2008

70

4,128

98.27

%

Plumtree

Fargo, ND

2017

18

939

98.22

%

Prairiewood Court I & II

Fargo, ND

2006 and 2007

60

2,387

95.74

%

Prairiewood Meadows

Fargo, ND

2012

85

2,095

94.72

%

Quail Creek

Springfield, MO

2015

164

10,332

94.33

%

Redpath

White Bear Lake, MN

2016

25,817

4,017

100.00

%

Regis Building

Edina, MN

2009

102,448

13,131

100.00

%

Robinwood

Coon Rapids, MN

2014

120

8,357

98.12

%

Rosedale Estates

Roseville, MN

2014

360

26,322

94.23

%

Rosegate

Fargo, ND

2008

90

3,560

94.22

%

Rosser

Bismarck, ND

2020

24

1,382

96.90

%

Roughrider

Grand Forks, ND

2016

12

699

90.17

%

Saddlebrook

West Fargo, ND

2008

60

1,804

93.91

%

Sage Park (FKA Brighton Village)

New Brighton, MN

2014

240

17,727

97.76

%

Sargent

Fargo, ND

2017

36

1,734

90.27

%

Schrock

Fargo, ND

2013

18

752

97.76

%

Sheridan Pointe

Fargo, ND

2013

48

2,907

97.66

%

Sierra Ridge

Bismarck, ND

2006 and 2011

136

10,438

97.04

%

Somerset

Fargo, ND

2008

75

4,027

97.23

%

Southgate

Fargo, ND

2007

162

6,472

96.51

%

Southview III

Grand Forks, ND

2011

18

738

86.54

%

Southview Village

Fargo, ND

2007

72

3,162

92.89

%

Spring

Fargo, ND

2013

25

1,036

88.96

%

Stanford Court

Grand Forks, ND

2013

96

4,769

91.73

%

Stonefield

Bismarck, ND

2014

192

32,097

98.36

%

Stony Brook

Omaha, NE

2009

148

11,620

97.73

%

Summerfield

Fargo, ND

2015

18

825

93.69

%

Summit Point

Fargo, ND

2015

87

6,678

95.41

%

Sunchase

Fargo, ND

2017

36

1,878

96.07

%

Sunset Ridge

Bismarck, ND

2008 and 2010

180

13,826

97.20

%

Sunview

Grand Forks, ND

2008

36

2,014

95.13

%

Sunwood Estates

Fargo, ND

2007

81

4,332

96.43

%

Terrace on the Green

Moorhead, MN

2012

116

3,768

85.56

%

Thunder Creek

Fargo, ND

2018

57

5,009

90.30

%

Titan Machinery

Bismarck, ND

2015

22,293

3,423

100.00

%

Titan Machinery

Dickinson, ND

2012

17,760

1,790

100.00

%

Titan Machinery

Fargo, ND

2012

29,800

3,336

100.00

%

Titan Machinery

Marshall, MN

2011

67,600

5,081

100.00

%

Titan Machinery

Minot, ND

2012

23,690

2,630

100.00

%

Titan Machinery

North Platte, NE

2016

18,910

1,769

100.00

%

Titan Machinery

Sioux City, IA

2013

36,332

4,567

100.00

%

Trustmark

Fargo, ND

2020

45,755

7,336

-

%

Twin Oaks

Hutchinson, MN

2014

80

4,442

98.87

%

Twin Parks

Fargo, ND

2008

66

2,589

97.45

%

Valley Homes Duplexes

Grand Forks, ND

2015

24

2,463

94.90

%

Valley View

Golden Valley, MN

2014

72

7,626

99.32

%

Village Park

Fargo, ND

2008

60

2,414

96.68

%

Village West

Fargo, ND

2008

80

2,980

95.63

%

Walgreens

Alexandria, LA

2009

14,560

4,296

100.00

%

Walgreens

Batesville, AR

2009

14,820

7,616

100.00

%

Walgreens

Denver, CO

2011

13,390

5,210

100.00

%

Walgreens

Fayetteville, AR

2009

14,550

5,810

100.00

%

Walgreens

Laurel, MS

2010

14,820

4,542

100.00

%

27

Table of Contents

Washington

Grand Forks, ND

2016

17

745

97.07

%

Wells Fargo Building

Duluth, MN

2007

95,961

10,880

77.80

%

West Oak

Fargo, ND

2017

18

820

94.61

%

Westcourt

Fargo, ND

2014

64

3,583

92.32

%

Westside

Hawley, MN

2010

14

507

95.24

%

Westwind

Fargo, ND

2008

18

632

94.86

%

Westwood Estates

Fargo, ND

2008

200

8,098

96.07

%

Willow Park

Fargo, ND

2008

102

6,668

97.98

%

Wolf Creek

Fargo, ND

2020

54

5,336

95.71

%

Woodland Pines (FKA Fredericksburg)

Omaha, NE

2018

173

13,243

97.88

%

* 70.00% ownership interest

** 66.67% ownership interest

*** 50.00% ownership interest

The following information applies to all of our operating properties:

We believe all of our properties are adequately covered by insurance and suitable for their intended purposes;purposes.
Our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and
Depreciation is provided on a straight-line basis over the estimated useful lives of the buildings.

24

Table of Contents

The below table sets forth certain information regarding each of our properties owned, including unconsolidated affiliates, as of December 31, 2022 (in thousands, except units or leasable sq. ft.).

# of

Physical

Units or

Occupancy

Year

Leasable

Total

at December

Property

    

Location

    

Acquired

    

Sq. Ft

    

Investment

    

31, 2022

Bluemont Lakes Financial Center

Fargo, ND

2004

31,750

$

5,255

81.17

%

Amberwood

Grand Forks, ND

2016

96

4,147

94.67

%

Applebee’s Neighborhood Bar & Grill

Coon Rapids, MN

2010

5,576

2,442

100.00

%

Arbor

Bismarck, ND

2013

12

696

98.49

%

Arbor II

Bismarck, ND

2013

12

700

96.52

%

Arbor III

Bismarck, ND

2013

12

696

97.80

%

Ashbury

Fargo, ND

2013 & 2016

61

4,139

99.52

%

Auburn II

Fargo, ND

2007

24

1,111

98.45

%

Autumn Ridge

Grand Forks, ND

2004

144

10,418

95.50

%

Barrett Arms

Crookston, MN

2014

24

1,281

94.35

%

Bayview

Fargo, ND

2007

100

6,083

92.18

%

Bell Plaza* (FKA Northland Plaza)

Bloomington, MN

2015

299,660

51,421

65.57

%

Belmont

Bismarck, ND

2020

26

1,601

88.55

%

Berkshire

Fargo, ND

2008

12

525

97.96

%

Betty Ann

Fargo, ND

2009

24

1,012

97.58

%

Biolife Plasma Center

Bismarck, ND

2008

11,671

2,881

100.00

%

Biolife Plasma Center

Grand Forks, ND

2008

13,190

2,944

100.00

%

Biolife Plasma Center

Janesville, WI

2008

12,225

2,388

100.00

%

Biolife Plasma Center

Mankato, MN

2008

13,181

4,149

100.00

%

Biolife Plasma Center

Marquette, MI

2008

11,737

3,215

100.00

%

Biolife Plasma Center

Onalaska, WI

2008

12,180

2,531

100.00

%

Biolife Plasma Center

Oshkosh, WI

2008

12,191

2,297

100.00

%

Biolife Plasma Center

Sheboygan, WI

2008

13,230

2,654

100.00

%

Biolife Plasma Center

Stevens Point, WI

2008

13,190

2,595

100.00

%

Birchwood I

Fargo, ND

2017

12

468

98.78

%

Birchwood II

Fargo, ND

2017

54

2,881

96.96

%

Bradbury

Bismarck, ND

2018

96

6,093

93.48

%

Briar Pointe

Fargo, ND

2021

30

1,935

97.61

%

Bridgeport

Fargo, ND

2016

120

8,420

98.71

%

Bristol Park

Grand Forks, ND

2016

80

5,837

92.84

%

Brookfield

Fargo, ND

2008

72

2,680

95.90

%

Brownstone

Fargo, ND

2021

72

4,390

96.91

%

Cambridge (FKA 44th Street)

Fargo, ND

2013

42

2,558

99.37

%

Candlelight

Fargo, ND

2012

66

2,214

93.73

%

Carling Manor

Grand Forks, ND

2008

12

838

95.34

%

Carlton Place

Fargo, ND

2008

213

9,072

93.54

%

Carr

Fargo, ND

2017

18

874

99.13

%

Cedars 4

Fargo, ND

2018

18

1,245

97.23

%

Chandler 1802

Grand Forks, ND

2014

24

1,434

96.12

%

Chandler 1834

Grand Forks, ND

2018

12

710

91.43

%

Chandler 1866

Grand Forks, ND

2005

12

384

98.71

%

Chandler 1898

Grand Forks, ND

2022

12

512

100.00

%

Cherry Creek (FKA Village)

Grand Forks, ND

2008

35

2,008

96.95

%

Cityside

Fargo, ND

2018

36

1,396

89.43

%

Columbia Park Village

Grand Forks, ND

2020

12

648

91.03

%

Columbia West

Grand Forks, ND

2008

70

4,487

93.12

%

Country Club

Fargo, ND

2011

40

1,843

95.04

%

Countryside

Fargo, ND

2011

24

951

97.20

%

Courtyard

St. Louis Park, MN

2013

151

9,252

93.37

%

Dairy Queen

Dickinson, ND

2012

2,811

1,331

100.00

%

Dairy Queen

Moorhead, MN

2011

2,712

1,186

100.00

%

Dairy Queen

Apple Valley, MN

2018

5,348

1,673

-

%

Dakota Manor

Fargo, ND

2014

54

2,865

96.57

%

Danbury

Fargo, ND

2007

135

7,547

94.53

%

Dellwood Estates

Anoka, MN

2013

132

12,320

97.50

%

Deer Park

Hutchinson, MN

2022

138

15,091

95.99

%

Desoto Estates

Grand Forks, ND

2022

68

6,111

98.06

%

25

Table of Contents

Desoto Townhomes

Grand Forks, ND

2022

24

3,338

95.85

%

Diamond Bend

Mandan, ND

2022

78

10,971

92.53

%

Eagle Run

West Fargo, ND

2010

144

7,067

96.38

%

Eagle Sky I

Bismarck, ND

2016

20

1,604

96.23

%

Eagle Sky II

Bismarck, ND

2016

20

1,680

94.72

%

East Bridge

Fargo, ND

2017

58

6,490

96.18

%

Eastbrook

Bismarck, ND

2020

24

1,381

87.84

%

Echo Manor

Hutchinson, MN

2014

30

1,198

99.04

%

Eide Bailly Building***

Fargo, ND

2007

74,646

9,331

100.00

%

Emerald Court

Fargo, ND

2008

24

1,144

98.00

%

Essex

Fargo, ND

2017

18

928

87.97

%

Evergreen Terrace

Omaha, NE

2020

144

8,798

95.30

%

Fairview

Bismarck, ND

2008

84

5,467

95.34

%

Family Dollar Store

Mandan, ND

2010

9,100

874

100.00

%

First International Bank & Trust

Moorhead, MN

2011

3,510

1,037

100.00

%

Flagstone

Fargo, ND

2021

120

7,792

97.00

%

Flickertail

Fargo, ND

2008

180

8,151

92.73

%

Forest Avenue

Fargo, ND

2013

20

815

99.19

%

Four Points Office Building

Fargo, ND

2007

12,383

1,494

100.00

%

Foxtail Creek Townhomes

Fargo, ND

2020

30

1,488

96.21

%

Galleria III

Fargo, ND

2010

18

1,144

93.18

%

Garden Grove

Bismarck, ND

2016

95

7,274

92.78

%

Gate City Bank

Grand Forks, ND

2008

17,406

2,200

100.00

%

Georgetown

Fridley, MN

2014

468

33,586

89.63

%

Glen Pond

Eagan, MN

2011

528

44,377

95.38

%

Goldmark Office Park

Fargo, ND

2007

124,613

23,692

100.00

%

Grand Forks Marketplace**

Grand Forks, ND

2003

182,522

26,710

78.04

%

Granger Court

Fargo, ND

2013

59

2,841

96.07

%

Great American Insurance Building

Fargo, ND

2005

15,000

2,360

100.00

%

Guardian Building Products

Fargo, ND

2012

100,600

3,760

100.00

%

Hannifin

Bismarck, ND

2013

14

789

93.51

%

Harrison Richfield

Grand Forks, ND

2007

140

7,915

94.13

%

Hartford

Fargo, ND

2018

30

1,426

92.51

%

Hawn

Fargo, ND

2020

48

2,557

97.89

%

Highland Meadows

Bismarck, ND

2011

144

10,629

96.92

%

Hunter’s Run I

Fargo, ND

2007

12

483

97.71

%

Hunter’s Run II

Fargo, ND

2008

12

518

95.04

%

Huntington

Fargo, ND

2015

10

439

99.18

%

Islander

Fargo, ND

2011

24

1,407

96.76

%

Jadestone

Fargo, ND

2017

18

898

83.60

%

Kennedy

Fargo, ND

2013

12

813

99.62

%

Library Lane

Grand Forks, ND

2007

60

3,003

91.22

%

Madison (FKA Columbine)

Grand Forks, ND

2015

12

740

95.54

%

Maple Ridge

Omaha, NE

2008

174

10,822

96.57

%

Maplewood

Maplewood, MN

2014

240

17,626

94.12

%

Maplewood Bend

Fargo, ND

2009 and 2010

183

7,637

96.69

%

Martha Alice

Fargo, ND

2009

24

1,055

97.03

%

Mayfair (FKA Colony Manor)

Grand Forks, ND

2008

24

1,319

91.99

%

Midtown Plaza

Minot, ND

2004

17,808

1,345

77.48

%

Monticello

Fargo, ND

2013

18

989

97.25

%

Montreal Courts

Little Canada, MN

2013

444

30,686

94.51

%

Morningside

Fargo, ND

2018

17

803

98.40

%

Newgate

Bismarck, ND

2022

46

2,473

89.52

%

Oak Court

Fargo, ND

2008

81

3,118

96.48

%

Oakview Townhomes (FKA Arrowhead)

Grand Forks, ND

2017

82

6,004

97.75

%

O'Reilly Auto Store

Mandan, ND

2010

6,300

706

100.00

%

Oxford

Fargo, ND

2021

144

10,219

97.54

%

Pacific Park I

Fargo, ND

2013

30

1,064

95.51

%

Pacific Park II

Fargo, ND

2013

39

1,182

94.54

%

Pacific South

Fargo, ND

2013

15

607

96.37

%

Park Circle

Fargo, ND

2017

18

937

99.56

%

Parkview Arms

Bismarck, ND

2015

62

4,850

92.80

%

Parkway Office (FKA Echelon Building)

Fargo, ND

2006

17,000

1,954

100.00

%

Parkwest Gardens

West Fargo, ND

2014

142

8,292

96.10

%

Parkwood

Fargo, ND

2008

40

1,462

97.77

%

Pebble Creek

Bismarck, ND

2008

70

3,396

95.86

%

26

Table of Contents

Pinehurst

Fargo, ND

2021

210

14,982

95.31

%

Plumtree

Fargo, ND

2017

18

939

99.76

%

Prairiewood Court I & II

Fargo, ND

2006 and 2007

60

2,434

90.98

%

Prairiewood Meadows

Fargo, ND

2012

88

5,290

93.30

%

Prose

Fort Worth, TX

2022

270

55,690

75.19

%

Quail Creek

Springfield, MO

2015

164

11,236

95.51

%

Redpath

White Bear Lake, MN

2016

25,817

4,017

100.00

%

Robinwood

Coon Rapids, MN

2014

120

8,399

93.70

%

Rosedale Estates

Roseville, MN

2014

360

26,637

90.13

%

Rosegate

Fargo, ND

2008

90

3,608

94.55

%

Rosser

Bismarck, ND

2020

24

1,468

95.21

%

Roughrider

Grand Forks, ND

2016

12

699

92.64

%

Saddlebrook

West Fargo, ND

2008

60

1,804

97.04

%

Sage Park (FKA Brighton Village)

New Brighton, MN

2014

240

17,840

94.88

%

Sargent

Fargo, ND

2017

36

1,734

94.51

%

Schrock

Fargo, ND

2013

18

811

98.63

%

SE Maple Grove, LLC****

Maple Grove, MN

2021

161

32,079

59.28

%

SE Savage, LLC****

Savage, MN

2021

190

36,794

94.32

%

Sheridan Pointe

Fargo, ND

2013

48

2,945

94.96

%

Sierra Ridge

Bismarck, ND

2006 and 2011

136

11,165

97.83

%

Somerset

Fargo, ND

2008

75

4,027

96.32

%

Southgate

Fargo, ND

2007

162

6,581

98.26

%

Southview III

Grand Forks, ND

2011

18

776

89.31

%

Southview Village

Fargo, ND

2007

72

3,648

97.62

%

Spring

Fargo, ND

2013

25

1,053

98.80

%

Stanford Court

Grand Forks, ND

2013

96

4,864

90.35

%

Stonefield

Bismarck, ND

2014

192

30,096

97.87

%

Stony Brook

Omaha, NE

2009

148

11,599

95.45

%

Summerfield

Fargo, ND

2015

18

862

97.58

%

Summit Point

Fargo, ND

2015

87

7,005

97.86

%

Sunchase

Fargo, ND

2017

36

1,878

98.01

%

Sunset Ridge

Bismarck, ND

2008 and 2010

180

12,471

96.59

%

Sunview

Grand Forks, ND

2008

36

2,073

95.77

%

Sunwood Estates

Fargo, ND

2007

80

4,452

92.81

%

Thunder Creek

Fargo, ND

2018

57

5,391

94.37

%

Titan Machinery

Bismarck, ND

2015

22,293

3,448

100.00

%

Titan Machinery

Dickinson, ND

2012

17,760

1,790

100.00

%

Titan Machinery

Fargo, ND

2012

29,800

3,336

100.00

%

Titan Machinery

Marshall, MN

2011

67,600

5,081

100.00

%

Titan Machinery

Minot, ND

2012

23,690

2,630

100.00

%

Titan Machinery

North Platte, NE

2016

18,910

1,769

100.00

%

Titan Machinery

Sioux City, IA

2013

36,332

4,567

100.00

%

Trustmark

Fargo, ND

2020

45,755

13,425

100.00

%

Twin Oaks

Hutchinson, MN

2014

80

4,470

97.75

%

Twin Parks

Fargo, ND

2008

66

2,596

98.76

%

Valley Homes Duplexes

Grand Forks, ND

2015

24

2,572

93.45

%

Valley View

Golden Valley, MN

2014

72

7,820

98.99

%

Village Park

Fargo, ND

2008

60

2,416

98.82

%

Village West

Fargo, ND

2008

80

2,987

95.82

%

Walgreens

Alexandria, LA

2009

14,560

4,296

100.00

%

Walgreens

Batesville, AR

2009

14,820

7,616

100.00

%

Walgreens

Denver, CO

2011

13,390

5,210

100.00

%

Walgreens

Fayetteville, AR

2009

14,550

5,810

100.00

%

Walgreens

Laurel, MS

2010

14,820

4,542

100.00

%

Washington

Grand Forks, ND

2016

17

745

94.30

%

Wells Fargo Building

Duluth, MN

2007

95,961

10,801

55.24

%

West Oak

Fargo, ND

2017

18

869

97.94

%

Westcourt

Fargo, ND

2014

64

3,710

93.43

%

Westside

Hawley, MN

2010

14

544

90.67

%

Westwind

Fargo, ND

2008

18

633

91.87

%

Westwood Estates

Fargo, ND

2008

200

8,277

93.58

%

Willow Park

Fargo, ND

2008

102

6,767

94.94

%

Wolf Creek

Fargo, ND

2020

54

5,364

99.18

%

Woodland Pines (FKA Fredericksburg)

Omaha, NE

2018

173

13,250

95.21

%

* 70.00% ownership interest

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** 66.67% ownership interest

*** 50.00% ownership interest

**** 60% ownership interest

Geography

Of our 179185 properties, 132142 are located in North Dakota, with 8689 being located in the greater Fargo, North Dakota and Moorhead, Minnesota metropolitan statistical area. The North Dakota region generated approximately 49.6%51.9% of our rental revenue for the year ended December 31, 2020.2022.

The following table presents the total real estate investment amount by state and annual rental revenue by state, as of the year ended December 31, 20202022 (in thousands):

Real Estate

Rental

Real Estate

Rental

State

    

Investment

%

Revenue

%

    

Investment

%

Revenue

%

North Dakota

$

434,590

51.4

%

$

61,744

49.6

%

$

510,127

52.5

%

$

70,132

51.9

%

Minnesota

311,043

36.8

%

51,623

41.4

%

305,463

34.6

%

51,314

38.0

%

Other

99,655

11.8

%

11,249

9.0

%

155,558

16.0

%

13,614

10.1

%

$

845,288

100.0

%

$

124,616

100.0

%

$

971,148

103.1

%

$

135,060

100.0

%

Economy

The North Dakota workforce is concentrated in agricultural, energy, information technology, aerospace sciences and medical sciences. According to the U.S. Census Bureau, the 20212022 estimated combined population of the Fargo, West Fargo and Moorhead metro area was 249,813210,903 people.

The following chart depicts the difference in unemployment rates between North Dakota and the national average for 2020:2022:

   

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

   

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

National (1)

3.5

%

3.5

%

4.4

%

14.8

%

13.3

%

11.1

%

10.2

%

8.4

%

7.8

%

6.9

%

6.7

%

6.7

%

4.0

%

3.8

%

3.6

%

3.6

%

3.6

%

3.6

%

3.5

%

3.7

%

3.5

%

3.7

%

3.6

%

3.5

%

North Dakota (1)

2.3

%

2.2

%

2.0

%

9.1

%

9.1

%

7.4

%

6.6

%

5.0

%

4.4

%

4.7

%

4.5

%

4.1

%

3.1

%

2.9

%

2.9

%

2.8

%

2.6

%

2.5

%

2.3

%

2.3

%

2.2

%

2.3

%

2.3

%

2.3

%

(1)Seasonally adjusted

Source: Bureau of Labor Statistics

Acquisitions and Dispositions

We had eight acquisitions and five dispositions of property during the year ended December 31, 2022. We had five acquisitions and two dispositions of property during the year ended December 31, 2021. We had nine acquisitions and three dispositions of property during the year ended December 31, 2020.

Capitalization rates are a key decision-making item used by the Board. In making acquisitions, the Board currently targets capitalization rates between 6.0 to 10.0%, depending on the amount of risk involved. For those properties with greater risk, the Board targets greater capitalization rates (9.0% or greater). For those properties exhibiting less risk, a lower capitalization risk is acceptable. For potential acquisitions, the Board also requires an adequate spread between the financing on the property and the capitalization rate. Capitalization rates for acquisitions are calculated using projected net operating income divided by the investment. Net operating income is calculated by taking GAAP net income and adding back depreciation, amortization, and interest expense. Capitalization rates for dispositions are calculated in the same way with the exception of using historical, rather than projected, net operating income. The market has seen an increase in investors, driving up overall acquisition prices, thus lowering capitalization rates below the target thresholds set by the Board.

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We use historical occupancy, rental income, and expenses to calculate projected net operating income for potential real estate investments. For residential properties, we make various assumptions about future rents, occupancy levels, and expenses based on historical financial information and our assessment of the property’s future potential. The projected NOI for residential acquisitions is typically based on historical occupancy and expenses over a three-to-five year period. When historical information is unavailable, market vacancy and credit loss factors are estimated.

For commercial and residential properties, assumptions regarding rental income and expenses are based on the terms of the in-place leases and available historical financial information which is then used to generate projected net operating income.

Numerous estimates and assumptions are necessary to generate projected net operating income for potential commercial and residential acquisitions, and there is no guarantee actual net operating income will equal projected net operating income.

Tenants

Our tenants are varied and consist of individuals and national, regional, and local businesses. Our commercial properties generally attract a mix of tenants. In 2020, 20192022, 2021 and 2018,2020, no single tenant represented more than 10% of our revenues. We have investments in several types of real estate, including multifamily, retail, office, industrial, and medical. Within our office, retail, and industrial properties, we have over 100 tenants who operate in numerous industries, including restaurants, pharmacy, medical, financing, banking, insurance, professional services, technology, wholesale and direct retail.

Lease ExpirationsPART II

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

30

Item 6. Selected Financial Data

32

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

33

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

45

Item 8. Financial Statements and Supplementary Data

45

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

45

Item 9A. Controls and Procedures

45

Item 9B. Other Information

47

PART III

Item 10. Trustees, Executive Officers and Corporate Governance

47

Item 11. Executive Compensation

47

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

47

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

47

Item 14. Principal Accountant Fees and Services

47

PART IV

Item 15. Exhibits and Financial Statement Schedules

48

Item 16. Form 10-K Summary

48

Report of Independent Registered Public Accounting Firm and Financial Statements

51

Signatures

94

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements regarding our plans and objectives, including, among other things, our future financial condition, anticipated capital expenditures, anticipated dividends and other matters. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.

The forward-looking statements included herein are based on our current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure readers that the forward-looking statements included in this filing will prove to be accurate. The accompanying information contained in this Annual Report on Form 10-K, including, without limitation, the information set forth under the section entitled “Risk Factors” in Item 1A, identifies important additional factors that could materially adversely affect actual results and performance. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of certain unanticipated events or changes to future operating results.

PART I

All dollar amounts in this Form 10-K are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

ITEM 1.  BUSINESS

GENERAL

Sterling Real Estate Trust (“we,” “us,” “our,” “Company,” “Trust” or “Sterling”) is a real estate investment trust (“REIT”). Sterling was registered in North Dakota as an unincorporated business trust in December 2002.  References in this Annual Report on Form 10-K to the “Company,” “Sterling,” “Trust,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our dividends and other factors.  As of December 31, 2022, we owned directly or through our operating partnership, 185 properties in 12 states.

UPREIT Structure

The Trust operates as an Umbrella Partnership Real Estate Investment Trust, which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, the Trust conducts substantially all investment activities and holds substantially all of the Trust’s assets through the operating partnership Sterling Properties, LLLP. The Trust controls the operating partnership as the general partner and owns approximately 36.60% of the operating partnership as of December 31, 2022. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, the proportionate shares of the assets and income of the operating partnership are deemed to be the assets and income of the Trust.

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The UPREIT structure is used to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the property for limited partnership units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, the Trust may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in the operating partnership, rather than directly in the Trust, may be more attractive to certain institutional or other investors due to their business or tax structure. If an investor is interested in making a substantial investment in our operating partnership, the structure provides the Trust the flexibility to accommodate different terms for each investment, while applicable tax laws generally restrict a REIT from charging different fee rates among its shareholders. Finally, if the Trust’s shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.

Operating Partnership

Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership in April 2003 to acquire, own and operate properties on the Trust’s behalf. The operating partnership holds a diversified portfolio of multifamily dwellings and commercial properties located principally in the upper and central Midwest United States.

Since formation, the Trust’s focus has consisted of owning and operating income-producing real estate properties. In 2006, the Trust held 23 total properties approximating $56,265 in total assets, in the operating partnership. Between 2007 and 2022, the Trust focused extensively on strengthening the multifamily component of the portfolio, acquiring properties directly or through UPREIT transactions. A majority of these multifamily properties are located in North Dakota. The portfolio has grown to 185 properties, approximating $888,723 in total assets, and book equity, including noncontrolling interests, of approximately $323,466 as of December 31, 2022. As of December 31, 2022, the portfolio contained approximately 11,300 apartment units and 1,498,000 square feet of leasable commercial space.

OUR PEOPLE

We do not have any employees. Instead, we rely on our external Advisor to conduct our day-to-day affairs.

Advisor to the Trust

Sterling Management, LLC, a North Dakota limited liability company formed in November 2002, is the external Advisor to the Trust. The Advisor is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.  The Advisor is 100% owned by Trustmark Enterprises, Inc., formerly known as Alloy, a North Dakota corporation (“Trustmark”).  Trustmark is owned in part by Kenneth P. Regan, a Trustee and Chief Executive Officer of the Trust, by James S. Wieland, also a Trustee of the Trust, by Joel S. Thomsen, President of the Trust. In addition, Messrs. Regan, Wieland, Thomsen and Gleave serve on the Advisor’s Board of Governors. The Advisor’s employee base has seen considerable growth, both in number and expertise, since its inception.

Audit and Disclosure Committee

The Audit and Disclosure Committee was established by the Board of Trustees to assist the Board in fulfilling its fiduciary duties and oversight responsibilities. The Audit and Disclosure Committee assists the Board by overseeing the integrity of the Trust’s financial statements, financial reporting and disclosure processes, internal accounting and financial controls and the annual independent audit of the Trust’s financial statements. The Audit and Disclosure Committee also oversees the establishment and maintenance of processes to assure the Trust’s compliance with all applicable laws, regulations, and Trust policy, including compliance with filing requirements under the Exchange Act and the rules and regulations promulgated thereunder. In performing its work, it is the Audit and Disclosure Committee’s responsibility to foster free and open means of communication between the Trustees, the independent auditors and the Trust’s financial managers. Our Audit and Disclosure Committee is currently comprised of Trustees Timothy A. Hunt (Chair of the Committee), Ann L. Christenson, Timothy L. Haugen, Michelle L. Korsmo, and Mark T. Polovitz.

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Board of Trustees and Executive Officers

The Trust operates under the direction of our Board of Trustees, the members of which are accountable to both the Trust and its shareholders. The Trustees are elected annually by our shareholders.  In addition, the Board has a duty to supervise our relationship with the Advisor and evaluate the performance of and fees paid to the Advisor on an annual basis. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on March 24, 2022, effective April 1, 2022 until March 31, 2023. The Board of Trustees has provided investment guidance for the Advisor to follow and must approve each investment recommended by the Advisor. Currently, the Advisor has eight members on the Board, six of whom are independent.

Although the Trust has executive officers, it does not have any paid employees. The President, Chief Executive Officer, Chief Investment Officer, Chief Financial Officer and Treasurer, and General Counsel and Secretary of the Trust, are also officers, employees, owners, or governors of our Advisor. Among others, such executive officers oversee the Advisor’s day-to-day operations with respect to the Trust. However, when doing so, such executive officers are acting on behalf of the Advisor in performing the Advisor’s obligations under the Advisory Agreement. Generally, the only services performed by the Trust’s executive officers are those required by law or regulation, such as executing documents as required by North Dakota law and providing certifications required by the federal securities laws.

Organizational Structure

On January 1, 2021, the advisor was acquired by Trustmark Enterprises, Inc. in an equity transfer.

The following chart shows the relationship structure with the advisor:

Graphic

(1)As of December 31, 2022, the Advisor was owned 100% by Trustmark Enterprises, Inc. Trustmark was owned in part by the Trust’s Chief Executive Officer and Trustee Kenneth P. Regan (36.23%), by Trustee James S. Wieland (25.15%), by President Joel S. Thomsen (20.00%).  Messrs. Regan and Thomsen, serve as officers of the Advisor. Messrs. Regan, Wieland, and Thomsen, serve on the Advisor’s Board of Governors.
(2)Sterling Management, LLC serves as Advisor to both the Trust and the operating partnership. The vast majorityAdvisor does not own any of residential leases are for one-year periods. The following table lists a summary,our shares. Messrs. Regan and Wieland beneficially own approximately 1.43% and 2.76%, respectively, of our shares as of December 31, 2020, of lease expirations on non-residential properties scheduled to occur during each2022.
(3)The Trust controls the operating partnership as the general partner and owns approximately 36.60% of the ten calendar years from 2021operating partnership as of December 31, 2022. Messrs. Regan and Wieland beneficially owned and had voting power over approximately 16.41% and 5.12%, respectively, of the Operating Partnership as of December 31, 2022.

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CORE INVESTMENT OBJECTIVES AND STRATEGY

Investment Objectives

The Trust’s primary investment objectives are to:

Acquire quality real estate properties or interests in real estate properties that can provide stable cash flow for distribution to 2030our shareholders, preservation of capital and thereafter, assuming that tenants exercise no renewal optionsrealization of long-term capital appreciation upon the sale of such properties,
Offer an investment option in which the value of the common shares is correlated to real estate as an asset class rather than traditional asset classes such as stocks and bonds; and
Provide a hedge against inflation through use of month-to-month rentals or early termination rights.  Base rents do not include CAM (common area maintenance).  short-term and long-term lease arrangements with rental properties tenants.

The Trust may change the investment objectives only with the approval of holders of a majority of the outstanding common shares.

Investment Guidance

The Board of Trustees has provided investment guidance to the Advisor to direct the investment strategy of the Trust. Changes to the investment guidance must be approved by the Board. The Advisor has been authorized to execute:

Commercial and multifamily real estate property acquisitions and dispositions,
Investments in other real estate related assets, in each case so long as such investments are approved by our Board,
Acquisitions of property or land for the purposes of future development; and
Capital investments in the portfolio’s current properties through capital improvements.

The Board will have ultimate oversight over the Trust’s investments and may change from time to time the scope of authority delegated to the Advisor with respect to acquisition and disposition transactions.

Investment Strategy

Sterling’s current investment strategy and focus is on multifamily properties. Our Advisor monitors industry trends and invests in property believed to provide the most favorable return balanced with risk. We attempt to manage our real estate portfolio by evaluating changes or trends in the industries in which our tenants operate, the creditworthiness of our tenants and changes or trends in the area demographics surrounding our properties for evidence that our properties will continue to meet our investment objectives of cash flow, preservation of capital and capital appreciation. There is no current plan for the existing commercial properties (industrial, medical, office and retail) regarding retention, acquisition, or disposition.

The Trust will primarily invest in existing or newly developed real estate properties. The Trust may also invest in interests in real estate properties by acquiring direct ownership or ownership interests with other investors, including affiliates of the Advisor, through holding company structures or joint ventures, real estate partnerships, tenant-in-common deals, REITs, or other collective investment vehicles. The Trust may also invest in other real estate property types, including undeveloped land or other development opportunities if the land is acquired for the purpose of producing rental or other operating income in the future. The properties the Trust primarily invests in have existing rent and expense schedules, or the properties are newly constructed with predictable cash flows.

Most current acquisitions are in or near metropolitan areas. However, there is no limitation on the geographic areas in which we may acquire targeted investments.

The Trust may also acquire portfolios of real estate properties held by individual owners and real estate properties held by funds, including hedge funds. It is anticipated that such property owners will primarily sell the properties in exchange for limited partnership interests of the operating partnership.

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SEGMENT DATA

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multifamily. Our commercial properties include retail, office, industrial and medical properties. We assess and measure operating results based on the non-GAAP financial measurement of net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and certain general and administrative expenses.

COMPETITION

Our properties are located in highly competitive real estate markets. The number of competitive properties in a particular area could have a material adverse effect on our ability to lease space and the amount of rent we can charge at our properties. We compete with many property owners, such as corporations, limited partnerships, individual owners, other real estate investment trusts, insurance companies and pension funds.

Our competition also consists of other owners and developers of multifamily and commercial properties who are trying to attract tenants to their properties. This competition influences our ability to acquire properties and the prices that we may pay for those properties. We believe, however, that the diversity of our investments, the experience and abilities of our management and the quality of our assets affords us some competitive advantages that have in the past, and should in the future, allow us to operate our business successfully despite the competitive nature of our business.

Generally, there are multifamily and other similar commercial properties within relatively close proximity to each of our properties. The majority of our retail properties are restaurants and pharmacies. In addition to competitor retail properties with similar business models, we and our tenants face increasing competition from outlet malls, internet shopping websites, discount shopping clubs, catalog companies, direct mail and telemarketing.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

As an owner of real estate, we are subject to various environmental laws, rules and regulations adopted by various governmental bodies or agencies. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations, and some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Some of these laws and regulations may impose joint and several liability on residents, owners, or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us.

In addition, we are subject to many other laws and governmental regulations applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1991, to be accessible to the handicapped and prohibits housing discrimination based upon familial status.

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The Housing for Older Persons Act (“HOPA”) provides age-based discrimination exceptions for housing developments qualifying as housing for older persons. Non-compliance with ADA, FHAA or HOPA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation. We believe our properties which are subject to ADA, FHAA and/or HOPA are substantially in compliance with their present requirements.

Compliance with these laws, rules, and regulations has not had a material adverse effect on our business, assets, or results of operations, financial condition, or ability to pay dividends. We do not believe our existing portfolio as of December 31, 2022 will require us to incur material expenditures to comply with these laws and regulations. However, we cannot assure that future laws, ordinances, or regulations will not impose any material liability, or that the current environmental condition of our properties will not be affected by the operations of tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

AVAILABLE INFORMATION

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to these filings with the Securities and Exchange Commission (“SEC”). The public may read any materials filed by us with the SEC on the internet site maintained by the SEC at www.sec.gov. We also maintain an internet site at www.smftrust.com, which includes the reports and other documents we file with the SEC. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. This reference to our website is not intended to incorporate information found on the website into this filing.

ITEM 1A. RISK FACTORS

Risks Related to Sterling Real Estate Trust

Our results are dependent on amounts received from the leasing and resale of investments, which are subject to market and economic changes. If income is insufficient to meet our capital needs, our ability to carry out our business plans could be adversely affected.

Our purpose is to acquire and hold real estate investments as long-term investments. The primary income that will be generated by us will be the profits, if any, from the operation or holding of the real estate and upon the resale of the investments. If circumstances arise which cause an investment to become undesirable or remain at its current value or decrease in value, we may generate less income than anticipated.

Our success is based on continuing to locate and hold suitable real estate investments, and failure of our Advisor to locate additional suitable properties or the unsuccessful operation of our existing real estate investments could adversely affect our operations and our ability to pay dividends.

Our ability to achieve our investment objectives and to pay dividends to our shareholders and distributions to unitholders is dependent upon the performance of our Advisor in locating suitable investments and appropriate financing arrangements for us as well as on the successful management of our properties after acquisition. We currently own, through the operating partnership, the properties described under Item 2 — Properties.  We cannot be sure our Advisor will be successful in locating suitable investments on financially attractive terms, or be certain that operation of the properties will avoid the risks attendant to real estate acquisitions, such as:

The table is based on leases on December 31, 2020risk properties may not perform in accordance with expectations, including projected occupancy and rental rates.
The risk we may have underestimated the cost of improvements or repairs required to bring or keep an acquired property up to or at standards established for our non-residential properties including our unconsolidated affiliates (in thousands, except leasable area data).its intended use or its intended market position.

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We may have to make expedited decisions on whether to invest in certain properties, including prior to receipt of detailed information.

We may be required to make expedited decisions in order to effectively compete for the acquisition of desirable properties and other assets. In such cases, our Advisor and Board of Trustees may not have access to detailed information regarding real estate investments at the time of making an investment decision to pay a non-refundable deposit and to proceed with an acquisition. In addition, the actual time period during which our Advisor will be allowed to conduct due diligence may be limited. Therefore, there can be no assurance our Advisor and Board of Trustees will have knowledge of all circumstances that may adversely affect an investment.

We may change our investment and operational policies without shareholder consent, and such changes could increase our exposure to additional risks.

Generally, the Board of Trustees may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our shareholders, which could result in our making investments different from, and possibly riskier than investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

There can be no assurance dividends or distributions will be paid or increase over time.

There are many factors that can affect the availability and timing of cash dividends to our shareholders and distributions to unitholders.  Dividends and distributions will be based principally on cash available from our real estate and other investments. The amount of cash available for dividends will be affected by many factors, such as our ability to acquire profitable real estate investments, successfully manage our real estate properties, our operating expenses, and general economic conditions. We can give no assurance we will be able to pay or maintain dividends or distributions or that dividends or distributions will increase over time.

Dividends may include a return of capital, and shareholders may be required to recognize capital gain on distributions.

Dividends payable to shareholders may include a return of capital. To the extent dividends exceed cash flow from operations, a shareholder’s basis in our shares will be reduced and, to the extent dividends exceed a shareholder’s basis, the shareholder may recognize capital gain and be required to make tax payments.

We depend on certain executive officers and trustees, and the loss of such persons may delay or hinder our ability to carry out our investment strategies.

Our future success substantially depends on the active participation of James Wieland, one of our trustees, Kenneth Regan, Chief Executive Officer and a trustee, Joel Thomsen, President, Damon Gleave, Chief Financial Officer and Treasurer, and Barry Schmiess, Chief Investment Officer. Messrs. Wieland, Regan, and Thomsen are also governors and owners of our Advisor. Messrs. Wieland, and Regan, have over 40 years of extensive experience each in the commercial real estate industry, and have been instrumental in setting our strategic direction, operating our business and arranging necessary financing, and through the Advisor, in locating desirable real estate investments and were serving as property manager, managing our properties. Losing the services of Messrs. Wieland, Regan, Thomsen, Gleave, or Schmiess without replacing their position with someone of the same competence and experience, could have a material adverse effect on our ability to successfully carry out our investment strategies and achieve our investment objectives. There can be no guarantee they will remain affiliated with us. See “Risks Related to Conflicts of Interest”.

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Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data, or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation, and damage to our investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by Sterling Management and service providers.   Our and Sterling Management’s processes, procedures and internal controls that are designed to mitigate cybersecurity risks and cyber intrusions do not guarantee that a cyber incident will not occur or that our financial results, operations, or confidential information will not be negatively impacted by such an incident.

We are not required to comply with certain reporting requirements, including those relating to auditor’s attestation reports on the effectiveness of our system of internal control over financial reporting, accounting standards and disclosure about our executive compensation, that apply to other public companies.

So long as our shares of common stock are not traded on a securities exchange, we will be deemed to be a “non-accelerated filer” under the Exchange Act, and as a non-accelerated filer, we will be exempt from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In addition, so long as we are externally managed by the Advisor and we do not directly compensate our executive officers, or reimburse the Advisor or its affiliates for salaries, bonuses, benefits and severance payments for persons who also serve as one of our executive officers or as an executive officer of the Advisor, we do not have any executive compensation.

Many of our costs, such as operating and general and administrative expenses, real estate acquisition, and constructions costs, could be adversely impacted by period of heightened inflation.

A sustained or further increase in inflation could have an adverse impact on our operating expenses incurred in connection with, among others, the property-related services such as repairs and maintenance, janitorial, utilities, security and insurance. Our operating expenses may be recoverable through commercial lease arrangements.

Risks Related to Our Structure

Our shareholders may experience dilution if we or our operating partnership issues additional securities.

Our shareholders do not have preemptive rights to any shares issued by us in the future. If we sell or issue additional shares in the future to raise capital, pursuant to a dividend reinvestment plan or in exchange for limited partnership units pursuant to our operating partnership’s Limited Liability Limited Partnership Agreement (“LLLP Agreement”), our shareholders will experience dilution of their equity investment. In addition, if our operating partnership sells additional securities or issues additional securities in connection with a property acquisition transaction, we would, and indirectly our shareholders would, experience dilution in their equity position.

Our securityholders have limited control over our operation, and the Board of Trustees has the sole power to appoint and terminate the Advisor.

Our Board of Trustees has the authority to determine our major policies, including our policies regarding financing, growth, investment strategies, debt capitalization, REIT qualification, distribution, and to take certain actions including acquiring or disposing of real estate and real estate related investments, dividend declaration and the election or removal of the Advisor. Our securityholders do not have the right to remove the Advisor but have the right to elect and remove trustees.

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Under our Third Amended and Restated Declaration of Trust, our trustees may not do the following without the approval of the holders of a majority of the outstanding common shares of beneficial interest:

# of Leases

Gross

% of Gross

Expiring

% of Total

Lease Expiration Year

  

Expiring

  

Leasable Area

  

Leasable Area

  

Base Rent

  

Base Rent

Month-to-Month

5

54,812

3.92

%

$

376

1.85

%

2021

18

192,278

13.74

%

1,455

7.15

%

2022

19

213,924

15.29

%

1,243

6.11

%

2023

14

80,363

5.74

%

748

3.68

%

2024

11

47,363

3.39

%

298

1.46

%

2025

10

142,767

10.20

%

772

3.79

%

2026

3

134,180

9.59

%

741

3.64

%

2027

3

45,301

3.24

%

366

1.80

%

2028

8

113,389

8.10

%

1,043

5.13

%

2029

3

59,180

4.23

%

683

3.36

%

2030

12

132,752

9.49

%

2,051

10.08

%

Thereafter

11

182,819

13.07

%

10,570

51.95

%

Leased Total

117

1,399,128

100.00

%

$

20,346

100.00

%

Mortgage Notes Secured byAmend the PropertiesThird Amended and Restated Declaration of Trust, except for amendments which do not adversely affect the rights, preference and privileges of shareholders.

Sell all or substantially all of our assets other than in the ordinary course of business or in connection with a liquidation and dissolution.
Conduct a merger or other reorganization of the trust; or
Dissolve or liquidate us.

Our shareholders have the right, without the concurrence of the Board of Trustees, to terminate the trust and liquidate our assets or amend the Third Amended and Restated Declaration of Trust.

Shareholders have no role in determining our investments and must rely on our Advisor and oversight by the Board of Trustees.

For future acquisitions or dispositions, the Board of Trustees has the authority to approve investment acquisitions or dispositions without shareholder approval. Therefore, shareholders will not be able to evaluate the terms of future investment acquisitions or dispositions, their economic merit or other relevant financial data before we acquire or sell investments. Shareholders must rely entirely on the oversight of our Board of Trustees, the management ability of our Advisor and the performance of the property managers.

We may issue securities with more favorable terms than the outstanding shares without shareholder approval.

Under our Third Amended and Restated Declaration of Trust, our Board of Trustees has the authority to establish more than one class or series of shares and to fix the relative preferences and rights regarding conversion, voting powers, restrictions, limitations as to dividends and other distributions, and terms or conditions of redemption of such different classes or series without shareholder approval. Thus, our Board could authorize the issuance of a class or series of shares with terms and conditions that could have priority as to dividends and amounts payable upon liquidation over the rights of the holders of our outstanding common shares of beneficial interest. Such class or series of shares could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our shares, even if it would be in the best interest of our shareholders.

Shareholders could incur current tax liability on dividends they elect to reinvest in our shares, and may have to use separate funds to pay their tax liability.

Shareholders that participate in our dividend reinvestment plan will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional dividend to the extent the shares are purchased at a discount to fair market value. As a result, unless shareholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the shares received.

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There may be conflicts of interest between us and our shareholders on one side and our operating partnership and its limited partners on the other side.

Our trustees and officers have duties to us and our shareholders in connection with their management of us. At the same time, we, as general partner will have duties to our operating partnership and its limited partners in connection with the management of the operating partnership. Our duties as general partner of the operating partnership may come into conflict with the duties of our trustees and officers to us and our shareholders. The LLLP Agreement of our operating partnership expressly limits our liability for monetary damages by providing we will not be liable for losses sustained, liabilities incurred or benefits not derived if we acted in good faith. In addition, our operating partnership is required to indemnify us and our trustees and officers from and against any and all claims arising from operations of our operating partnership, unless it is established: (1) the act or omission was material and committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe the act or omission was unlawful. The LLLP Agreement also provides that we will not be held responsible for any misconduct or negligence on the part of any agent appointed by us in good faith.

There is no public trading market for our shares, nor do we expect one to develop, which may negatively impact our shareholders’ ability to sell their shares and the price at which shares may be sold.

There is no public market for our shares and there is no assurance one may develop. In addition, the price shareholders may receive for the sale of their shares is likely to be less than the proportionate value of our investments. If our shareholders are able to find a buyer for their shares, they may have to sell them at a substantial discount from the price they purchased the shares. Consequently, shareholders may not be able to liquidate their investments in the event of emergency or for any other reason. Therefore, shareholders should consider our securities as illiquid and a long-term investment and should be prepared to hold their shares for an indefinite period of time.

The estimated value of our common stock is based on a number of assumptions and estimates that may not be accurate and is also subject to a number of limitations.

The current estimated value of our common stock as of January 1, 2023, is approximately $23.00 per share. The methodology used by our Board to determine this value was based on estimates of the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain and certain additional information. No formal valuation has been undertaken by us. Our valuation process involves a number of estimates, assumptions and subjective judgments that may not be accurate and complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated value per share may not represent current market values or fair values as determined in accordance with U.S. generally accepted accounting principles. A shareholder should not rely on the estimated value per share as being an accurate or precise measure of the then-current value of the shares of our common stock in making a decision to buy or sell shares of our common stock, including whether to reinvest dividends by participating in the dividend reinvestment plan and whether to request redemption pursuant to our share redemption program.

Risks Related to Our Status as a REIT and Related Federal Income Tax Matters

If we fail to continue to qualify as a REIT, we would incur additional tax liabilities that would adversely affect our operations and our ability to make distributions and could result in a number of other negative consequences.

Although our management believes we are organized, have operated, and will be able to continue to be organized and to operate in such a manner to qualify as a real estate investment trust (REIT), as that term is defined under the Internal Revenue Code, we may not have been organized, may not have operated, or may not be able to continue to be organized or to operate in a manner to have qualified or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status.

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The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control, regarding our organization and ownership, distributions of our income and the nature and diversification of our income and assets. The fact we hold substantially all of our assets through our operating partnership and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.

If we lose our REIT qualification, we will face income tax consequences that will reduce substantially our available cash for dividends and investments for each of the years involved because:

On December 31, 2020,
We would be subject to federal corporate income taxation on our taxable income, including any applicable alternative minimum tax, and could be subject to increased state and local taxes.
We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income; and
Unless we had $423,111are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

The increased taxes could reduce the value of the shares as well as cash available for dividends to shareholders and investments in additional assets. In addition, if we fail to continue to qualify as a REIT, we will not be required to pay dividends to shareholders. Our failure to continue to qualify as a REIT also could impair our ability to expand our business and to raise capital.

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal and state taxes on our income or property, including the following:

To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gains) to our shareholders. If we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on the undistributed income. In such situation, shareholders will be treated as having received the undistributed income and having paid the tax directly, but tax-exempt shareholders, such as charities or qualified pension plans, will receive no benefit from any deemed tax payments.
We may be subject to state and local taxes on our income or property, either directly or indirectly, because of the taxation of our operating partnership or of other entities through which we indirectly own our assets.
If we have net income from the sale of foreclosure property we hold primarily for sale to customers in mortgage notesthe ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
If we sell a property, other than foreclosure property, we hold primarily for sale to customers in the ordinary course of business, our gain will be subject to the 100% “prohibited transaction” tax.
We will be subject to a 4% nondeductible excise tax on the amount, if any, by which the distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

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We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.

To qualify as a REIT, in general, we must distribute to our shareholders at least 90% of our net taxable income each year, excluding capital gains. However, we could be required to include earnings in our net taxable income before we actually receive the related cash. If we do not have sufficient cash to pay the necessary dividends to preserve our REIT status for any year or to avoid taxation, we may need to borrow funds, to sell assets or to issue additional securities even if the then-prevailing market conditions are not favorable for such actions.  In addition, we will require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

If our operating partnership does not qualify as a partnership, its income may be subject to taxation, and we would no longer qualify as a REIT.

The Internal Revenue Code classifies “publicly traded partnerships” as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. We structured our operating partnership to be classified as a partnership for federal income tax purposes. However, no assurance can be given the IRS will not challenge our position or will classify our operating partnership as a “publicly traded partnership” for federal income tax purposes. To minimize this risk, we have placed certain restrictions on the transfer and/or redemption of partnership units in the LLLP Agreement. If the IRS would assert successfully our operating partnership should be treated as a “publicly traded partnership” and substantially all of the operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat the operating partnership as an association taxable as a corporation. In such event, we would cease to qualify as a REIT. In addition, the imposition of a corporate tax on the operating partnership would reduce the amount of distributions the operating partnership could make to us and, in turn, reduce the amount of cash available to us to pay dividends to our shareholders.

We have transfer restrictions on our shares that may limit offers to acquire substantial amounts of the Trust’s shares at a premium.

To qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Currently, Third Amended and Restated Declaration of Trust prohibits transfers of our shares that would result in: (1) our shares being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our shares, applying broad attribution rules imposed by the federal income tax laws, or (3) before our shares qualify as a class of publicly-offered securities, 25% or more of our shares being owned by ERISA investors. If a shareholder acquires shares in excess of the ownership limits or in violation of the restrictions on transfer, we:

May consider the transfer to be void ab initio.
May not reflect the transaction on our books.
May institute legal action to enjoin the transaction.
May redeem such excess shares.
Automatically transfer any excess shares to a charitable trust for the benefit of a charitable beneficiary.

If such excess shares are transferred to a trust for the benefit of a charitable beneficiary, the charitable trustee shall sell the excess shares and the shareholder will be paid the net proceeds from the sale equal to the lesser of: (1) the price paid by the shareholder or the “market price” of our shares if no value was paid or (2) the price per share received by the charitable trustee.

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If shares are acquired in violation of the ownership limits or the restrictions on transfer described above:

Transferee may lose its power to dispose of the shares; and
Transferee may incur a loss from the sale of such shares if the fair market price decreases.

These limitations may have the effect of preventing a change of control or takeover of us by a third party, even if the change in control or takeover would be in the best interest of our shareholders.

Complying with REIT requirements may restrict our ability to operate in a way to maximize profits.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders, and the ownership of our common shares. For example, we may be required to pay dividends to our shareholders at disadvantageous times, including when we do not have readily available funds. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to forego or liquidate otherwise attractive investments which could negatively impact shareholder value.

To qualify as a REIT, at the end of each calendar quarter, at least 75% of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets), in general, cannot include more than 10% of the voting securities of any one issuer or more than 10% of the value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries. Therefore, we may be required to liquidate otherwise attractive investments or may be forced to forego attractive investments to satisfy these requirements. Such action or inaction could be adverse to our shareholder interests.

Gains from asset sales may be subject to a 100% prohibited transaction tax, which tax could reduce the Trust’s available assets and reduce shareholder value.

We may have to sell assets from time to time to satisfy our REIT distribution requirements and other REIT requirements or for other purposes. The IRS may posit one or more asset sales may be “prohibited transactions.” If we are deemed to have engaged in a “prohibited transaction,” our gain from such sale would be subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax, but we cannot assure you we will be able to qualify for the safe harbor. We will use reasonable efforts to avoid the 100% tax and we do not intend to hold assets in a manner to cause their dispositions to be treated as “prohibited transactions,” but we cannot assure you the IRS will not challenge our position, especially if we make frequent sales or sales of assets in which we have short holding periods. Payment of a 100% tax would adversely affect our results of operations.

Ordinary dividends payable by REITs generally are taxed at the higher ordinary income rate which could reduce the net cash received by shareholders.

The maximum U.S. federal income tax rate for “qualified dividends” payable by U.S. corporations to individual U.S. shareholders currently is 20%.  In addition, the 3.8% tax on net investment income may apply to such dividends. In general, ordinary dividends payable by REITs to its individual U.S. shareholders, however, are generally not eligible for the reduced rates and generally are taxed at ordinary income rates (for REIT dividends received after December 31, 2017, the maximum individual income tax rate currently is 37%, but the current maximum, effective federal income tax rate as to REIT dividends may be reduced to 29.6% because of a partial deduction that may apply with respect to REIT dividends; in addition, the 3.8% tax on net investment income may apply to REIT dividends). It is also possible tax legislation that has or may be enacted might increase this rate differential. The differing treatment of dividends received from REITs and other corporations might cause individual investors to view an investment in REITs as less attractive related to other corporations which might be detrimental to our ability to raise additional funds through the sale of our common shares.

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Changes in legislative or other actions affecting REITs may adversely affect our status as a REIT.

The rules dealing with U.S. federal income taxation are constantly under review by the legislative process, the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may apply retroactively) could adversely affect us or our shareholders. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the federal income tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification. We cannot predict whether, when, in what forms, or with what effective dates, the laws applicable to us or our shareholders may be changed.

Our Board of Trustees may revoke our REIT election without shareholder approval, and we would no longer be required to make distributions of our net income.

Our Board of Trustees can revoke or otherwise terminate our REIT election without the approval of our shareholders if our Board determines it is not in our best interest to continue to qualify as a REIT. In such case, we would become subject to U.S. federal income tax on our taxable income, and we no longer would be required to distribute most of our net income to our shareholders, which may reduce the total return to our shareholders and affect the value of the shares.

Risks Related to Tax-Exempt Investors

Common shares may not be a suitable investment for tax-exempt investors.

There are special considerations that apply to investing in common shares on behalf of a trust, pension, profit sharing or 401(k) plans, health or welfare plans, trusts, individual retirement accounts (IRAs), or Keogh plans. If you are investing the assets of any of the above in common shares, you should satisfy yourself:

Your investment is consistent with your fiduciary obligations under applicable law, including common law, ERISA and the Internal Revenue Code.
Your investment is made in accordance with the documents and instruments that govern the trust, plan or IRA, including any investment policy.
Your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code.
Your investment will not impair the liquidity of the trust, plan or IRA.
Your investment will not produce “unrelated business taxable income” for the trust, plan or IRA.
You will be able to value the assets of the trust, plan or IRA annually in accordance with ERISA requirements and applicable provisions of the trust, plan, or IRA; and
Your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

We have not evaluated, and will not evaluate, whether an investment in us is suitable for any particular trust, plan, or IRA.

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Under certain circumstances, tax-exempt shareholders may be subject to unrelated business taxable income, which could adversely affect such shareholders.

Neither ordinary nor capital gain distributions with respect to our common shares nor gain from the sale of our common shares, in general, should constitute unrelated business taxable income to tax-exempt shareholders. The following, however, are some exceptions to this rule:

Under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our properties. Principal payments on these notescommon shares may be treated as unrelated business taxable income if our common shares are payableheld predominately by qualified employee pension trusts (which we do not expect to be the case).
Part of the income and gain recognized by a tax-exempt shareholder with respect to common shares would constitute unrelated business taxable income if the tax-exempt shareholder incurs debt to acquire the common shares; and
Part or all of the income or gain recognized with respect to our common shares held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Internal Revenue Code may be treated as follows (in thousands):unrelated business taxable income.

Therefore, tax-exempt shareholders are not assured all dividends received from the trust will be tax-exempt.

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Risks Related to Our Relationship with the Advisor and Its Affiliates

We depend on our Advisor for the successful operations of the REIT, and if required, we may not be able to find a suitable replacement advisor.

Our ability to achieve our investment objectives is dependent upon the successful performance of our Advisor in locating attractive acquisitions, advising on dispositions of real estate properties and other real estate related assets, advising on any financing arrangements and other administrative tasks to operate our business. If the Advisor suffers or is distracted by adverse financial and operational problems in connection with its operations unrelated to us or for any reason, it may be unable to allocate a sufficient amount of time and resources to our operations. If this occurs, our ability to achieve our investment objectives or pay dividends to our shareholders may be adversely affected. Any adversity experienced by the Advisor or problems in our relationship with the Advisor could also adversely impact the operation of our properties and, consequently, our cash flow and ability to pay dividends to shareholders.

Either we or the Advisor can terminate the Advisory Agreement upon 60 days written notice to the other party for any reason, or we can terminate the Advisory Agreement immediately for cause or material breach of the Advisory Agreement. In addition, the Board of Trustees may determine not to renew the Advisory Agreement in any year. If this occurs, we would need to find another advisor to provide us with day-to-day management services or engage employees to provide these services directly to us, which would likely be difficult to do and may be costly. There can be no assurances we would be able to find a suitable replacement advisor or suitable employees or enter into agreements for such services on acceptable terms.

The termination or replacement of the Advisor could trigger a default or repayment event under financings.

Lenders providing financing for our acquired properties may include provisions in the mortgage loan documentation that state the termination or replacement of the Advisor is an event of default or an event triggering acceleration of the repayment of the loan in full. Even though we will attempt to have such provisions excluded from the loan documents, the lenders may still require them to be included. In addition, the termination or replacement of the Advisor could trigger an event of default under any credit agreement governing a line of credit we may obtain. If an event of default or repayment event occurs with respect to any of our properties, our ability to achieve our investment objectives could be materially adversely affected.

The Advisor may not be able to retain its key employees, which could adversely affect our ability to carry out our investment strategies.

We depend on the Advisor’s key officers, employees and governors. However, none of these individuals have an employment agreement with the Advisor and the loss of any or all of such person’s services and the Advisor’s inability to find, or any delay in finding, replacements with equivalent skills and experience, could adversely impact our ability to successfully carry out our investment strategies and achieve our investment objectives.

Our future success also depends on the Advisor’s and its affiliates’ ability to identify, hire, train and retain highly qualified real estate, managerial, financial, marketing, and technical personnel to provide the services to us pursuant to the Advisory Agreement and any other written services agreement, including any property management agreements. Competition for such personnel is intense, and the Advisor or its affiliates may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary personnel could have a material adverse effect on our business and results of operations.

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Risks Related to Investments in Real Estate

Insufficient geographic diversity of our real estate investments could adversely affect our operating results if economic changes impact real estate markets where we own significant assets.

Geographic concentration of our properties may expose us to economic downturns in those areas where our properties are located. A recession in any area where we own several properties or interests in properties could adversely affect our ability to generate or increase operating revenues, locate, and retain financially sound tenants or dispose of unproductive properties. In addition, it could have an adverse impact on our tenant’s ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Currently, the majority of our properties are located in North Dakota and Minnesota, and we hold several properties in Fargo, North Dakota and Moorhead, Minnesota. To the extent weak economic or real estate conditions affect North Dakota, Minnesota, or other markets in which we own properties more severely than other areas of the country, our financial performance could be negatively impacted.

We may invest in and develop undeveloped real property, which requires us to pay expenses prior to receiving any income on the property.

We have the discretion to invest up to 10% of our total assets in undeveloped property. When we invest in undeveloped property, such property does not generate operating revenue while costs are incurred to develop the property and may generate other expenses including property taxes and insurance. In addition, construction and development of such properties may not be completed within budget or as scheduled and projected rental levels may not be achieved. In addition to the risks of real estate investments in general, an investment in undeveloped property is subject to additional risks, including the expense and delay which may be associated with rezoning the land for a higher use and the development and environmental concerns of governmental entities and/or community groups. Therefore, we will not generate income on such property until development is completed and we begin leasing the property.

We may acquire multiple properties in a single transaction, which may adversely affect our operations through the inclusion of less desirable investments or financing requirements greater than we would otherwise be willing to incur.

Periodically, we may acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single property acquisitions, and the risk a multiple property acquisition does not close may be greater than in a single property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns we can earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for dividends. Any of the foregoing events may increase the risk of adverse business results and negatively affect our results of operations.

We may invest in co-ventures, where our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of a real estate investment and lower our overall return.

We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with our Advisor, its affiliates, our trustees, or third parties having investment objectives similar to ours in the acquisition of real estate investments. In such arrangements, we may be acquiring non-controlling interests in or sharing responsibility for managing the affairs of the investment. In such event, we would not be in a position to exercise sole decision-making authority. Investments such as these may, under certain circumstances, involve risks not present where another party is not involved, including the possibility that partners or co-investees might become bankrupt or fail to fund their required capital contributions. Co-investees may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.

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Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-investee would have full control over the joint venture. Disputes between us and co-investees may result in litigation or arbitration that would increase our expenses and prevent our management and the Advisor from focusing their time and effort on our business. Consequently, actions by or disputes with co-investees might result in subjecting additional risk to properties owned by the investment. In addition, we may in certain circumstances be liable for the actions of our co-investees. Any of these risks could subject us to liabilities in excess of those contemplated and reduce our returns on that investment.

We could experience difficulties or delays renewing leases or re-leasing space, which will increase our costs to maintain such properties without receiving income.

We derive a significant portion of our net income from rent received from our tenants. Our properties include both residential as well as commercial properties. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. If lease defaults occur, we may experience delays in enforcing our rights as landlord. Also, if our tenants decide not to renew their leases, terminate early or default on their lease, we may not be able to re-let the space or may experience delays in finding suitable replacement tenants. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, particularly commercial tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay dividends to shareholders could be materially adversely affected. Further, if one of our properties cannot be leased on terms and conditions favorable to us, the property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all.

We could face potential adverse effects if a commercial tenant is unable to make timely rental payments, declares bankruptcy or become insolvent.

If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Delayed rental payments could adversely affect cash flow available for dividends. If a commercial tenant declares bankruptcy or becomes insolvent, it may adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. However, if a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy. If a court authorizes the commercial tenant to reject and terminate its lease with us, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In addition, it is unlikely a bankrupt tenant would pay in full amounts it owes us under a lease. Additionally, we may be required to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as lower our rental rates to reflect any decline in market rents. This shortfall could adversely affect our cash flow and results of operations.

Investments in real estate are illiquid, and we may not be able to resell a property on terms favorable to us.

We intend to hold real estate properties until such time as our Advisor determines a sale or other disposition appears to be advantageous or when our shareholders approve our termination and liquidation. Because real estate investments are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may be a result of economic conditions, availability of financing, interest rates and other factors beyond our control. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate investments by their nature are often difficult or time consuming to liquidate. In addition, federal tax laws imposing a 100% excise tax on gains from sales of certain types of property sales by a REIT (generally, property viewed as being purchased for resale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our shareholders. These restrictions could adversely affect our ability to achieve our investment objectives.

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Valuations and appraisals of our investments may not necessarily correspond to realizable value.

We value our real estate properties initially at cost, which we expect to represent fair value at that time. After acquisition, valuations may include appraisals of our properties periodically. The valuation methodologies used to value our real estate properties will involve subjective judgments regarding such factors as comparable sales, rental and operating expense data, the capitalization and/or discount rate and projections of future rent and expenses based on appropriate analysis. Although we believe our valuation procedures are designed to determine the accurate fair value of our assets, appraisals and valuations of our real estate properties and other investments assets will be only estimates of fair value and therefore may not correspond to realizable value upon a sale of those assets.

Uninsured losses related to real estate investments may adversely affect our results of operation.

We purchase, and we may be required by lenders of mortgage loans or other financings to obtain, certain insurance coverage on our real estate investments. Either the property manager or the Advisor selects policy specifications and insured limits which it believes to be appropriate and adequate given the risk of loss, the cost of the coverage and industry practice. The nature of the tenants at the properties we hold may expose us and our operations to an increase in liability for personal injuries or other losses. There can be no assurance that such insurance will be sufficient to cover potential liabilities. Some of our policies may be subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. Furthermore, insurance against certain risks, such as terrorism, flood, and toxic mold, may be unavailable or available at commercially unreasonable rates or in amounts less than the full market value or replacement cost of the properties. There can be no assurance particular risks that are currently insurable, will continue to be insurable on an economical basis or current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment in a property as well as the anticipated future cash flows from such properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. We may also be liable for any uninsured or underinsured personal injury, death, or property damage claims, which could result in decreased dividends to shareholders.

We may acquire a property or properties “AS IS,” which increases the risk of an investment that requires us to remedy defects or costs without recourse to the prior owner.

We may acquire real estate properties “as is” with only limited representations and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. As a result, if defects in the property (including any building on the property) or other matters adversely affecting the property are discovered, we may not be able to pursue a claim for any or all damage against the property seller. Such a situation could negatively affect our results of operations.

We rely on affiliated and outside property managers to properly manage and lease our properties.

The Advisor and an affiliate of the Advisor serve as our principal property managers, and the Advisor has hired and intends to hire other affiliates and/or third parties to serve as additional property managers, to manage our properties and act as leasing agents to lease vacancies in our real estate properties. These property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not, and the Advisor will not as to its affiliates and third-party property managers, supervise any of the property managers or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in large part on the ability of our property managers to manage the day-to-day operations and their ability to lease vacancies in our properties. Any adversity experienced by our property managers could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives.

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Risks Related with Our Indebtedness and Financing

Market conditions could adversely affect our ability to obtain financing.

As a REIT, we are required to distribute at least 90% of our taxable income (excluding net capital gains) to our shareholders in each taxable year, and thus our ability to retain internally generated cash is limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties can depend on our ability to obtain debt or equity financing from third parties or the sellers of properties or to sell other properties. Market fluctuations and disruptions in the credit markets could significantly affect our ability to access capital. Reductions in our available borrowing capacity, or inability to establish a credit facility when required or when business conditions warrant, could then limit the number, size and quality of properties we could acquire or the amount of improvements we could make on acquired properties, which could materially affect our ability to achieve our investment objectives and may result in price or value decreases of our real estate assets.

Derivatives and hedging activity could adversely affect cash flow.

In the normal course of business, we use derivatives to manage our exposure to interest rate volatility on debt instruments, including hedging for future debt issuances. At other times we may utilize derivatives to decrease our exposure to floating interest rates. There can be no assurance that these hedging arrangements will have the desired beneficial impact.  These arrangements, which can include a number of counterparties, may expose us to additional risks, including failure of any of our counterparties to perform under these contracts, and may involve extensive costs, such as transaction fees or breakage costs, if we terminate them.  No strategy can completely insulate us from the risks associated with interest rate volatility.

The phase out of LIBOR and transition to SOFR as a benchmark interest rate could have adverse effects.

In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2023, it is expected that no new contracts will reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including the Company, are impacted by the risks associated with this transition and therefore it could adversely affect our operations and cash flows.

We could face difficulties in refinancing loans involving balloon payment obligations.

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or our ability to sell the particular property. If we try and refinance the debt, we may not be able to obtain terms as favorable as the original loan. Based on current market interest rates, the interest rate obtained upon refinancing in subsequent years may be higher than the original loan. If we are not able to refinance the debt, or obtain acceptable terms, we may be required to sell the mortgaged property at a time which may not permit realization of the maximum return on such property. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets.

Lenders may require restrictive covenants relating to our operations, which may adversely affect our flexibility and our ability to achieve our investment objectives.

Mortgage loans obtained by us could impose restrictions that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in the property. Loan documents may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, replace the Advisor or the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

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Increases in interest rates on variable rate debt incurred and new financings by us will reduce cash available for dividends.

Increases in interest rates on any variable rate debt incurred or new financings would increase our interest costs, which could reduce our cash flows and our ability to pay dividends to our shareholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

Complying with REIT requirements may limit our ability to hedge liabilities through tax-efficient means, which may adversely affect our results of operations.

We have entered into a number of hedging transactions and may enter into additional such transactions. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments. The REIT provisions of the Code substantially limit our ability to hedge liabilities. Because we conduct substantially all of our operations through our operating partnership, any income from a hedging transaction entered into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets will not constitute gross income to us for purposes of the 75% or 95% gross income test. As a result, we may be required to limit the operating partnership’s use of advantageous hedging techniques or to implement hedges through certain taxable corporations. This could increase the costs and risks of hedging activities. We intend to structure any hedging transaction in a manner that does not jeopardize our ability to qualify as a REIT.

Risks Related to Other Investments

Investments in other real estate related investments could involve higher risks than investment in real estate properties, which could adversely affect our operations and ability to make dividend payments.

We are permitted to invest in other real estate assets.  We can invest in real estate equity, debt, and derivative securities.  These assets can be quite risky, illiquid, and volatile and the value of these assets could cause the value of our shares to fluctuate and could result in losses that materially adversely affect our results of operations.

Risks Related to Conflicts of Interest

We are subject to several conflicts of interest arising out of our relationships with our affiliates, including our Advisor and its affiliates.

There are conflicts of interest in our relationship with the Advisor and its affiliates and several trustees, which could adversely affect our operations and business operations.

We are subject to potential conflicts of interest arising out of our relationships with the Advisor, its affiliates, and certain trustees. Conflicts of interest may arise among a trustee or the Advisor and its respective affiliates, on the one hand, and us and our shareholders, on the other hand. As a result of these conflicts, the trustee or Advisor may favor its own interests or the interests of its affiliates over the interest of our shareholders or operating partnership.

Division of Loyalty/Allocation of time and effort

Several of our officers and/or trustees serve as officers, governors, and owners of one or more entities (certain of which are affiliated with our Advisor or trustees), property managers, tenants of our properties, brokerage companies and other real estate entities owning real estate investments. As a result, these individuals owe duties to these other entities and their investors, which may conflict with the duties that they owe to us and our shareholders. Their loyalties to these other entities and investors could result in action or inaction detrimental to our business or result in conflicts relating to the allocation of their time and services, which could harm implementation of our business strategy and investment and leasing opportunities.

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Allocation of investment opportunities

The Advisor and its affiliates are or may become committed to the management of other business ventures. Accordingly, there may be conflicts of interest between our investments and other investments or business ventures in which the Advisor and its affiliates are participants. In addition, the Advisor and its officers will advise other investment programs that invest in commercial real estate properties and real estate related assets in which we may be interested. Therefore, the Advisor could face conflicts of interest in allocating and determining which programs will have the opportunity to acquire and participate in such investments as they become available. As a result, other investment programs advised by the Advisor may compete with us with respect to investors and certain investments we may want to acquire.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

General

Our policy is to acquire assets with an intention to hold these assets as long-term investments seeking income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rent. These types of investments are the core of our strategy of creating shareholder value. We currently own and maintain a portfolio of real estate diversified by geographical location and by type and size.

The majority of our real estate investments are managed by a third party. Property management firms usually receive between 2% and 5% of gross rent collection for their services. Substantially all of our commercial revenues consist of base rents received under leases having terms ranging from month-to-month to over 25 years. More than half of our existing commercial property leases as of December 31, 2022 contain “step up” rental clauses providing for annual increases in the base rental payments of approximately 1.0% to 3.0% each year during the term of the lease.

Properties

As of December 31, 2022, we owned 185 properties located in 12 states, containing approximately 11,300 apartment units and 1,498,000 square feet of leasable commercial space. The residential and commercial portfolio of properties includes a diversified mixture of multifamily, single, and multi-tenant retail and office buildings as well as industrial and medical facility properties. The majority of the properties are located in the largest cities in the states of North Dakota and Minnesota.

As of December 31, 2022, approximately 78.8% (based on cost) of the properties were apartment communities. Most multifamily dwelling properties are leased to a variety of tenants under short-term leases of less than a year.

As of December 31, 2022, approximately 21.2% (based on cost) of the properties were comprised of industrial, office, retail and medical commercial properties. Most commercial properties are leased to a variety of tenants under long-term leases.

The following information applies to all of our operating properties:

Years ending December 31,

Amount

2021

$

30,040

2022

26,595

2023

49,886

2024

18,873

2025

50,489

Thereafter

247,228

$

423,111

We believe all of our properties are adequately covered by insurance and suitable for their intended purposes.

Our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and

Depreciation is provided on a straight-line basis over the estimated useful lives of the buildings.

29

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The below table sets forth certain information regarding each of our properties owned, including unconsolidated affiliates, as of December 31, 2022 (in thousands, except units or leasable sq. ft.).

# of

Physical

Units or

Occupancy

Year

Leasable

Total

at December

Property

    

Location

    

Acquired

    

Sq. Ft

    

Investment

    

31, 2022

Bluemont Lakes Financial Center

Fargo, ND

2004

31,750

$

5,255

81.17

%

Amberwood

Grand Forks, ND

2016

96

4,147

94.67

%

Applebee’s Neighborhood Bar & Grill

Coon Rapids, MN

2010

5,576

2,442

100.00

%

Arbor

Bismarck, ND

2013

12

696

98.49

%

Arbor II

Bismarck, ND

2013

12

700

96.52

%

Arbor III

Bismarck, ND

2013

12

696

97.80

%

Ashbury

Fargo, ND

2013 & 2016

61

4,139

99.52

%

Auburn II

Fargo, ND

2007

24

1,111

98.45

%

Autumn Ridge

Grand Forks, ND

2004

144

10,418

95.50

%

Barrett Arms

Crookston, MN

2014

24

1,281

94.35

%

Bayview

Fargo, ND

2007

100

6,083

92.18

%

Bell Plaza* (FKA Northland Plaza)

Bloomington, MN

2015

299,660

51,421

65.57

%

Belmont

Bismarck, ND

2020

26

1,601

88.55

%

Berkshire

Fargo, ND

2008

12

525

97.96

%

Betty Ann

Fargo, ND

2009

24

1,012

97.58

%

Biolife Plasma Center

Bismarck, ND

2008

11,671

2,881

100.00

%

Biolife Plasma Center

Grand Forks, ND

2008

13,190

2,944

100.00

%

Biolife Plasma Center

Janesville, WI

2008

12,225

2,388

100.00

%

Biolife Plasma Center

Mankato, MN

2008

13,181

4,149

100.00

%

Biolife Plasma Center

Marquette, MI

2008

11,737

3,215

100.00

%

Biolife Plasma Center

Onalaska, WI

2008

12,180

2,531

100.00

%

Biolife Plasma Center

Oshkosh, WI

2008

12,191

2,297

100.00

%

Biolife Plasma Center

Sheboygan, WI

2008

13,230

2,654

100.00

%

Biolife Plasma Center

Stevens Point, WI

2008

13,190

2,595

100.00

%

Birchwood I

Fargo, ND

2017

12

468

98.78

%

Birchwood II

Fargo, ND

2017

54

2,881

96.96

%

Bradbury

Bismarck, ND

2018

96

6,093

93.48

%

Briar Pointe

Fargo, ND

2021

30

1,935

97.61

%

Bridgeport

Fargo, ND

2016

120

8,420

98.71

%

Bristol Park

Grand Forks, ND

2016

80

5,837

92.84

%

Brookfield

Fargo, ND

2008

72

2,680

95.90

%

Brownstone

Fargo, ND

2021

72

4,390

96.91

%

Cambridge (FKA 44th Street)

Fargo, ND

2013

42

2,558

99.37

%

Candlelight

Fargo, ND

2012

66

2,214

93.73

%

Carling Manor

Grand Forks, ND

2008

12

838

95.34

%

Carlton Place

Fargo, ND

2008

213

9,072

93.54

%

Carr

Fargo, ND

2017

18

874

99.13

%

Cedars 4

Fargo, ND

2018

18

1,245

97.23

%

Chandler 1802

Grand Forks, ND

2014

24

1,434

96.12

%

Chandler 1834

Grand Forks, ND

2018

12

710

91.43

%

Chandler 1866

Grand Forks, ND

2005

12

384

98.71

%

Chandler 1898

Grand Forks, ND

2022

12

512

100.00

%

Cherry Creek (FKA Village)

Grand Forks, ND

2008

35

2,008

96.95

%

Cityside

Fargo, ND

2018

36

1,396

89.43

%

Columbia Park Village

Grand Forks, ND

2020

12

648

91.03

%

Columbia West

Grand Forks, ND

2008

70

4,487

93.12

%

Country Club

Fargo, ND

2011

40

1,843

95.04

%

Countryside

Fargo, ND

2011

24

951

97.20

%

Courtyard

St. Louis Park, MN

2013

151

9,252

93.37

%

Dairy Queen

Dickinson, ND

2012

2,811

1,331

100.00

%

Dairy Queen

Moorhead, MN

2011

2,712

1,186

100.00

%

Dairy Queen

Apple Valley, MN

2018

5,348

1,673

-

%

Dakota Manor

Fargo, ND

2014

54

2,865

96.57

%

Danbury

Fargo, ND

2007

135

7,547

94.53

%

Dellwood Estates

Anoka, MN

2013

132

12,320

97.50

%

Deer Park

Hutchinson, MN

2022

138

15,091

95.99

%

Desoto Estates

Grand Forks, ND

2022

68

6,111

98.06

%

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Desoto Townhomes

Grand Forks, ND

2022

24

3,338

95.85

%

Diamond Bend

Mandan, ND

2022

78

10,971

92.53

%

Eagle Run

West Fargo, ND

2010

144

7,067

96.38

%

Eagle Sky I

Bismarck, ND

2016

20

1,604

96.23

%

Eagle Sky II

Bismarck, ND

2016

20

1,680

94.72

%

East Bridge

Fargo, ND

2017

58

6,490

96.18

%

Eastbrook

Bismarck, ND

2020

24

1,381

87.84

%

Echo Manor

Hutchinson, MN

2014

30

1,198

99.04

%

Eide Bailly Building***

Fargo, ND

2007

74,646

9,331

100.00

%

Emerald Court

Fargo, ND

2008

24

1,144

98.00

%

Essex

Fargo, ND

2017

18

928

87.97

%

Evergreen Terrace

Omaha, NE

2020

144

8,798

95.30

%

Fairview

Bismarck, ND

2008

84

5,467

95.34

%

Family Dollar Store

Mandan, ND

2010

9,100

874

100.00

%

First International Bank & Trust

Moorhead, MN

2011

3,510

1,037

100.00

%

Flagstone

Fargo, ND

2021

120

7,792

97.00

%

Flickertail

Fargo, ND

2008

180

8,151

92.73

%

Forest Avenue

Fargo, ND

2013

20

815

99.19

%

Four Points Office Building

Fargo, ND

2007

12,383

1,494

100.00

%

Foxtail Creek Townhomes

Fargo, ND

2020

30

1,488

96.21

%

Galleria III

Fargo, ND

2010

18

1,144

93.18

%

Garden Grove

Bismarck, ND

2016

95

7,274

92.78

%

Gate City Bank

Grand Forks, ND

2008

17,406

2,200

100.00

%

Georgetown

Fridley, MN

2014

468

33,586

89.63

%

Glen Pond

Eagan, MN

2011

528

44,377

95.38

%

Goldmark Office Park

Fargo, ND

2007

124,613

23,692

100.00

%

Grand Forks Marketplace**

Grand Forks, ND

2003

182,522

26,710

78.04

%

Granger Court

Fargo, ND

2013

59

2,841

96.07

%

Great American Insurance Building

Fargo, ND

2005

15,000

2,360

100.00

%

Guardian Building Products

Fargo, ND

2012

100,600

3,760

100.00

%

Hannifin

Bismarck, ND

2013

14

789

93.51

%

Harrison Richfield

Grand Forks, ND

2007

140

7,915

94.13

%

Hartford

Fargo, ND

2018

30

1,426

92.51

%

Hawn

Fargo, ND

2020

48

2,557

97.89

%

Highland Meadows

Bismarck, ND

2011

144

10,629

96.92

%

Hunter’s Run I

Fargo, ND

2007

12

483

97.71

%

Hunter’s Run II

Fargo, ND

2008

12

518

95.04

%

Huntington

Fargo, ND

2015

10

439

99.18

%

Islander

Fargo, ND

2011

24

1,407

96.76

%

Jadestone

Fargo, ND

2017

18

898

83.60

%

Kennedy

Fargo, ND

2013

12

813

99.62

%

Library Lane

Grand Forks, ND

2007

60

3,003

91.22

%

Madison (FKA Columbine)

Grand Forks, ND

2015

12

740

95.54

%

Maple Ridge

Omaha, NE

2008

174

10,822

96.57

%

Maplewood

Maplewood, MN

2014

240

17,626

94.12

%

Maplewood Bend

Fargo, ND

2009 and 2010

183

7,637

96.69

%

Martha Alice

Fargo, ND

2009

24

1,055

97.03

%

Mayfair (FKA Colony Manor)

Grand Forks, ND

2008

24

1,319

91.99

%

Midtown Plaza

Minot, ND

2004

17,808

1,345

77.48

%

Monticello

Fargo, ND

2013

18

989

97.25

%

Montreal Courts

Little Canada, MN

2013

444

30,686

94.51

%

Morningside

Fargo, ND

2018

17

803

98.40

%

Newgate

Bismarck, ND

2022

46

2,473

89.52

%

Oak Court

Fargo, ND

2008

81

3,118

96.48

%

Oakview Townhomes (FKA Arrowhead)

Grand Forks, ND

2017

82

6,004

97.75

%

O'Reilly Auto Store

Mandan, ND

2010

6,300

706

100.00

%

Oxford

Fargo, ND

2021

144

10,219

97.54

%

Pacific Park I

Fargo, ND

2013

30

1,064

95.51

%

Pacific Park II

Fargo, ND

2013

39

1,182

94.54

%

Pacific South

Fargo, ND

2013

15

607

96.37

%

Park Circle

Fargo, ND

2017

18

937

99.56

%

Parkview Arms

Bismarck, ND

2015

62

4,850

92.80

%

Parkway Office (FKA Echelon Building)

Fargo, ND

2006

17,000

1,954

100.00

%

Parkwest Gardens

West Fargo, ND

2014

142

8,292

96.10

%

Parkwood

Fargo, ND

2008

40

1,462

97.77

%

Pebble Creek

Bismarck, ND

2008

70

3,396

95.86

%

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Pinehurst

Fargo, ND

2021

210

14,982

95.31

%

Plumtree

Fargo, ND

2017

18

939

99.76

%

Prairiewood Court I & II

Fargo, ND

2006 and 2007

60

2,434

90.98

%

Prairiewood Meadows

Fargo, ND

2012

88

5,290

93.30

%

Prose

Fort Worth, TX

2022

270

55,690

75.19

%

Quail Creek

Springfield, MO

2015

164

11,236

95.51

%

Redpath

White Bear Lake, MN

2016

25,817

4,017

100.00

%

Robinwood

Coon Rapids, MN

2014

120

8,399

93.70

%

Rosedale Estates

Roseville, MN

2014

360

26,637

90.13

%

Rosegate

Fargo, ND

2008

90

3,608

94.55

%

Rosser

Bismarck, ND

2020

24

1,468

95.21

%

Roughrider

Grand Forks, ND

2016

12

699

92.64

%

Saddlebrook

West Fargo, ND

2008

60

1,804

97.04

%

Sage Park (FKA Brighton Village)

New Brighton, MN

2014

240

17,840

94.88

%

Sargent

Fargo, ND

2017

36

1,734

94.51

%

Schrock

Fargo, ND

2013

18

811

98.63

%

SE Maple Grove, LLC****

Maple Grove, MN

2021

161

32,079

59.28

%

SE Savage, LLC****

Savage, MN

2021

190

36,794

94.32

%

Sheridan Pointe

Fargo, ND

2013

48

2,945

94.96

%

Sierra Ridge

Bismarck, ND

2006 and 2011

136

11,165

97.83

%

Somerset

Fargo, ND

2008

75

4,027

96.32

%

Southgate

Fargo, ND

2007

162

6,581

98.26

%

Southview III

Grand Forks, ND

2011

18

776

89.31

%

Southview Village

Fargo, ND

2007

72

3,648

97.62

%

Spring

Fargo, ND

2013

25

1,053

98.80

%

Stanford Court

Grand Forks, ND

2013

96

4,864

90.35

%

Stonefield

Bismarck, ND

2014

192

30,096

97.87

%

Stony Brook

Omaha, NE

2009

148

11,599

95.45

%

Summerfield

Fargo, ND

2015

18

862

97.58

%

Summit Point

Fargo, ND

2015

87

7,005

97.86

%

Sunchase

Fargo, ND

2017

36

1,878

98.01

%

Sunset Ridge

Bismarck, ND

2008 and 2010

180

12,471

96.59

%

Sunview

Grand Forks, ND

2008

36

2,073

95.77

%

Sunwood Estates

Fargo, ND

2007

80

4,452

92.81

%

Thunder Creek

Fargo, ND

2018

57

5,391

94.37

%

Titan Machinery

Bismarck, ND

2015

22,293

3,448

100.00

%

Titan Machinery

Dickinson, ND

2012

17,760

1,790

100.00

%

Titan Machinery

Fargo, ND

2012

29,800

3,336

100.00

%

Titan Machinery

Marshall, MN

2011

67,600

5,081

100.00

%

Titan Machinery

Minot, ND

2012

23,690

2,630

100.00

%

Titan Machinery

North Platte, NE

2016

18,910

1,769

100.00

%

Titan Machinery

Sioux City, IA

2013

36,332

4,567

100.00

%

Trustmark

Fargo, ND

2020

45,755

13,425

100.00

%

Twin Oaks

Hutchinson, MN

2014

80

4,470

97.75

%

Twin Parks

Fargo, ND

2008

66

2,596

98.76

%

Valley Homes Duplexes

Grand Forks, ND

2015

24

2,572

93.45

%

Valley View

Golden Valley, MN

2014

72

7,820

98.99

%

Village Park

Fargo, ND

2008

60

2,416

98.82

%

Village West

Fargo, ND

2008

80

2,987

95.82

%

Walgreens

Alexandria, LA

2009

14,560

4,296

100.00

%

Walgreens

Batesville, AR

2009

14,820

7,616

100.00

%

Walgreens

Denver, CO

2011

13,390

5,210

100.00

%

Walgreens

Fayetteville, AR

2009

14,550

5,810

100.00

%

Walgreens

Laurel, MS

2010

14,820

4,542

100.00

%

Washington

Grand Forks, ND

2016

17

745

94.30

%

Wells Fargo Building

Duluth, MN

2007

95,961

10,801

55.24

%

West Oak

Fargo, ND

2017

18

869

97.94

%

Westcourt

Fargo, ND

2014

64

3,710

93.43

%

Westside

Hawley, MN

2010

14

544

90.67

%

Westwind

Fargo, ND

2008

18

633

91.87

%

Westwood Estates

Fargo, ND

2008

200

8,277

93.58

%

Willow Park

Fargo, ND

2008

102

6,767

94.94

%

Wolf Creek

Fargo, ND

2020

54

5,364

99.18

%

Woodland Pines (FKA Fredericksburg)

Omaha, NE

2018

173

13,250

95.21

%

* 70.00% ownership interest

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** 66.67% ownership interest

*** 50.00% ownership interest

**** 60% ownership interest

Geography

Of our 185 properties, 142 are located in North Dakota, with 89 being located in the greater Fargo, North Dakota and Moorhead, Minnesota metropolitan statistical area. The North Dakota region generated approximately 51.9% of our rental revenue for the year ended December 31, 2022.

The following table presents the total real estate investment amount by state and annual rental revenue by state, as of the year ended December 31, 2022 (in thousands):

Real Estate

Rental

State

    

Investment

%

Revenue

%

North Dakota

$

510,127

52.5

%

$

70,132

51.9

%

Minnesota

305,463

34.6

%

51,314

38.0

%

Other

155,558

16.0

%

13,614

10.1

%

$

971,148

103.1

%

$

135,060

100.0

%

Economy

The North Dakota workforce is concentrated in agricultural, energy, information technology, aerospace sciences and medical sciences. According to the U.S. Census Bureau, the 2022 estimated combined population of the Fargo, West Fargo and Moorhead metro area was 210,903 people.

The following chart depicts the difference in unemployment rates between North Dakota and the national average for 2022:

   

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

National (1)

4.0

%

3.8

%

3.6

%

3.6

%

3.6

%

3.6

%

3.5

%

3.7

%

3.5

%

3.7

%

3.6

%

3.5

%

North Dakota (1)

3.1

%

2.9

%

2.9

%

2.8

%

2.6

%

2.5

%

2.3

%

2.3

%

2.2

%

2.3

%

2.3

%

2.3

%

(1)Seasonally adjusted

Source: Bureau of Labor Statistics

Acquisitions and Dispositions

We had eight acquisitions and five dispositions of property during the year ended December 31, 2022. We had five acquisitions and two dispositions of property during the year ended December 31, 2021. We had nine acquisitions and three dispositions of property during the year ended December 31, 2020.

Capitalization rates are a key decision-making item used by the Board. In making acquisitions, the Board currently targets capitalization rates between 6.0 to 10.0%, depending on the amount of risk involved. For those properties with greater risk, the Board targets greater capitalization rates (9.0% or greater). For those properties exhibiting less risk, a lower capitalization risk is acceptable. For potential acquisitions, the Board also requires an adequate spread between the financing on the property and the capitalization rate. Capitalization rates for acquisitions are calculated using projected net operating income divided by the investment. Net operating income is calculated by taking GAAP net income and adding back depreciation, amortization, and interest expense. Capitalization rates for dispositions are calculated in the same way with the exception of using historical, rather than projected, net operating income. The market has seen an increase in investors, driving up overall acquisition prices, thus lowering capitalization rates below the target thresholds set by the Board.

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We use historical occupancy, rental income, and expenses to calculate projected net operating income for potential real estate investments. For residential properties, we make various assumptions about future rents, occupancy levels, and expenses based on historical financial information and our assessment of the property’s future potential. The projected NOI for residential acquisitions is typically based on historical occupancy and expenses over a three-to-five year period. When historical information is unavailable, market vacancy and credit loss factors are estimated.

For commercial and residential properties, assumptions regarding rental income and expenses are based on the terms of the in-place leases and available historical financial information which is then used to generate projected net operating income.

Numerous estimates and assumptions are necessary to generate projected net operating income for potential commercial and residential acquisitions, and there is no guarantee actual net operating income will equal projected net operating income.

Tenants

Our tenants are varied and consist of individuals and national, regional, and local businesses. Our commercial properties generally attract a mix of tenants. In 2022, 2021 and 2020, no single tenant represented more than 10% of our revenues. We have investments in several types of real estate, including multifamily, retail, office, industrial, and medical. Within our office, retail, and industrial properties, we have over 100 tenants who operate in numerous industries, including restaurants, pharmacy, medical, financing, banking, insurance, professional services, technology, wholesale and direct retail.

We had nine acquisitions and three dispositions during the year ended December 31, 2020. There were no acquisitions or dispositions during the year ended December 31, 2019.

Capitalization rates are a key decision-making item used by the Board. In making acquisitions, the Board currently targets capitalization rates between 6.0 to 10.0%, depending on the amount of risk involved. For those properties with greater risk, the Board targets greater capitalization rates (9.0% or greater). For those properties exhibiting less risk, a lower capitalization risk is acceptable. For potential acquisitions, the Board also requires an adequate spread between the financing on the property and the capitalization rate. Capitalization rates for acquisitions are calculated using projected net operating income divided by the investment. Net operating income is calculated by taking GAAP net income and adding back depreciation, amortization and interest expense. Capitalization rates for dispositions are calculated in the same way with the exception of using historical, rather than projected, net operating income.  The market has seen an increase in investors, driving up overall acquisition prices, thus lowering capitalization rates below the target thresholds set by the Board.

We use historical occupancy, rental income, and expenses to calculate projected net operating income for potential real estate investments. For residential properties, we make various assumptions about future rents, occupancy levels, and expenses based on historical financial information and our assessment of the property’s future potential. The projected NOI for residential acquisitions is typically based on historical occupancy and expenses over a three to five year period. When historical information is unavailable, market vacancy and credit loss factors are estimated. We normally do not assign a value to residential tenant leases already in place due to the short-term duration of twelve months or less of these leases and the uncertainty of retaining all tenants due to a change in ownership and in some cases property management companies.

For commercial properties, assumptions regarding rental income and expenses are based on the terms of the in-place leases and available historical financial information which is then used to generate projected net operating income.

Numerous estimates and assumptions are necessary to generate projected net operating income for potential commercial and residential acquisitions, and there is no guarantee actual net operating income will equal projected net operating income.

See financial statement notes 17 and 18 for additional details regarding acquisitions and dispositions.

Insurance

We believe we have adequate property damage, fire loss and liability insurance on all of our properties with reputable, commercially rated companies. We also believe our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount we believe to be adequate.

Regulations

Our properties, as well as any other properties we may acquire in the future, are subject to various federal, state and local laws, ordinances and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe we have all permits and approvals necessary under current law to operate our properties.

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Table of Contents

ITEM 3. LEGAL PROCEEDINGS

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.  While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Company.

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

30

Item 6. Selected Financial Data

32

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

33

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

45

Item 8. Financial Statements and Supplementary Data

45

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

45

Item 9A. Controls and Procedures

45

Item 9B. Other Information

47

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESPART III

Item 10. Trustees, Executive Officers and Corporate Governance

47

Item 11. Executive Compensation

47

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

47

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

47

Item 14. Principal Accountant Fees and Services

47

PART IV

Item 15. Exhibits and Financial Statement Schedules

48

Item 16. Form 10-K Summary

48

Report of Independent Registered Public Accounting Firm and Financial Statements

51

Signatures

94

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements regarding our plans and objectives, including, among other things, our future financial condition, anticipated capital expenditures, anticipated dividends and other matters. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.

The forward-looking statements included herein are based on our current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure readers that the forward-looking statements included in this filing will prove to be accurate. The accompanying information contained in this Annual Report on Form 10-K, including, without limitation, the information set forth under the section entitled “Risk Factors” in Item 1A, identifies important additional factors that could materially adversely affect actual results and performance. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of certain unanticipated events or changes to future operating results.

PART I

All dollar amounts in this Form 10-K are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

ITEM 1.  BUSINESS

GENERAL

Sterling Real Estate Trust (“we,” “us,” “our,” “Company,” “Trust” or “Sterling”) is a real estate investment trust (“REIT”). Sterling was registered in North Dakota as an unincorporated business trust in December 2002.  References in this Annual Report on Form 10-K to the “Company,” “Sterling,” “Trust,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our dividends and other factors.  As of December 31, 2022, we owned directly or through our operating partnership, 185 properties in 12 states.

UPREIT Structure

The Trust operates as an Umbrella Partnership Real Estate Investment Trust, which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, the Trust conducts substantially all investment activities and holds substantially all of the Trust’s assets through the operating partnership Sterling Properties, LLLP. The Trust controls the operating partnership as the general partner and owns approximately 36.60% of the operating partnership as of December 31, 2022. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, the proportionate shares of the assets and income of the operating partnership are deemed to be the assets and income of the Trust.

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Table of Contents

The UPREIT structure is used to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the property for limited partnership units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, the Trust may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in the operating partnership, rather than directly in the Trust, may be more attractive to certain institutional or other investors due to their business or tax structure. If an investor is interested in making a substantial investment in our operating partnership, the structure provides the Trust the flexibility to accommodate different terms for each investment, while applicable tax laws generally restrict a REIT from charging different fee rates among its shareholders. Finally, if the Trust’s shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.

Operating Partnership

Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership in April 2003 to acquire, own and operate properties on the Trust’s behalf. The operating partnership holds a diversified portfolio of multifamily dwellings and commercial properties located principally in the upper and central Midwest United States.

Since formation, the Trust’s focus has consisted of owning and operating income-producing real estate properties. In 2006, the Trust held 23 total properties approximating $56,265 in total assets, in the operating partnership. Between 2007 and 2022, the Trust focused extensively on strengthening the multifamily component of the portfolio, acquiring properties directly or through UPREIT transactions. A majority of these multifamily properties are located in North Dakota. The portfolio has grown to 185 properties, approximating $888,723 in total assets, and book equity, including noncontrolling interests, of approximately $323,466 as of December 31, 2022. As of December 31, 2022, the portfolio contained approximately 11,300 apartment units and 1,498,000 square feet of leasable commercial space.

OUR PEOPLE

We do not have any employees. Instead, we rely on our external Advisor to conduct our day-to-day affairs.

Advisor to the Trust

Sterling Management, LLC, a North Dakota limited liability company formed in November 2002, is the external Advisor to the Trust. The Advisor is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.  The Advisor is 100% owned by Trustmark Enterprises, Inc., formerly known as Alloy, a North Dakota corporation (“Trustmark”).  Trustmark is owned in part by Kenneth P. Regan, a Trustee and Chief Executive Officer of the Trust, by James S. Wieland, also a Trustee of the Trust, by Joel S. Thomsen, President of the Trust. In addition, Messrs. Regan, Wieland, Thomsen and Gleave serve on the Advisor’s Board of Governors. The Advisor’s employee base has seen considerable growth, both in number and expertise, since its inception.

Audit and Disclosure Committee

The Audit and Disclosure Committee was established by the Board of Trustees to assist the Board in fulfilling its fiduciary duties and oversight responsibilities. The Audit and Disclosure Committee assists the Board by overseeing the integrity of the Trust’s financial statements, financial reporting and disclosure processes, internal accounting and financial controls and the annual independent audit of the Trust’s financial statements. The Audit and Disclosure Committee also oversees the establishment and maintenance of processes to assure the Trust’s compliance with all applicable laws, regulations, and Trust policy, including compliance with filing requirements under the Exchange Act and the rules and regulations promulgated thereunder. In performing its work, it is the Audit and Disclosure Committee’s responsibility to foster free and open means of communication between the Trustees, the independent auditors and the Trust’s financial managers. Our Audit and Disclosure Committee is currently comprised of Trustees Timothy A. Hunt (Chair of the Committee), Ann L. Christenson, Timothy L. Haugen, Michelle L. Korsmo, and Mark T. Polovitz.

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Table of Contents

Board of Trustees and Executive Officers

The Trust operates under the direction of our Board of Trustees, the members of which are accountable to both the Trust and its shareholders. The Trustees are elected annually by our shareholders.  In addition, the Board has a duty to supervise our relationship with the Advisor and evaluate the performance of and fees paid to the Advisor on an annual basis. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on March 24, 2022, effective April 1, 2022 until March 31, 2023. The Board of Trustees has provided investment guidance for the Advisor to follow and must approve each investment recommended by the Advisor. Currently, the Advisor has eight members on the Board, six of whom are independent.

Although the Trust has executive officers, it does not have any paid employees. The President, Chief Executive Officer, Chief Investment Officer, Chief Financial Officer and Treasurer, and General Counsel and Secretary of the Trust, are also officers, employees, owners, or governors of our Advisor. Among others, such executive officers oversee the Advisor’s day-to-day operations with respect to the Trust. However, when doing so, such executive officers are acting on behalf of the Advisor in performing the Advisor’s obligations under the Advisory Agreement. Generally, the only services performed by the Trust’s executive officers are those required by law or regulation, such as executing documents as required by North Dakota law and providing certifications required by the federal securities laws.

Organizational Structure

On January 1, 2021, the advisor was acquired by Trustmark Enterprises, Inc. in an equity transfer.

The following chart shows the relationship structure with the advisor:

Graphic

(1)As of December 31, 2022, the Advisor was owned 100% by Trustmark Enterprises, Inc. Trustmark was owned in part by the Trust’s Chief Executive Officer and Trustee Kenneth P. Regan (36.23%), by Trustee James S. Wieland (25.15%), by President Joel S. Thomsen (20.00%).  Messrs. Regan and Thomsen, serve as officers of the Advisor. Messrs. Regan, Wieland, and Thomsen, serve on the Advisor’s Board of Governors.
(2)Sterling Management, LLC serves as Advisor to both the Trust and the operating partnership. The Advisor does not own any of our shares. Messrs. Regan and Wieland beneficially own approximately 1.43% and 2.76%, respectively, of our shares as of December 31, 2022.
(3)The Trust controls the operating partnership as the general partner and owns approximately 36.60% of the operating partnership as of December 31, 2022. Messrs. Regan and Wieland beneficially owned and had voting power over approximately 16.41% and 5.12%, respectively, of the Operating Partnership as of December 31, 2022.

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Table of Contents

CORE INVESTMENT OBJECTIVES AND STRATEGY

Investment Objectives

The Trust’s primary investment objectives are to:

Acquire quality real estate properties or interests in real estate properties that can provide stable cash flow for distribution to our shareholders, preservation of capital and realization of long-term capital appreciation upon the sale of such properties,
Offer an investment option in which the value of the common shares is correlated to real estate as an asset class rather than traditional asset classes such as stocks and bonds; and
Provide a hedge against inflation through use of month-to-month rentals or short-term and long-term lease arrangements with rental properties tenants.

The Trust may change the investment objectives only with the approval of holders of a majority of the outstanding common shares.

Investment Guidance

The Board of Trustees has provided investment guidance to the Advisor to direct the investment strategy of the Trust. Changes to the investment guidance must be approved by the Board. The Advisor has been authorized to execute:

Commercial and multifamily real estate property acquisitions and dispositions,
Investments in other real estate related assets, in each case so long as such investments are approved by our Board,
Acquisitions of property or land for the purposes of future development; and
Capital investments in the portfolio’s current properties through capital improvements.

The Board will have ultimate oversight over the Trust’s investments and may change from time to time the scope of authority delegated to the Advisor with respect to acquisition and disposition transactions.

Investment Strategy

Sterling’s current investment strategy and focus is on multifamily properties. Our Advisor monitors industry trends and invests in property believed to provide the most favorable return balanced with risk. We attempt to manage our real estate portfolio by evaluating changes or trends in the industries in which our tenants operate, the creditworthiness of our tenants and changes or trends in the area demographics surrounding our properties for evidence that our properties will continue to meet our investment objectives of cash flow, preservation of capital and capital appreciation. There is no current plan for the existing commercial properties (industrial, medical, office and retail) regarding retention, acquisition, or disposition.

The Trust will primarily invest in existing or newly developed real estate properties. The Trust may also invest in interests in real estate properties by acquiring direct ownership or ownership interests with other investors, including affiliates of the Advisor, through holding company structures or joint ventures, real estate partnerships, tenant-in-common deals, REITs, or other collective investment vehicles. The Trust may also invest in other real estate property types, including undeveloped land or other development opportunities if the land is acquired for the purpose of producing rental or other operating income in the future. The properties the Trust primarily invests in have existing rent and expense schedules, or the properties are newly constructed with predictable cash flows.

Most current acquisitions are in or near metropolitan areas. However, there is no limitation on the geographic areas in which we may acquire targeted investments.

The Trust may also acquire portfolios of real estate properties held by individual owners and real estate properties held by funds, including hedge funds. It is anticipated that such property owners will primarily sell the properties in exchange for limited partnership interests of the operating partnership.

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Table of Contents

SEGMENT DATA

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multifamily. Our commercial properties include retail, office, industrial and medical properties. We assess and measure operating results based on the non-GAAP financial measurement of net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and certain general and administrative expenses.

COMPETITION

Our properties are located in highly competitive real estate markets. The number of competitive properties in a particular area could have a material adverse effect on our ability to lease space and the amount of rent we can charge at our properties. We compete with many property owners, such as corporations, limited partnerships, individual owners, other real estate investment trusts, insurance companies and pension funds.

Our competition also consists of other owners and developers of multifamily and commercial properties who are trying to attract tenants to their properties. This competition influences our ability to acquire properties and the prices that we may pay for those properties. We believe, however, that the diversity of our investments, the experience and abilities of our management and the quality of our assets affords us some competitive advantages that have in the past, and should in the future, allow us to operate our business successfully despite the competitive nature of our business.

Generally, there are multifamily and other similar commercial properties within relatively close proximity to each of our properties. The majority of our retail properties are restaurants and pharmacies. In addition to competitor retail properties with similar business models, we and our tenants face increasing competition from outlet malls, internet shopping websites, discount shopping clubs, catalog companies, direct mail and telemarketing.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

As an owner of real estate, we are subject to various environmental laws, rules and regulations adopted by various governmental bodies or agencies. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations, and some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Some of these laws and regulations may impose joint and several liability on residents, owners, or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us.

In addition, we are subject to many other laws and governmental regulations applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1991, to be accessible to the handicapped and prohibits housing discrimination based upon familial status.

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The Housing for Older Persons Act (“HOPA”) provides age-based discrimination exceptions for housing developments qualifying as housing for older persons. Non-compliance with ADA, FHAA or HOPA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation. We believe our properties which are subject to ADA, FHAA and/or HOPA are substantially in compliance with their present requirements.

Compliance with these laws, rules, and regulations has not had a material adverse effect on our business, assets, or results of operations, financial condition, or ability to pay dividends. We do not believe our existing portfolio as of December 31, 2022 will require us to incur material expenditures to comply with these laws and regulations. However, we cannot assure that future laws, ordinances, or regulations will not impose any material liability, or that the current environmental condition of our properties will not be affected by the operations of tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

AVAILABLE INFORMATION

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to these filings with the Securities and Exchange Commission (“SEC”). The public may read any materials filed by us with the SEC on the internet site maintained by the SEC at www.sec.gov. We also maintain an internet site at www.smftrust.com, which includes the reports and other documents we file with the SEC. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. This reference to our website is not intended to incorporate information found on the website into this filing.

ITEM 1A. RISK FACTORS

Risks Related to Sterling Real Estate Trust

Our results are dependent on amounts received from the leasing and resale of investments, which are subject to market and economic changes. If income is insufficient to meet our capital needs, our ability to carry out our business plans could be adversely affected.

Our purpose is to acquire and hold real estate investments as long-term investments. The primary income that will be generated by us will be the profits, if any, from the operation or holding of the real estate and upon the resale of the investments. If circumstances arise which cause an investment to become undesirable or remain at its current value or decrease in value, we may generate less income than anticipated.

Our success is based on continuing to locate and hold suitable real estate investments, and failure of our Advisor to locate additional suitable properties or the unsuccessful operation of our existing real estate investments could adversely affect our operations and our ability to pay dividends.

Our ability to achieve our investment objectives and to pay dividends to our shareholders and distributions to unitholders is dependent upon the performance of our Advisor in locating suitable investments and appropriate financing arrangements for us as well as on the successful management of our properties after acquisition. We currently own, through the operating partnership, the properties described under Item 2 — Properties.  We cannot be sure our Advisor will be successful in locating suitable investments on financially attractive terms, or be certain that operation of the properties will avoid the risks attendant to real estate acquisitions, such as:

Market Information
The risk properties may not perform in accordance with expectations, including projected occupancy and rental rates.
The risk we may have underestimated the cost of improvements or repairs required to bring or keep an acquired property up to or at standards established for its intended use or its intended market position.

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We may have to make expedited decisions on whether to invest in certain properties, including prior to receipt of detailed information.

We may be required to make expedited decisions in order to effectively compete for the acquisition of desirable properties and other assets. In such cases, our Advisor and Board of Trustees may not have access to detailed information regarding real estate investments at the time of making an investment decision to pay a non-refundable deposit and to proceed with an acquisition. In addition, the actual time period during which our Advisor will be allowed to conduct due diligence may be limited. Therefore, there can be no assurance our Advisor and Board of Trustees will have knowledge of all circumstances that may adversely affect an investment.

We may change our investment and operational policies without shareholder consent, and such changes could increase our exposure to additional risks.

Generally, the Board of Trustees may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our shareholders, which could result in our making investments different from, and possibly riskier than investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

There can be no assurance dividends or distributions will be paid or increase over time.

There are many factors that can affect the availability and timing of cash dividends to our shareholders and distributions to unitholders.  Dividends and distributions will be based principally on cash available from our real estate and other investments. The amount of cash available for dividends will be affected by many factors, such as our ability to acquire profitable real estate investments, successfully manage our real estate properties, our operating expenses, and general economic conditions. We can give no assurance we will be able to pay or maintain dividends or distributions or that dividends or distributions will increase over time.

Dividends may include a return of capital, and shareholders may be required to recognize capital gain on distributions.

Dividends payable to shareholders may include a return of capital. To the extent dividends exceed cash flow from operations, a shareholder’s basis in our shares will be reduced and, to the extent dividends exceed a shareholder’s basis, the shareholder may recognize capital gain and be required to make tax payments.

We depend on certain executive officers and trustees, and the loss of such persons may delay or hinder our ability to carry out our investment strategies.

Our future success substantially depends on the active participation of James Wieland, one of our trustees, Kenneth Regan, Chief Executive Officer and a trustee, Joel Thomsen, President, Damon Gleave, Chief Financial Officer and Treasurer, and Barry Schmiess, Chief Investment Officer. Messrs. Wieland, Regan, and Thomsen are also governors and owners of our Advisor. Messrs. Wieland, and Regan, have over 40 years of extensive experience each in the commercial real estate industry, and have been instrumental in setting our strategic direction, operating our business and arranging necessary financing, and through the Advisor, in locating desirable real estate investments and were serving as property manager, managing our properties. Losing the services of Messrs. Wieland, Regan, Thomsen, Gleave, or Schmiess without replacing their position with someone of the same competence and experience, could have a material adverse effect on our ability to successfully carry out our investment strategies and achieve our investment objectives. There can be no guarantee they will remain affiliated with us. See “Risks Related to Conflicts of Interest”.

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Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data, or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation, and damage to our investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by Sterling Management and service providers.   Our and Sterling Management’s processes, procedures and internal controls that are designed to mitigate cybersecurity risks and cyber intrusions do not guarantee that a cyber incident will not occur or that our financial results, operations, or confidential information will not be negatively impacted by such an incident.

We are not required to comply with certain reporting requirements, including those relating to auditor’s attestation reports on the effectiveness of our system of internal control over financial reporting, accounting standards and disclosure about our executive compensation, that apply to other public companies.

So long as our shares of common stock are not traded on a securities exchange, we will be deemed to be a “non-accelerated filer” under the Exchange Act, and as a non-accelerated filer, we will be exempt from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In addition, so long as we are externally managed by the Advisor and we do not directly compensate our executive officers, or reimburse the Advisor or its affiliates for salaries, bonuses, benefits and severance payments for persons who also serve as one of our executive officers or as an executive officer of the Advisor, we do not have any executive compensation.

Many of our costs, such as operating and general and administrative expenses, real estate acquisition, and constructions costs, could be adversely impacted by period of heightened inflation.

A sustained or further increase in inflation could have an adverse impact on our operating expenses incurred in connection with, among others, the property-related services such as repairs and maintenance, janitorial, utilities, security and insurance. Our operating expenses may be recoverable through commercial lease arrangements.

Risks Related to Our Structure

Our shareholders may experience dilution if we or our operating partnership issues additional securities.

Our shareholders do not have preemptive rights to any shares issued by us in the future. If we sell or issue additional shares in the future to raise capital, pursuant to a dividend reinvestment plan or in exchange for limited partnership units pursuant to our operating partnership’s Limited Liability Limited Partnership Agreement (“LLLP Agreement”), our shareholders will experience dilution of their equity investment. In addition, if our operating partnership sells additional securities or issues additional securities in connection with a property acquisition transaction, we would, and indirectly our shareholders would, experience dilution in their equity position.

Our securityholders have limited control over our operation, and the Board of Trustees has the sole power to appoint and terminate the Advisor.

Our Board of Trustees has the authority to determine our major policies, including our policies regarding financing, growth, investment strategies, debt capitalization, REIT qualification, distribution, and to take certain actions including acquiring or disposing of real estate and real estate related investments, dividend declaration and the election or removal of the Advisor. Our securityholders do not have the right to remove the Advisor but have the right to elect and remove trustees.

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Under our Third Amended and Restated Declaration of Trust, our trustees may not do the following without the approval of the holders of a majority of the outstanding common shares of beneficial interest:

Our common shares
Amend the Third Amended and Restated Declaration of beneficial interest are not listed on any national exchange or over-the-counter market or quoted on any national securities market, and we currentlyTrust, except for amendments which do not have plans to listadversely affect the rights, preference and privileges of shareholders.
Sell all or havesubstantially all of our common shares quoted.assets other than in the ordinary course of business or in connection with a liquidation and dissolution.
Conduct a merger or other reorganization of the trust; or
Dissolve or liquidate us.

Our shareholders have the right, without the concurrence of the Board of Trustees, to terminate the trust and liquidate our assets or amend the Third Amended and Restated Declaration of Trust.

Shareholders have no role in determining our investments and must rely on our Advisor and oversight by the Board of Trustees.

For future acquisitions or dispositions, the Board of Trustees has the authority to approve investment acquisitions or dispositions without shareholder approval. Therefore, shareholders will not be able to evaluate the terms of future investment acquisitions or dispositions, their economic merit or other relevant financial data before we acquire or sell investments. Shareholders must rely entirely on the oversight of our Board of Trustees, the management ability of our Advisor and the performance of the property managers.

We may issue securities with more favorable terms than the outstanding shares without shareholder approval.

Under our Third Amended and Restated Declaration of Trust, our Board of Trustees has the authority to establish more than one class or series of shares and to fix the relative preferences and rights regarding conversion, voting powers, restrictions, limitations as to dividends and other distributions, and terms or conditions of redemption of such different classes or series without shareholder approval. Thus, our Board could authorize the issuance of a class or series of shares with terms and conditions that could have priority as to dividends and amounts payable upon liquidation over the rights of the holders of our outstanding common shares of beneficial interest. Such class or series of shares could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our shares, even if it would be in the best interest of our shareholders.

Shareholders could incur current tax liability on dividends they elect to reinvest in our shares, and may have to use separate funds to pay their tax liability.

Shareholders that participate in our dividend reinvestment plan will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional dividend to the extent the shares are purchased at a discount to fair market value. As a result, unless shareholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the shares received.

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There may be conflicts of interest between us and our shareholders on one side and our operating partnership and its limited partners on the other side.

Our trustees and officers have duties to us and our shareholders in connection with their management of us. At the same time, we, as general partner will have duties to our operating partnership and its limited partners in connection with the management of the operating partnership. Our duties as general partner of the operating partnership may come into conflict with the duties of our trustees and officers to us and our shareholders. The LLLP Agreement of our operating partnership expressly limits our liability for monetary damages by providing we will not be liable for losses sustained, liabilities incurred or benefits not derived if we acted in good faith. In addition, our operating partnership is required to indemnify us and our trustees and officers from and against any and all claims arising from operations of our operating partnership, unless it is established: (1) the act or omission was material and committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe the act or omission was unlawful. The LLLP Agreement also provides that we will not be held responsible for any misconduct or negligence on the part of any agent appointed by us in good faith.

There is no public trading market for our shares, nor do we expect one to develop, which may negatively impact our shareholders’ ability to sell their shares and the price at which shares may be sold.

There is no public market for our shares and there is no assurance one may develop. In addition, the price shareholders may receive for the sale of their shares is likely to be less than the proportionate value of our investments. If our shareholders are able to find a buyer for their shares, they may have to sell them at a substantial discount from the price they purchased the shares. Consequently, shareholders may not be able to liquidate their investments in the event of emergency or for any other reason. Therefore, shareholders should consider our securities as illiquid and a long-term investment and should be prepared to hold their shares for an indefinite period of time.

The estimated value of our common stock is based on a number of assumptions and estimates that may not be accurate and is also subject to a number of limitations.

The current estimated value of our common stock as of January 1, 2023, is approximately $23.00 per share. The methodology used by our Board to determine this value was based on estimates of the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain and certain additional information. No formal valuation has been undertaken by us. Our valuation process involves a number of estimates, assumptions and subjective judgments that may not be accurate and complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated value per share may not represent current market values or fair values as determined in accordance with U.S. generally accepted accounting principles. A shareholder should not rely on the estimated value per share as being an accurate or precise measure of the then-current value of the shares of our common stock in making a decision to buy or sell shares of our common stock, including whether to reinvest dividends by participating in the dividend reinvestment plan and whether to request redemption pursuant to our share redemption program.

Risks Related to Our Status as a REIT and Related Federal Income Tax Matters

If we fail to continue to qualify as a REIT, we would incur additional tax liabilities that would adversely affect our operations and our ability to make distributions and could result in a number of other negative consequences.

Although our management believes we are organized, have operated, and will be able to continue to be organized and to operate in such a manner to qualify as a real estate investment trust (REIT), as that term is defined under the Internal Revenue Code, we may not have been organized, may not have operated, or may not be able to continue to be organized or to operate in a manner to have qualified or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status.

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The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control, regarding our organization and ownership, distributions of our income and the nature and diversification of our income and assets. The fact we hold substantially all of our assets through our operating partnership and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.

If we lose our REIT qualification, we will face income tax consequences that will reduce substantially our available cash for dividends and investments for each of the years involved because:

Shareholders
We would be subject to federal corporate income taxation on our taxable income, including any applicable alternative minimum tax, and Unit Holderscould be subject to increased state and local taxes.
We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income; and
Unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

The increased taxes could reduce the value of the shares as well as cash available for dividends to shareholders and investments in additional assets. In addition, if we fail to continue to qualify as a REIT, we will not be required to pay dividends to shareholders. Our failure to continue to qualify as a REIT also could impair our ability to expand our business and to raise capital.

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal and state taxes on our income or property, including the following:

As
To continue to qualify as a REIT, we must distribute annually at least 90% of March 29, 2021,our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gains) to our shareholders. If we had 9,968,034, common sharessatisfy the distribution requirement but distribute less than 100% of beneficial interests outstanding, held by a totalour REIT taxable income, we will be subject to corporate income tax on the undistributed income. In such situation, shareholders will be treated as having received the undistributed income and having paid the tax directly, but tax-exempt shareholders, such as charities or qualified pension plans, will receive no benefit from any deemed tax payments.
We may be subject to state and local taxes on our income or property, either directly or indirectly, because of 1,054 common shareholders and no outstanding options or warrants to purchase our common shares.

In addition, as of March 29, 2021, there were approximately 18,246,421 limited partnership unitsthe taxation of our operating partnership outstanding held by approximately 523 limited partners. Pursuantor of other entities through which we indirectly own our assets.

If we have net income from the sale of foreclosure property we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
If we sell a property, other than foreclosure property, we hold primarily for sale to customers in the ordinary course of business, our gain will be subject to the exchange rights under100% “prohibited transaction” tax.
We will be subject to a 4% nondeductible excise tax on the LLLP Agreementamount, if any, by which the distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

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We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.

To qualify as a REIT, in general, we must distribute to our shareholders at least 90% of our net taxable income each year, excluding capital gains. However, we could be required to include earnings in our net taxable income before we actually receive the related cash. If we do not have sufficient cash to pay the necessary dividends to preserve our REIT status for any year or to avoid taxation, we may need to borrow funds, to sell assets or to issue additional securities even if the then-prevailing market conditions are not favorable for such actions.  In addition, we will require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

If our operating partnership does not qualify as a partnership, its income may be subject to taxation, and we would no longer qualify as a REIT.

The Internal Revenue Code classifies “publicly traded partnerships” as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. We structured our operating partnership to be classified as a partnership for federal income tax purposes. However, no assurance can be given the IRS will not challenge our position or will classify our operating partnership as a “publicly traded partnership” for federal income tax purposes. To minimize this risk, we have placed certain restrictions on the transfer and/or redemption of partnership units in the LLLP Agreement. If the IRS would assert successfully our operating partnership should be treated as a “publicly traded partnership” and substantially all of the operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat the operating partnership as an association taxable as a corporation. In such event, we would cease to qualify as a REIT. In addition, the imposition of a corporate tax on the operating partnership would reduce the amount of distributions the operating partnership could make to us and, in turn, reduce the amount of cash available to us to pay dividends to our shareholders.

We have transfer restrictions on our shares that may limit offers to acquire substantial amounts of the Trust’s shares at a premium.

To qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Currently, Third Amended and Restated Declaration of Trust prohibits transfers of our shares that would result in: (1) our shares being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our shares, applying broad attribution rules imposed by the federal income tax laws, or (3) before our shares qualify as a class of publicly-offered securities, 25% or more of our shares being owned by ERISA investors. If a shareholder acquires shares in excess of the ownership limits or in violation of the restrictions on transfer, we:

May consider the transfer to be void ab initio.
May not reflect the transaction on our books.
May institute legal action to enjoin the transaction.
May redeem such excess shares.
Automatically transfer any excess shares to a charitable trust for the benefit of a charitable beneficiary.

If such excess shares are transferred to a trust for the benefit of a charitable beneficiary, the charitable trustee shall sell the excess shares and the shareholder will be paid the net proceeds from the sale equal to the lesser of: (1) the price paid by the shareholder or the “market price” of our shares if no value was paid or (2) the price per share received by the charitable trustee.

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If shares are acquired in violation of the ownership limits or the restrictions on transfer described above:

Transferee may lose its power to dispose of the operating partnership, we haveshares; and
Transferee may incur a loss from the option, upon redemption requests bysale of such shares if the holdersfair market price decreases.

These limitations may have the effect of preventing a change of control or takeover of us by a third party, even if the change in control or takeover would be in the best interest of our shareholders.

Complying with REIT requirements may restrict our ability to operate in a way to maximize profits.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders, and the ownership of our common shares. For example, we may be required to pay dividends to our shareholders at disadvantageous times, including when we do not have readily available funds. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to forego or liquidate otherwise attractive investments which could negatively impact shareholder value.

To qualify as a REIT, at the end of each calendar quarter, at least 75% of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets), in general, cannot include more than 10% of the voting securities of any one issuer or more than 10% of the value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries. Therefore, we may be required to liquidate otherwise attractive investments or may be forced to forego attractive investments to satisfy these requirements. Such action or inaction could be adverse to our shareholder interests.

Gains from asset sales may be subject to a 100% prohibited transaction tax, which tax could reduce the Trust’s available assets and reduce shareholder value.

We may have to sell assets from time to time to satisfy our REIT distribution requirements and other REIT requirements or for other purposes. The IRS may posit one or more asset sales may be “prohibited transactions.” If we are deemed to have engaged in a “prohibited transaction,” our gain from such sale would be subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax, but we cannot assure you we will be able to qualify for the safe harbor. We will use reasonable efforts to avoid the 100% tax and we do not intend to hold assets in a manner to cause their dispositions to be treated as “prohibited transactions,” but we cannot assure you the IRS will not challenge our position, especially if we make frequent sales or sales of assets in which we have short holding periods. Payment of a 100% tax would adversely affect our results of operations.

Ordinary dividends payable by REITs generally are taxed at the higher ordinary income rate which could reduce the net cash received by shareholders.

The maximum U.S. federal income tax rate for “qualified dividends” payable by U.S. corporations to individual U.S. shareholders currently is 20%.  In addition, the 3.8% tax on net investment income may apply to such dividends. In general, ordinary dividends payable by REITs to its individual U.S. shareholders, however, are generally not eligible for the reduced rates and generally are taxed at ordinary income rates (for REIT dividends received after December 31, 2017, the maximum individual income tax rate currently is 37%, but the current maximum, effective federal income tax rate as to REIT dividends may be reduced to 29.6% because of a partial deduction that may apply with respect to REIT dividends; in addition, the 3.8% tax on net investment income may apply to REIT dividends). It is also possible tax legislation that has or may be enacted might increase this rate differential. The differing treatment of dividends received from REITs and other corporations might cause individual investors to view an investment in REITs as less attractive related to other corporations which might be detrimental to our ability to raise additional funds through the sale of our common shares.

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Changes in legislative or other actions affecting REITs may adversely affect our status as a REIT.

The rules dealing with U.S. federal income taxation are constantly under review by the legislative process, the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may apply retroactively) could adversely affect us or our shareholders. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the federal income tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification. We cannot predict whether, when, in what forms, or with what effective dates, the laws applicable to us or our shareholders may be changed.

Our Board of Trustees may revoke our REIT election without shareholder approval, and we would no longer be required to make distributions of our net income.

Our Board of Trustees can revoke or otherwise terminate our REIT election without the approval of our shareholders if our Board determines it is not in our best interest to continue to qualify as a REIT. In such case, we would become subject to U.S. federal income tax on our taxable income, and we no longer would be required to distribute most of our net income to our shareholders, which may reduce the total return to our shareholders and affect the value of the shares.

Risks Related to Tax-Exempt Investors

Common shares may not be a suitable investment for tax-exempt investors.

There are special considerations that apply to investing in common shares on behalf of a trust, pension, profit sharing or 401(k) plans, health or welfare plans, trusts, individual retirement accounts (IRAs), or Keogh plans. If you are investing the assets of any of the above in common shares, you should satisfy yourself:

Your investment is consistent with your fiduciary obligations under applicable law, including common law, ERISA and the Internal Revenue Code.
Your investment is made in accordance with the documents and instruments that govern the trust, plan or IRA, including any investment policy.
Your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code.
Your investment will not impair the liquidity of the limited partnership units,trust, plan or IRA.
Your investment will not produce “unrelated business taxable income” for the trust, plan or IRA.
You will be able to value the assets of the trust, plan or IRA annually in accordance with ERISA requirements and applicable provisions of the trust, plan, or IRA; and
Your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

We have not evaluated, and will not evaluate, whether an investment in us is suitable for any particular trust, plan, or IRA.

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Under certain circumstances, tax-exempt shareholders may be subject to unrelated business taxable income, which could adversely affect such shareholders.

Neither ordinary nor capital gain distributions with respect to our common shares nor gain from the sale of our common shares, in general, should constitute unrelated business taxable income to tax-exempt shareholders. The following, however, are some exceptions to this rule:

Under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our common shares may be treated as unrelated business taxable income if our common shares are held predominately by qualified employee pension trusts (which we do not expect to be the case).
Part of the income and gain recognized by a tax-exempt shareholder with respect to common shares would constitute unrelated business taxable income if the tax-exempt shareholder incurs debt to acquire the limited partnership units by payingcommon shares; and
Part or all of the holdersincome or gain recognized with respect to our common shares held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of beneficial interest on a one-for-one exchange basis. The numbers of common shareholders and limited partners is based on the Company’s records.Internal Revenue Code may be treated as unrelated business taxable income.

Therefore, tax-exempt shareholders are not assured all dividends received from the trust will be tax-exempt.

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Risks Related to Our Relationship with the Advisor and Its Affiliates

We depend on our Advisor for the successful operations of the REIT, and if required, we may not be able to find a suitable replacement advisor.

Our ability to achieve our investment objectives is dependent upon the successful performance of our Advisor in locating attractive acquisitions, advising on dispositions of real estate properties and other real estate related assets, advising on any financing arrangements and other administrative tasks to operate our business. If the Advisor suffers or is distracted by adverse financial and operational problems in connection with its operations unrelated to us or for any reason, it may be unable to allocate a sufficient amount of time and resources to our operations. If this occurs, our ability to achieve our investment objectives or pay dividends to our shareholders may be adversely affected. Any adversity experienced by the Advisor or problems in our relationship with the Advisor could also adversely impact the operation of our properties and, consequently, our cash flow and ability to pay dividends to shareholders.

Either we or the Advisor can terminate the Advisory Agreement upon 60 days written notice to the other party for any reason, or we can terminate the Advisory Agreement immediately for cause or material breach of the Advisory Agreement. In addition, the Board of Trustees may determine not to renew the Advisory Agreement in any year. If this occurs, we would need to find another advisor to provide us with day-to-day management services or engage employees to provide these services directly to us, which would likely be difficult to do and may be costly. There can be no assurances we would be able to find a suitable replacement advisor or suitable employees or enter into agreements for such services on acceptable terms.

The termination or replacement of the Advisor could trigger a default or repayment event under financings.

Lenders providing financing for our acquired properties may include provisions in the mortgage loan documentation that state the termination or replacement of the Advisor is an event of default or an event triggering acceleration of the repayment of the loan in full. Even though we will attempt to have such provisions excluded from the loan documents, the lenders may still require them to be included. In addition, the termination or replacement of the Advisor could trigger an event of default under any credit agreement governing a line of credit we may obtain. If an event of default or repayment event occurs with respect to any of our properties, our ability to achieve our investment objectives could be materially adversely affected.

The Advisor may not be able to retain its key employees, which could adversely affect our ability to carry out our investment strategies.

We depend on the Advisor’s key officers, employees and governors. However, none of these individuals have an employment agreement with the Advisor and the loss of any or all of such person’s services and the Advisor’s inability to find, or any delay in finding, replacements with equivalent skills and experience, could adversely impact our ability to successfully carry out our investment strategies and achieve our investment objectives.

Our future success also depends on the Advisor’s and its affiliates’ ability to identify, hire, train and retain highly qualified real estate, managerial, financial, marketing, and technical personnel to provide the services to us pursuant to the Advisory Agreement and any other written services agreement, including any property management agreements. Competition for such personnel is intense, and the Advisor or its affiliates may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary personnel could have a material adverse effect on our business and results of operations.

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Risks Related to Investments in Real Estate

Insufficient geographic diversity of our real estate investments could adversely affect our operating results if economic changes impact real estate markets where we own significant assets.

Geographic concentration of our properties may expose us to economic downturns in those areas where our properties are located. A recession in any area where we own several properties or interests in properties could adversely affect our ability to generate or increase operating revenues, locate, and retain financially sound tenants or dispose of unproductive properties. In addition, it could have an adverse impact on our tenant’s ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Currently, the majority of our properties are located in North Dakota and Minnesota, and we hold several properties in Fargo, North Dakota and Moorhead, Minnesota. To the extent weak economic or real estate conditions affect North Dakota, Minnesota, or other markets in which we own properties more severely than other areas of the country, our financial performance could be negatively impacted.

We may invest in and develop undeveloped real property, which requires us to pay expenses prior to receiving any income on the property.

We have the discretion to invest up to 10% of our total assets in undeveloped property. When we invest in undeveloped property, such property does not generate operating revenue while costs are incurred to develop the property and may generate other expenses including property taxes and insurance. In addition, construction and development of such properties may not be completed within budget or as scheduled and projected rental levels may not be achieved. In addition to the risks of real estate investments in general, an investment in undeveloped property is subject to additional risks, including the expense and delay which may be associated with rezoning the land for a higher use and the development and environmental concerns of governmental entities and/or community groups. Therefore, we will not generate income on such property until development is completed and we begin leasing the property.

We may acquire multiple properties in a single transaction, which may adversely affect our operations through the inclusion of less desirable investments or financing requirements greater than we would otherwise be willing to incur.

Periodically, we may acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single property acquisitions, and the risk a multiple property acquisition does not close may be greater than in a single property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns we can earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for dividends. Any of the foregoing events may increase the risk of adverse business results and negatively affect our results of operations.

We may invest in co-ventures, where our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of a real estate investment and lower our overall return.

We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with our Advisor, its affiliates, our trustees, or third parties having investment objectives similar to ours in the acquisition of real estate investments. In such arrangements, we may be acquiring non-controlling interests in or sharing responsibility for managing the affairs of the investment. In such event, we would not be in a position to exercise sole decision-making authority. Investments such as these may, under certain circumstances, involve risks not present where another party is not involved, including the possibility that partners or co-investees might become bankrupt or fail to fund their required capital contributions. Co-investees may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.

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Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-investee would have full control over the joint venture. Disputes between us and co-investees may result in litigation or arbitration that would increase our expenses and prevent our management and the Advisor from focusing their time and effort on our business. Consequently, actions by or disputes with co-investees might result in subjecting additional risk to properties owned by the investment. In addition, we may in certain circumstances be liable for the actions of our co-investees. Any of these risks could subject us to liabilities in excess of those contemplated and reduce our returns on that investment.

We could experience difficulties or delays renewing leases or re-leasing space, which will increase our costs to maintain such properties without receiving income.

We derive a significant portion of our net income from rent received from our tenants. Our properties include both residential as well as commercial properties. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. If lease defaults occur, we may experience delays in enforcing our rights as landlord. Also, if our tenants decide not to renew their leases, terminate early or default on their lease, we may not be able to re-let the space or may experience delays in finding suitable replacement tenants. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, particularly commercial tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay dividends to shareholders could be materially adversely affected. Further, if one of our properties cannot be leased on terms and conditions favorable to us, the property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all.

We could face potential adverse effects if a commercial tenant is unable to make timely rental payments, declares bankruptcy or become insolvent.

If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Delayed rental payments could adversely affect cash flow available for dividends. If a commercial tenant declares bankruptcy or becomes insolvent, it may adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. However, if a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy. If a court authorizes the commercial tenant to reject and terminate its lease with us, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In addition, it is unlikely a bankrupt tenant would pay in full amounts it owes us under a lease. Additionally, we may be required to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as lower our rental rates to reflect any decline in market rents. This shortfall could adversely affect our cash flow and results of operations.

Investments in real estate are illiquid, and we may not be able to resell a property on terms favorable to us.

We intend to hold real estate properties until such time as our Advisor determines a sale or other disposition appears to be advantageous or when our shareholders approve our termination and liquidation. Because real estate investments are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may be a result of economic conditions, availability of financing, interest rates and other factors beyond our control. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate investments by their nature are often difficult or time consuming to liquidate. In addition, federal tax laws imposing a 100% excise tax on gains from sales of certain types of property sales by a REIT (generally, property viewed as being purchased for resale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our shareholders. These restrictions could adversely affect our ability to achieve our investment objectives.

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Valuations and appraisals of our investments may not necessarily correspond to realizable value.

We value our real estate properties initially at cost, which we expect to represent fair value at that time. After acquisition, valuations may include appraisals of our properties periodically. The valuation methodologies used to value our real estate properties will involve subjective judgments regarding such factors as comparable sales, rental and operating expense data, the capitalization and/or discount rate and projections of future rent and expenses based on appropriate analysis. Although we believe our valuation procedures are designed to determine the accurate fair value of our assets, appraisals and valuations of our real estate properties and other investments assets will be only estimates of fair value and therefore may not correspond to realizable value upon a sale of those assets.

Uninsured losses related to real estate investments may adversely affect our results of operation.

We purchase, and we may be required by lenders of mortgage loans or other financings to obtain, certain insurance coverage on our real estate investments. Either the property manager or the Advisor selects policy specifications and insured limits which it believes to be appropriate and adequate given the risk of loss, the cost of the coverage and industry practice. The nature of the tenants at the properties we hold may expose us and our operations to an increase in liability for personal injuries or other losses. There can be no assurance that such insurance will be sufficient to cover potential liabilities. Some of our policies may be subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. Furthermore, insurance against certain risks, such as terrorism, flood, and toxic mold, may be unavailable or available at commercially unreasonable rates or in amounts less than the full market value or replacement cost of the properties. There can be no assurance particular risks that are currently insurable, will continue to be insurable on an economical basis or current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment in a property as well as the anticipated future cash flows from such properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. We may also be liable for any uninsured or underinsured personal injury, death, or property damage claims, which could result in decreased dividends to shareholders.

We may acquire a property or properties “AS IS,” which increases the risk of an investment that requires us to remedy defects or costs without recourse to the prior owner.

We may acquire real estate properties “as is” with only limited representations and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. As a result, if defects in the property (including any building on the property) or other matters adversely affecting the property are discovered, we may not be able to pursue a claim for any or all damage against the property seller. Such a situation could negatively affect our results of operations.

We rely on affiliated and outside property managers to properly manage and lease our properties.

The Advisor and an affiliate of the Advisor serve as our principal property managers, and the Advisor has hired and intends to hire other affiliates and/or third parties to serve as additional property managers, to manage our properties and act as leasing agents to lease vacancies in our real estate properties. These property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not, and the Advisor will not as to its affiliates and third-party property managers, supervise any of the property managers or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in large part on the ability of our property managers to manage the day-to-day operations and their ability to lease vacancies in our properties. Any adversity experienced by our property managers could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives.

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Risks Related with Our Indebtedness and Financing

Market conditions could adversely affect our ability to obtain financing.

As a REIT, we are required to distribute at least 90% of our taxable income (excluding net capital gains) to our shareholders in each taxable year, and thus our ability to retain internally generated cash is limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties can depend on our ability to obtain debt or equity financing from third parties or the sellers of properties or to sell other properties. Market fluctuations and disruptions in the credit markets could significantly affect our ability to access capital. Reductions in our available borrowing capacity, or inability to establish a credit facility when required or when business conditions warrant, could then limit the number, size and quality of properties we could acquire or the amount of improvements we could make on acquired properties, which could materially affect our ability to achieve our investment objectives and may result in price or value decreases of our real estate assets.

Derivatives and hedging activity could adversely affect cash flow.

In the normal course of business, we use derivatives to manage our exposure to interest rate volatility on debt instruments, including hedging for future debt issuances. At other times we may utilize derivatives to decrease our exposure to floating interest rates. There can be no assurance that these hedging arrangements will have the desired beneficial impact.  These arrangements, which can include a number of counterparties, may expose us to additional risks, including failure of any of our counterparties to perform under these contracts, and may involve extensive costs, such as transaction fees or breakage costs, if we terminate them.  No strategy can completely insulate us from the risks associated with interest rate volatility.

The phase out of LIBOR and transition to SOFR as a benchmark interest rate could have adverse effects.

In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2023, it is expected that no new contracts will reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including the Company, are impacted by the risks associated with this transition and therefore it could adversely affect our operations and cash flows.

We could face difficulties in refinancing loans involving balloon payment obligations.

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or our ability to sell the particular property. If we try and refinance the debt, we may not be able to obtain terms as favorable as the original loan. Based on current market interest rates, the interest rate obtained upon refinancing in subsequent years may be higher than the original loan. If we are not able to refinance the debt, or obtain acceptable terms, we may be required to sell the mortgaged property at a time which may not permit realization of the maximum return on such property. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets.

Lenders may require restrictive covenants relating to our operations, which may adversely affect our flexibility and our ability to achieve our investment objectives.

Mortgage loans obtained by us could impose restrictions that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in the property. Loan documents may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, replace the Advisor or the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

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Increases in interest rates on variable rate debt incurred and new financings by us will reduce cash available for dividends.

Increases in interest rates on any variable rate debt incurred or new financings would increase our interest costs, which could reduce our cash flows and our ability to pay dividends to our shareholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

Complying with REIT requirements may limit our ability to hedge liabilities through tax-efficient means, which may adversely affect our results of operations.

We have entered into a number of hedging transactions and may enter into additional such transactions. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments. The REIT provisions of the Code substantially limit our ability to hedge liabilities. Because we conduct substantially all of our operations through our operating partnership, any income from a hedging transaction entered into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets will not constitute gross income to us for purposes of the 75% or 95% gross income test. As a result, we may be required to limit the operating partnership’s use of advantageous hedging techniques or to implement hedges through certain taxable corporations. This could increase the costs and risks of hedging activities. We intend to structure any hedging transaction in a manner that does not jeopardize our ability to qualify as a REIT.

Risks Related to Other Investments

Investments in other real estate related investments could involve higher risks than investment in real estate properties, which could adversely affect our operations and ability to make dividend payments.

We are permitted to invest in other real estate assets.  We can invest in real estate equity, debt, and derivative securities.  These assets can be quite risky, illiquid, and volatile and the value of these assets could cause the value of our shares to fluctuate and could result in losses that materially adversely affect our results of operations.

Risks Related to Conflicts of Interest

We are subject to several conflicts of interest arising out of our relationships with our affiliates, including our Advisor and its affiliates.

There are conflicts of interest in our relationship with the Advisor and its affiliates and several trustees, which could adversely affect our operations and business operations.

We are subject to potential conflicts of interest arising out of our relationships with the Advisor, its affiliates, and certain trustees. Conflicts of interest may arise among a trustee or the Advisor and its respective affiliates, on the one hand, and us and our shareholders, on the other hand. As a result of these conflicts, the trustee or Advisor may favor its own interests or the interests of its affiliates over the interest of our shareholders or operating partnership.

Division of Loyalty/Allocation of time and effort

Several of our officers and/or trustees serve as officers, governors, and owners of one or more entities (certain of which are affiliated with our Advisor or trustees), property managers, tenants of our properties, brokerage companies and other real estate entities owning real estate investments. As a result, these individuals owe duties to these other entities and their investors, which may conflict with the duties that they owe to us and our shareholders. Their loyalties to these other entities and investors could result in action or inaction detrimental to our business or result in conflicts relating to the allocation of their time and services, which could harm implementation of our business strategy and investment and leasing opportunities.

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Allocation of investment opportunities

The Advisor and its affiliates are or may become committed to the management of other business ventures. Accordingly, there may be conflicts of interest between our investments and other investments or business ventures in which the Advisor and its affiliates are participants. In addition, the Advisor and its officers will advise other investment programs that invest in commercial real estate properties and real estate related assets in which we may be interested. Therefore, the Advisor could face conflicts of interest in allocating and determining which programs will have the opportunity to acquire and participate in such investments as they become available. As a result, other investment programs advised by the Advisor may compete with us with respect to investors and certain investments we may want to acquire.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

General

Our policy is to acquire assets with an intention to hold these assets as long-term investments seeking income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rent. These types of investments are the core of our strategy of creating shareholder value. We currently own and maintain a portfolio of real estate diversified by geographical location and by type and size.

The majority of our real estate investments are managed by a third party. Property management firms usually receive between 2% and 5% of gross rent collection for their services. Substantially all of our commercial revenues consist of base rents received under leases having terms ranging from month-to-month to over 25 years. More than half of our existing commercial property leases as of December 31, 2022 contain “step up” rental clauses providing for annual increases in the base rental payments of approximately 1.0% to 3.0% each year during the term of the lease.

Properties

As of December 31, 2022, we owned 185 properties located in 12 states, containing approximately 11,300 apartment units and 1,498,000 square feet of leasable commercial space. The residential and commercial portfolio of properties includes a diversified mixture of multifamily, single, and multi-tenant retail and office buildings as well as industrial and medical facility properties. The majority of the properties are located in the largest cities in the states of North Dakota and Minnesota.

As of December 31, 2022, approximately 78.8% (based on cost) of the properties were apartment communities. Most multifamily dwelling properties are leased to a variety of tenants under short-term leases of less than a year.

As of December 31, 2022, approximately 21.2% (based on cost) of the properties were comprised of industrial, office, retail and medical commercial properties. Most commercial properties are leased to a variety of tenants under long-term leases.

The following information applies to all of our operating properties:

Quarterly Dividend Data

We have declared and intend to continue to declare regular quarterly dividends to our common shareholders. Becausebelieve all of our operationsproperties are conducted through our operating partnership, our abilityadequately covered by insurance and suitable for their intended purposes.

Our properties are located in markets where we are subject to pay dividends dependscompetition in attracting new tenants and retaining current tenants; and
Depreciation is provided on a straight-line basis over the operating partnership’s ability to make distributions to us and its other limited partners. We pay declared dividends quarterly, whereby the dividend attributable to a calendar quarter would be paid during the first monthestimated useful lives of the next quarter. Dividends will be paid to common shareholders as of the record dates selected by the Board of Trustees. We intend to make dividends sufficient to satisfy the requirements for qualification as a REIT for federal tax purposes.buildings.

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The below table sets forth certain information regarding each of our properties owned, including unconsolidated affiliates, as of December 31, 2022 (in thousands, except units or leasable sq. ft.).

# of

Physical

Units or

Occupancy

Year

Leasable

Total

at December

Property

    

Location

    

Acquired

    

Sq. Ft

    

Investment

    

31, 2022

Bluemont Lakes Financial Center

Fargo, ND

2004

31,750

$

5,255

81.17

%

Amberwood

Grand Forks, ND

2016

96

4,147

94.67

%

Applebee’s Neighborhood Bar & Grill

Coon Rapids, MN

2010

5,576

2,442

100.00

%

Arbor

Bismarck, ND

2013

12

696

98.49

%

Arbor II

Bismarck, ND

2013

12

700

96.52

%

Arbor III

Bismarck, ND

2013

12

696

97.80

%

Ashbury

Fargo, ND

2013 & 2016

61

4,139

99.52

%

Auburn II

Fargo, ND

2007

24

1,111

98.45

%

Autumn Ridge

Grand Forks, ND

2004

144

10,418

95.50

%

Barrett Arms

Crookston, MN

2014

24

1,281

94.35

%

Bayview

Fargo, ND

2007

100

6,083

92.18

%

Bell Plaza* (FKA Northland Plaza)

Bloomington, MN

2015

299,660

51,421

65.57

%

Belmont

Bismarck, ND

2020

26

1,601

88.55

%

Berkshire

Fargo, ND

2008

12

525

97.96

%

Betty Ann

Fargo, ND

2009

24

1,012

97.58

%

Biolife Plasma Center

Bismarck, ND

2008

11,671

2,881

100.00

%

Biolife Plasma Center

Grand Forks, ND

2008

13,190

2,944

100.00

%

Biolife Plasma Center

Janesville, WI

2008

12,225

2,388

100.00

%

Biolife Plasma Center

Mankato, MN

2008

13,181

4,149

100.00

%

Biolife Plasma Center

Marquette, MI

2008

11,737

3,215

100.00

%

Biolife Plasma Center

Onalaska, WI

2008

12,180

2,531

100.00

%

Biolife Plasma Center

Oshkosh, WI

2008

12,191

2,297

100.00

%

Biolife Plasma Center

Sheboygan, WI

2008

13,230

2,654

100.00

%

Biolife Plasma Center

Stevens Point, WI

2008

13,190

2,595

100.00

%

Birchwood I

Fargo, ND

2017

12

468

98.78

%

Birchwood II

Fargo, ND

2017

54

2,881

96.96

%

Bradbury

Bismarck, ND

2018

96

6,093

93.48

%

Briar Pointe

Fargo, ND

2021

30

1,935

97.61

%

Bridgeport

Fargo, ND

2016

120

8,420

98.71

%

Bristol Park

Grand Forks, ND

2016

80

5,837

92.84

%

Brookfield

Fargo, ND

2008

72

2,680

95.90

%

Brownstone

Fargo, ND

2021

72

4,390

96.91

%

Cambridge (FKA 44th Street)

Fargo, ND

2013

42

2,558

99.37

%

Candlelight

Fargo, ND

2012

66

2,214

93.73

%

Carling Manor

Grand Forks, ND

2008

12

838

95.34

%

Carlton Place

Fargo, ND

2008

213

9,072

93.54

%

Carr

Fargo, ND

2017

18

874

99.13

%

Cedars 4

Fargo, ND

2018

18

1,245

97.23

%

Chandler 1802

Grand Forks, ND

2014

24

1,434

96.12

%

Chandler 1834

Grand Forks, ND

2018

12

710

91.43

%

Chandler 1866

Grand Forks, ND

2005

12

384

98.71

%

Chandler 1898

Grand Forks, ND

2022

12

512

100.00

%

Cherry Creek (FKA Village)

Grand Forks, ND

2008

35

2,008

96.95

%

Cityside

Fargo, ND

2018

36

1,396

89.43

%

Columbia Park Village

Grand Forks, ND

2020

12

648

91.03

%

Columbia West

Grand Forks, ND

2008

70

4,487

93.12

%

Country Club

Fargo, ND

2011

40

1,843

95.04

%

Countryside

Fargo, ND

2011

24

951

97.20

%

Courtyard

St. Louis Park, MN

2013

151

9,252

93.37

%

Dairy Queen

Dickinson, ND

2012

2,811

1,331

100.00

%

Dairy Queen

Moorhead, MN

2011

2,712

1,186

100.00

%

Dairy Queen

Apple Valley, MN

2018

5,348

1,673

-

%

Dakota Manor

Fargo, ND

2014

54

2,865

96.57

%

Danbury

Fargo, ND

2007

135

7,547

94.53

%

Dellwood Estates

Anoka, MN

2013

132

12,320

97.50

%

Deer Park

Hutchinson, MN

2022

138

15,091

95.99

%

Desoto Estates

Grand Forks, ND

2022

68

6,111

98.06

%

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Desoto Townhomes

Grand Forks, ND

2022

24

3,338

95.85

%

Diamond Bend

Mandan, ND

2022

78

10,971

92.53

%

Eagle Run

West Fargo, ND

2010

144

7,067

96.38

%

Eagle Sky I

Bismarck, ND

2016

20

1,604

96.23

%

Eagle Sky II

Bismarck, ND

2016

20

1,680

94.72

%

East Bridge

Fargo, ND

2017

58

6,490

96.18

%

Eastbrook

Bismarck, ND

2020

24

1,381

87.84

%

Echo Manor

Hutchinson, MN

2014

30

1,198

99.04

%

Eide Bailly Building***

Fargo, ND

2007

74,646

9,331

100.00

%

Emerald Court

Fargo, ND

2008

24

1,144

98.00

%

Essex

Fargo, ND

2017

18

928

87.97

%

Evergreen Terrace

Omaha, NE

2020

144

8,798

95.30

%

Fairview

Bismarck, ND

2008

84

5,467

95.34

%

Family Dollar Store

Mandan, ND

2010

9,100

874

100.00

%

First International Bank & Trust

Moorhead, MN

2011

3,510

1,037

100.00

%

Flagstone

Fargo, ND

2021

120

7,792

97.00

%

Flickertail

Fargo, ND

2008

180

8,151

92.73

%

Forest Avenue

Fargo, ND

2013

20

815

99.19

%

Four Points Office Building

Fargo, ND

2007

12,383

1,494

100.00

%

Foxtail Creek Townhomes

Fargo, ND

2020

30

1,488

96.21

%

Galleria III

Fargo, ND

2010

18

1,144

93.18

%

Garden Grove

Bismarck, ND

2016

95

7,274

92.78

%

Gate City Bank

Grand Forks, ND

2008

17,406

2,200

100.00

%

Georgetown

Fridley, MN

2014

468

33,586

89.63

%

Glen Pond

Eagan, MN

2011

528

44,377

95.38

%

Goldmark Office Park

Fargo, ND

2007

124,613

23,692

100.00

%

Grand Forks Marketplace**

Grand Forks, ND

2003

182,522

26,710

78.04

%

Granger Court

Fargo, ND

2013

59

2,841

96.07

%

Great American Insurance Building

Fargo, ND

2005

15,000

2,360

100.00

%

Guardian Building Products

Fargo, ND

2012

100,600

3,760

100.00

%

Hannifin

Bismarck, ND

2013

14

789

93.51

%

Harrison Richfield

Grand Forks, ND

2007

140

7,915

94.13

%

Hartford

Fargo, ND

2018

30

1,426

92.51

%

Hawn

Fargo, ND

2020

48

2,557

97.89

%

Highland Meadows

Bismarck, ND

2011

144

10,629

96.92

%

Hunter’s Run I

Fargo, ND

2007

12

483

97.71

%

Hunter’s Run II

Fargo, ND

2008

12

518

95.04

%

Huntington

Fargo, ND

2015

10

439

99.18

%

Islander

Fargo, ND

2011

24

1,407

96.76

%

Jadestone

Fargo, ND

2017

18

898

83.60

%

Kennedy

Fargo, ND

2013

12

813

99.62

%

Library Lane

Grand Forks, ND

2007

60

3,003

91.22

%

Madison (FKA Columbine)

Grand Forks, ND

2015

12

740

95.54

%

Maple Ridge

Omaha, NE

2008

174

10,822

96.57

%

Maplewood

Maplewood, MN

2014

240

17,626

94.12

%

Maplewood Bend

Fargo, ND

2009 and 2010

183

7,637

96.69

%

Martha Alice

Fargo, ND

2009

24

1,055

97.03

%

Mayfair (FKA Colony Manor)

Grand Forks, ND

2008

24

1,319

91.99

%

Midtown Plaza

Minot, ND

2004

17,808

1,345

77.48

%

Monticello

Fargo, ND

2013

18

989

97.25

%

Montreal Courts

Little Canada, MN

2013

444

30,686

94.51

%

Morningside

Fargo, ND

2018

17

803

98.40

%

Newgate

Bismarck, ND

2022

46

2,473

89.52

%

Oak Court

Fargo, ND

2008

81

3,118

96.48

%

Oakview Townhomes (FKA Arrowhead)

Grand Forks, ND

2017

82

6,004

97.75

%

O'Reilly Auto Store

Mandan, ND

2010

6,300

706

100.00

%

Oxford

Fargo, ND

2021

144

10,219

97.54

%

Pacific Park I

Fargo, ND

2013

30

1,064

95.51

%

Pacific Park II

Fargo, ND

2013

39

1,182

94.54

%

Pacific South

Fargo, ND

2013

15

607

96.37

%

Park Circle

Fargo, ND

2017

18

937

99.56

%

Parkview Arms

Bismarck, ND

2015

62

4,850

92.80

%

Parkway Office (FKA Echelon Building)

Fargo, ND

2006

17,000

1,954

100.00

%

Parkwest Gardens

West Fargo, ND

2014

142

8,292

96.10

%

Parkwood

Fargo, ND

2008

40

1,462

97.77

%

Pebble Creek

Bismarck, ND

2008

70

3,396

95.86

%

26

Table of Contents

Pinehurst

Fargo, ND

2021

210

14,982

95.31

%

Plumtree

Fargo, ND

2017

18

939

99.76

%

Prairiewood Court I & II

Fargo, ND

2006 and 2007

60

2,434

90.98

%

Prairiewood Meadows

Fargo, ND

2012

88

5,290

93.30

%

Prose

Fort Worth, TX

2022

270

55,690

75.19

%

Quail Creek

Springfield, MO

2015

164

11,236

95.51

%

Redpath

White Bear Lake, MN

2016

25,817

4,017

100.00

%

Robinwood

Coon Rapids, MN

2014

120

8,399

93.70

%

Rosedale Estates

Roseville, MN

2014

360

26,637

90.13

%

Rosegate

Fargo, ND

2008

90

3,608

94.55

%

Rosser

Bismarck, ND

2020

24

1,468

95.21

%

Roughrider

Grand Forks, ND

2016

12

699

92.64

%

Saddlebrook

West Fargo, ND

2008

60

1,804

97.04

%

Sage Park (FKA Brighton Village)

New Brighton, MN

2014

240

17,840

94.88

%

Sargent

Fargo, ND

2017

36

1,734

94.51

%

Schrock

Fargo, ND

2013

18

811

98.63

%

SE Maple Grove, LLC****

Maple Grove, MN

2021

161

32,079

59.28

%

SE Savage, LLC****

Savage, MN

2021

190

36,794

94.32

%

Sheridan Pointe

Fargo, ND

2013

48

2,945

94.96

%

Sierra Ridge

Bismarck, ND

2006 and 2011

136

11,165

97.83

%

Somerset

Fargo, ND

2008

75

4,027

96.32

%

Southgate

Fargo, ND

2007

162

6,581

98.26

%

Southview III

Grand Forks, ND

2011

18

776

89.31

%

Southview Village

Fargo, ND

2007

72

3,648

97.62

%

Spring

Fargo, ND

2013

25

1,053

98.80

%

Stanford Court

Grand Forks, ND

2013

96

4,864

90.35

%

Stonefield

Bismarck, ND

2014

192

30,096

97.87

%

Stony Brook

Omaha, NE

2009

148

11,599

95.45

%

Summerfield

Fargo, ND

2015

18

862

97.58

%

Summit Point

Fargo, ND

2015

87

7,005

97.86

%

Sunchase

Fargo, ND

2017

36

1,878

98.01

%

Sunset Ridge

Bismarck, ND

2008 and 2010

180

12,471

96.59

%

Sunview

Grand Forks, ND

2008

36

2,073

95.77

%

Sunwood Estates

Fargo, ND

2007

80

4,452

92.81

%

Thunder Creek

Fargo, ND

2018

57

5,391

94.37

%

Titan Machinery

Bismarck, ND

2015

22,293

3,448

100.00

%

Titan Machinery

Dickinson, ND

2012

17,760

1,790

100.00

%

Titan Machinery

Fargo, ND

2012

29,800

3,336

100.00

%

Titan Machinery

Marshall, MN

2011

67,600

5,081

100.00

%

Titan Machinery

Minot, ND

2012

23,690

2,630

100.00

%

Titan Machinery

North Platte, NE

2016

18,910

1,769

100.00

%

Titan Machinery

Sioux City, IA

2013

36,332

4,567

100.00

%

Trustmark

Fargo, ND

2020

45,755

13,425

100.00

%

Twin Oaks

Hutchinson, MN

2014

80

4,470

97.75

%

Twin Parks

Fargo, ND

2008

66

2,596

98.76

%

Valley Homes Duplexes

Grand Forks, ND

2015

24

2,572

93.45

%

Valley View

Golden Valley, MN

2014

72

7,820

98.99

%

Village Park

Fargo, ND

2008

60

2,416

98.82

%

Village West

Fargo, ND

2008

80

2,987

95.82

%

Walgreens

Alexandria, LA

2009

14,560

4,296

100.00

%

Walgreens

Batesville, AR

2009

14,820

7,616

100.00

%

Walgreens

Denver, CO

2011

13,390

5,210

100.00

%

Walgreens

Fayetteville, AR

2009

14,550

5,810

100.00

%

Walgreens

Laurel, MS

2010

14,820

4,542

100.00

%

Washington

Grand Forks, ND

2016

17

745

94.30

%

Wells Fargo Building

Duluth, MN

2007

95,961

10,801

55.24

%

West Oak

Fargo, ND

2017

18

869

97.94

%

Westcourt

Fargo, ND

2014

64

3,710

93.43

%

Westside

Hawley, MN

2010

14

544

90.67

%

Westwind

Fargo, ND

2008

18

633

91.87

%

Westwood Estates

Fargo, ND

2008

200

8,277

93.58

%

Willow Park

Fargo, ND

2008

102

6,767

94.94

%

Wolf Creek

Fargo, ND

2020

54

5,364

99.18

%

Woodland Pines (FKA Fredericksburg)

Omaha, NE

2018

173

13,250

95.21

%

* 70.00% ownership interest

27

Table of Contents

** 66.67% ownership interest

*** 50.00% ownership interest

**** 60% ownership interest

Geography

Of our 185 properties, 142 are located in North Dakota, with 89 being located in the greater Fargo, North Dakota and Moorhead, Minnesota metropolitan statistical area. The North Dakota region generated approximately 51.9% of our rental revenue for the year ended December 31, 2022.

The following table presents the total real estate investment amount by state and annual rental revenue by state, as of the year ended December 31, 2022 (in thousands):

Real Estate

Rental

State

    

Investment

%

Revenue

%

North Dakota

$

510,127

52.5

%

$

70,132

51.9

%

Minnesota

305,463

34.6

%

51,314

38.0

%

Other

155,558

16.0

%

13,614

10.1

%

$

971,148

103.1

%

$

135,060

100.0

%

Economy

The North Dakota workforce is concentrated in agricultural, energy, information technology, aerospace sciences and medical sciences. According to the U.S. Census Bureau, the 2022 estimated combined population of the Fargo, West Fargo and Moorhead metro area was 210,903 people.

The following chart depicts the difference in unemployment rates between North Dakota and the national average for 2022:

   

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

National (1)

4.0

%

3.8

%

3.6

%

3.6

%

3.6

%

3.6

%

3.5

%

3.7

%

3.5

%

3.7

%

3.6

%

3.5

%

North Dakota (1)

3.1

%

2.9

%

2.9

%

2.8

%

2.6

%

2.5

%

2.3

%

2.3

%

2.2

%

2.3

%

2.3

%

2.3

%

(1)Seasonally adjusted

Source: Bureau of Labor Statistics

Acquisitions and Dispositions

We had eight acquisitions and five dispositions of property during the year ended December 31, 2022. We had five acquisitions and two dispositions of property during the year ended December 31, 2021. We had nine acquisitions and three dispositions of property during the year ended December 31, 2020.

Capitalization rates are a key decision-making item used by the Board. In making acquisitions, the Board currently targets capitalization rates between 6.0 to 10.0%, depending on the amount of risk involved. For those properties with greater risk, the Board targets greater capitalization rates (9.0% or greater). For those properties exhibiting less risk, a lower capitalization risk is acceptable. For potential acquisitions, the Board also requires an adequate spread between the financing on the property and the capitalization rate. Capitalization rates for acquisitions are calculated using projected net operating income divided by the investment. Net operating income is calculated by taking GAAP net income and adding back depreciation, amortization, and interest expense. Capitalization rates for dispositions are calculated in the same way with the exception of using historical, rather than projected, net operating income. The market has seen an increase in investors, driving up overall acquisition prices, thus lowering capitalization rates below the target thresholds set by the Board.

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Table of Contents

We use historical occupancy, rental income, and expenses to calculate projected net operating income for potential real estate investments. For residential properties, we make various assumptions about future rents, occupancy levels, and expenses based on historical financial information and our assessment of the property’s future potential. The projected NOI for residential acquisitions is typically based on historical occupancy and expenses over a three-to-five year period. When historical information is unavailable, market vacancy and credit loss factors are estimated.

For commercial and residential properties, assumptions regarding rental income and expenses are based on the terms of the in-place leases and available historical financial information which is then used to generate projected net operating income.

Numerous estimates and assumptions are necessary to generate projected net operating income for potential commercial and residential acquisitions, and there is no guarantee actual net operating income will equal projected net operating income.

Tenants

Our tenants are varied and consist of individuals and national, regional, and local businesses. Our commercial properties generally attract a mix of tenants. In 2022, 2021 and 2020, no single tenant represented more than 10% of our revenues. We have investments in several types of real estate, including multifamily, retail, office, industrial, and medical. Within our office, retail, and industrial properties, we have over 100 tenants who operate in numerous industries, including restaurants, pharmacy, medical, financing, banking, insurance, professional services, technology, wholesale and direct retail.

Lease Expirations

The vast majority of residential leases are for one-year periods. The following table lists a summary, as of December 31, 2022, of lease expirations on non-residential properties scheduled to occur during each of the ten calendar years from 2023 to 2032 and thereafter, assuming that tenants exercise no renewal options or early termination rights.  Base rents do not include CAM (common area maintenance).  

The table is based on leases on December 31, 2022 for our non-residential properties including our unconsolidated affiliates (in thousands, except leasable area data).

# of Leases

Gross

% of Gross

Expiring

% of Total

Lease Expiration Year

  

Expiring

  

Leasable Area

  

Leasable Area

  

Base Rent

  

Base Rent

Month-to-Month

0

0.00

%

$

0.00

%

2023

7

23,335

1.81

%

234,781

1.05

%

2024

19

156,445

12.16

%

828,540

3.72

%

2025

13

142,130

11.05

%

831,440

3.73

%

2026

11

150,378

11.69

%

1,136,265

5.10

%

2027

13

128,878

10.02

%

2,695,716

12.09

%

2028

7

69,390

5.39

%

1,038,051

4.65

%

2029

5

86,532

6.73

%

484,989

2.17

%

2030

13

147,113

11.43

%

1,994,416

8.94

%

2031

3

111,196

8.64

%

1,314,405

5.89

%

2032

8

181,795

14.13

%

1,668,691

7.48

%

Thereafter

7

89,384

6.95

%

10,072,420

45.18

%

Leased Total

106

1,286,576

100.00

%

$

22,299,714

100.00

%

29

Table of Contents

Mortgage Notes Secured by the Properties

On December 31, 2022, we had $508,305 in mortgage notes payable with respect to our properties. Principal payments on these notes are payable as follows (in thousands):

Years ending December 31,

Amount

2023

$

53,341

2024

22,376

2025

53,130

2026

45,546

2027

77,845

Thereafter

256,067

$

508,305

Insurance

We believe we have adequate property damage, fire loss and liability insurance on all of our properties with reputable, commercially rated companies. We also believe our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount we believe to be adequate.

Regulations

Our properties, as well as any other properties we may acquire in the future, are subject to various federal, state, and local laws, ordinances and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe we have all permits and approvals necessary under current law to operate our properties.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.  While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Company.

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

Our common shares of beneficial interest are not listed on any national exchange or over-the-counter market or quoted on any national securities market, and we currently do not have plans to list or have our common shares quoted.

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Table of Contents

Shareholders and Unit Holders

As of March 14, 2023, we had 10,947,790, common shares of beneficial interests outstanding, held by a total of 1,122 common shareholders and no outstanding options or warrants to purchase our common shares.

In addition, as of March 14, 2023, there were approximately 18,687,896 limited partnership units of our operating partnership outstanding held by approximately 529 limited partners. Pursuant to the exchange rights under the LLLP Agreement of the operating partnership, we have the option, upon redemption requests by the holders of the limited partnership units, to acquire the limited partnership units by paying the holders with our common shares of beneficial interest in lieu of delivering cash. The numbers of common shareholders and limited partners is based on the Company’s records. There is no public trading market for our common shares or the limited partnership units of our Operating Partnership.

Quarterly Dividend Data

We have declared and intend to continue to declare regular quarterly dividends to our common shareholders. Because all of our operations are conducted through our operating partnership, our ability to pay dividends depends on the operating partnership’s ability to make distributions to us and its other limited partners. We pay declared dividends quarterly, whereby the dividend attributable to a calendar quarter would be paid during the first month of the next quarter. Dividends will be paid to common shareholders as of the record dates selected by the Board of Trustees. We intend to make dividends sufficient to satisfy the requirements for qualification as a REIT for federal tax purposes.

The following tables show the dividends we have declared (including the total amount paid on a per share basis, paid in cash, reinvested in shares of our common stock pursuant to the Dividend Reinvestment Plan, and the total amount paid) during the last two fiscal years (in thousands, except per share data).

Dividends Per

Reinvested

2022 Quarter Ended

  

Common Share

  

Cash

  

via DRP

  

Total Dividends

December 31

$

0.287500

$

1,146

$

1,962

$

3,108

(a)

September 30

$

0.287500

1,097

1,973

3,070

June 30

$

0.287500

1,127

1,910

3,037

March 31

$

0.287500

1,130

1,877

3,007

$

4,500

$

7,722

$

12,222

Dividends Per

Reinvested

2021 Quarter Ended

Common Share

Cash

via DRP

Total Dividends

December 31

$

0.265000

$

1,024

$

1,716

$

2,740

(a)

September 30

$

0.265000

927

1,780

2,707

June 30

$

0.265000

928

1,743

2,671

March 31

$

0.265000

963

1,679

2,642

$

3,842

$

6,918

$

10,760

(a)Fourth quarter dividends paid on January 17th of the following year, for the year ended December 31, 2022. Fourth Quarter dividends were paid on January 18th of the following year, for the year ended December 31, 2021.

The Trust expects that future dividends will be maintained at least at the present rate, unless there are changes in our results of operations, our general financial condition, general economic conditions, or the Board determines other action prudent.

31

Table of Contents

The following tables show the dividends we have declared (including the total amount paid on a per share basis, paid in cash, reinvested in shares of our common stock pursuant to the Dividend Reinvestment Plan, and the total amount paid) during the last two fiscal years (in thousands, except per share data).

Dividends Per

Reinvested

2020 Quarter Ended

  

Common Share

  

Cash

  

via DRP

  

Total Dividends

December 31

$

0.264688

$

922

$

1,686

$

2,608

(a)

September 30

$

0.264688

902

1,675

2,577

June 30

$

0.264688

900

1,644

2,544

March 31

$

0.264688

919

1,608

2,527

$

3,643

$

6,613

$

10,256

Dividends Per

Reinvested

2019 Quarter Ended

Common Share

Cash

via DRP

Total Dividends

December 31

$

0.261250

$

880

$

1,585

$

2,465

(a)

September 30

$

0.261250

881

1,554

2,435

June 30

$

0.261250

849

1,558

2,407

March 31

$

0.261250

818

1,556

2,374

$

3,428

$

6,253

$

9,681

(a)Fourth quarter dividends paid on January 15th of the following year.

The Trust expects that future dividends will be maintained at least at the present rate, unless there are changes in our results of operations, our general financial condition, general economic conditions or the Board determines other action prudent.

Sale of Securities

Neither Sterling nor the operating partnership issued any unregistered securities duringDuring the year ended December 31, 2020.2022, the Operating Partnership issued approximately 560,000 limited partnership units valued at $23 per unit for an aggregate consideration of $12,870, for the purchase of real estate investments. The units were sold to accredited investors unaffiliated with the Operating Partnership in private placement transactions exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of such Act. Limited Partners may request, in accordance with the requirements of the redemptions plans, the redemption of their limited partnership units for cash or the exchange of their limited partnership units for common shares of the Trust in lieu of cash for the redemption on a basis of one limited partnership unit for one common share. At the sole and absolute discretion of the Operating partnership, and so long as our redemption plans exist and applicable conditions and limitations are satisfied, the Trust may, acting for itself or in its capacity as General Partner of the Operating Partnership, elect to redeem or exchange such limited partnership units.

Other Sales

During the yearyears ended December 31, 2022, 2021 and 2020, there were no common shares of the Trust issued in exchange for limited partnership units of the operating partnership issued for common shares of the Trust.

During the year ended December 31, 2019, there were 1,475 limited partnership units or $28 exchanged for common shares on a one-for-one basis pursuant to redemption requests made by accredited investors.partnership.

32

Table of Contents

Redemptions of Securities

Set forth below is information regarding common shares and limited partnership units redeemed during the year ended December 31, 2020.2022

Average

Total Number of

Total Number of

Approximate Dollar Value of

Average

Total Number of

Total Number of

Approximate Dollar Value of

Total Number

Total Number

Price

Shares Redeemed

Units Redeemed

Shares (or Units) that May

Total Number

Total Number

Price

Shares Redeemed

Units Redeemed

Shares (or Units) that May

of Common

of Limited

Paid per

as Part of

as Part of

Yet Be Redeemed Under

of Common

of Limited

Paid per

as Part of

as Part of

Yet Be Redeemed Under

Shares

Partner Units

Common

Publicly Announced

Publicly Announced

Publicly Announced

Shares

Partner Units

Common

Publicly Announced

Publicly Announced

Publicly Announced

Period

    

Redeemed

    

Redeemed

    

Share/Unit

    

Plans or Programs

    

Plans or Programs

    

Plans or Programs

    

Redeemed

    

Redeemed

    

Share/Unit

    

Plans or Programs

    

Plans or Programs

    

Plans or Programs

January 1-31, 2020

13,000

13,000

$

18.25

1,250,000

846,000

$

5,395

February 1-29, 2020

4,000

14,000

$

18.25

1,254,000

860,000

$

5,065

March 1-31, 2020

21,000

3,000

$

18.25

1,275,000

863,000

$

4,625

October 1-31, 2022

1,000

$

21.85

1,501,000

1,147,000

$

14,870

November 1-30, 2022

1,000

4,000

$

21.85

1,502,000

1,151,000

$

14,750

December 1-31, 2022

3,000

$

21.85

1,502,000

1,154,000

$

14,684

Total

38,000

30,000

2,000

7,000

April 1-30, 2020

53,000

5,000

$

18.25

1,328,000

868,000

$

3,582

May 1-31, 2020

4,000

7,000

$

18.25

1,332,000

875,000

$

3,376

June 1-30, 2020

$

18.25

1,332,000

875,000

$

8,376

Total

57,000

12,000

July 1-31, 2020

5,000

$

18.25

1,332,000

880,000

$

8,281

August 1-31, 2020

3,000

1,000

$

18.25

1,335,000

881,000

$

8,205

September 1-30, 2020

3,000

3,000

$

18.25

1,338,000

884,000

$

8,076

Total

6,000

9,000

October 1-31, 2020

5,000

9,000

$

18.25

1,343,000

893,000

$

7,822

November 1-30, 2020

21,000

5,000

$

18.25

1,364,000

898,000

$

7,349

December 1-31, 2020

1,000

$

18.25

1,364,000

899,000

$

7,325

Total

26,000

15,000

For the year ended December 31, 2020,2022, the Trust redeemed all shares or units for which we received redemption requests.  In addition, for the year ended December 31, 2020,2022, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan, effective January 1, 2022, permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our operating partnership,Operating Partnership, up to a maximuman aggregate amount of $40,000$55,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of December 31, 20202022, was $7,325.$14,684. The redemption price for such shares and units redeemed under the plan was fixed at $18.25$21.85 per share or unit, which became effective January 1, 2020. Subsequently the redemption price was increased to $19.00 effective January 1, 2021 and is the current redemption price.2022. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the over the counter market.pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plan at any time if it determines to do so is in our best interest.

ITEM 6. SELECTED FINANCIAL DATA

None.

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

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this section and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such

33

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forward-looking statements.  Please see “Note Regarding Forward-Looking Statements” and “Risk Factors” for more information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.

Executive SummaryIntroduction

The following discussion should be read in conjunction with the financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") within this section is focused on the years ended December 31, 2022 and 2021, including year-to-year comparisons between these years. Our MD&A for the year ended December 31, 2020, including year-to-year comparisons between 2021 and 2020, can be found in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Overview

Sterling Real Estate Trust d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002.  Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.  Our real estate portfolio asconsisted of December 31, 2020 consists of 179185 properties in 11 states. Our properties are primarily located in North Dakota, Minnesota, and Nebraska and contain 10,328containing 11,300 apartment units and approximately 1,642,0001,498,000 square feet of leasable commercial space.space as of December 31, 2022. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $684,713,$776,299, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.

Critical Accounting Policies and Estimates

Below are the accounting policies and estimates that management believe are critical to the preparation of the audited consolidated financial statements included in this Report. Certain accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see note 2 to the audited consolidated financial statements). These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.

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Impairment of Real Estate Investments

TheTrust’sinvestment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Trust separately determines whether impairment indicators exist for each property.

Examples of situations considered to be impairment indicators include, but are not limited to:

oA substantial decline or negative cash flows;
oContinued low occupancy rates;
oContinued difficulty in leasing space;
oSignificant financially troubled tenants;
oA change in plan to sell a property prior to the end of its useful life or holding period;
oA significant decrease in market price not in line with general market trends; and
oAny other quantitative or qualitative events or factors deemed significant by the Trust’s management or Board of Trustees.

If the presence of one or more impairment indicators as described above is identified with respect to an investment property, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows. An investment property is considered to be impaired when the estimated future undiscounted cash flows are less than its current carrying value.  When performing a test for recoverability or estimating the fair value of an impaired investment property, the Trust makes complex or subjective assumptions which include, but are not limited to:

oProjected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;
oProjected capital expenditures;
oProjected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;
oComparable selling prices; and
oProperty specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value. Based on evaluation, there was one impairment loss of $561 during the year ended December 31, 2022. There were no impairment losses during the years ended December 31, 2021 and 2020.

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the year ended December 31, 2022 included elsewhere in this report.

Acquisition of Real Estate Investments

The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing, and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.

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REIT Status

We had one heldoperate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains, as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to distribute to our shareholders 100% of our taxable income. Therefore, no provision for sale propertyFederal income taxes is required. If we fail to distribute the required amount of income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result

Principal Business Activity

The operating partnership currently directly owns 185 properties. Of these, 143 are residential properties located in Waite Park,North Dakota, Minnesota, Missouri, Nebraska and Texas and are principally multifamily apartment buildings. The remaining 42 are commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, and medical properties.  The Trust’s mix of properties is 78.8% residential and 21.2% commercial (based on cost) with a net booktotal carrying value of $829$776,299 at December 31, 2022. Currently our focus is limited to multifamily apartment properties. We will consider unsolicited offers for purchase of commercial properties on a case-by-case basis.

The following table represents the number of properties the Trust owns in each state as of December 31, 2020. Our portfolio of properties currently includes a diversified mixture of multifamily, single and multi-tenant retail and office buildings.  The Trust’s current investment strategy is to focus on multifamily real estate properties located primarily in the central corridor of the contiguous forty-eight (48) states.  There is no current plan for the existing commercial properties (industrial, medical, office, and retail) in regard to retention or disposition.2022:

Residential Property

    

Location

    

No. of Properties

    

Units

North Dakota

122

7,187

Minnesota

15

3,040

Missouri

1

164

Nebraska

4

639

Texas

1

270

143

11,300

Commercial Property

    

Location

    

No. of Properties

    

Sq. Ft

North Dakota

20

772,000

Arkansas

2

28,000

Colorado

1

17,000

Iowa

1

33,000

Louisiana

1

15,000

Michigan

1

12,000

Minnesota

9

524,000

Mississippi

1

15,000

Nebraska

1

19,000

Wisconsin

5

63,000

42

1,498,000

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Specific AchievementsManagement Highlights

Increased revenues from rental operations by $4,277$5,736 or 3.6%4.4% for the year ended December 31, 2020,2022, compared to the year ended December 31, 2019.  2021.
Eight properties with a total cost of $94,844 were acquired during the year ended December 31, 2022.
Disposed of two residential and three commercial properties during the year ended December 31, 2022.
Declared and paid dividends aggregating $1.059$1.1500 per common share for the year ended December 31, 2020.
New and Renewal commercial lease values of $37,600 signed during the year ended December 31, 2020.
Nine properties with a book value of $28,336 were acquired during the year ended December 31, 2020.2022.

Results of Operations for the Years Year Ended December 31, 20202022 and 20192021

Year ended December 31, 2020

    

Year ended December 31, 2019

Year ended December 31, 2022

    

Year ended December 31, 2021

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(in thousands)

(in thousands)

(in thousands)

(in thousands)

Real Estate Revenues

    

$

98,576

    

$

26,040

    

$

124,616

    

$

94,763

    

$

25,576

    

$

120,339

    

$

113,968

    

$

21,092

    

$

135,060

    

$

107,284

    

$

22,040

    

$

129,324

Real Estate Expenses

Real Estate Taxes

9,790

2,708

12,498

9,372

2,706

12,078

11,734

2,511

14,245

10,778

2,928

13,706

Property Management

12,798

904

13,702

12,470

975

13,445

13,778

789

14,567

12,907

1,217

14,124

Utilities

8,099

1,022

9,121

8,198

1,174

9,372

10,901

1,274

12,175

9,031

1,104

10,135

Repairs and Maintenance

19,761

2,107

21,868

21,030

2,235

23,265

24,479

1,812

26,291

21,571

1,956

23,527

Insurance

2,238

142

2,380

2,684

92

2,776

3,755

105

3,860

3,167

110

3,277

Total Real Estate Expenses

52,686

6,883

59,569

53,754

7,182

60,936

64,647

6,491

71,138

57,454

7,315

64,769

Net Operating Income

$

45,890

$

19,157

65,047

$

41,009

$

18,394

59,403

$

49,321

$

14,601

63,922

$

49,830

$

14,725

64,555

Interest

17,097

18,282

19,994

18,142

Depreciation and amortization

21,214

21,495

24,679

22,203

Administration of REIT

4,217

4,112

5,247

4,381

Other income

(4,461)

(545)

(10,530)

(4,609)

Net Income

$

26,980

$

16,059

$

24,532

$

24,438

Net Income Attributed to:

Noncontrolling Interest

$

17,575

$

10,525

$

15,611

$

15,644

Sterling Real Estate Trust

$

9,405

$

5,534

$

8,921

$

8,794

Dividends per share (1)

$

1.0588

$

1.0450

$

1.1500

$

1.0600

Earnings per share

$

0.9700

$

0.6000

$

0.8400

$

0.8700

Weighted average number of common shares

9,694

9,268

10,632

10,160

(1)Does not take into consideration the amounts distributed by the operating partnership to limited partners.

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Revenues

Property revenues totaled approximately $124,616$135,060 for the year ended December 31, 20202022, which constituted an increase of approximately $4,277$5,736 or 3.6%4.4% compared to the same period in 2019.2021. Residential property revenues increased approximately $3,813$6,684 and commercial property revenues increaseddecreased approximately $464.$948.

The following table illustrates the occupancy percentage for the periods ended indicated:

December 31,

December 31,

December 31,

December 31,

    

2020

2019

    

2022

2021

Residential occupancy

93.5

%

93.7

%

93.2

%

94.8

%

Commercial occupancy

91.6

%

91.8

%

87.0

%

80.7

%

Residential revenues for the year ended December 31, 20202022, increased $3,813$6,684 or 4.0%6.2%, in comparison to the same period in 2019.2021. Residential properties acquired since January 1, 20202021, contributed approximately $2,339$5,232 to the increase in total

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residential revenues. The remaining increase is due to decreased rental incentives caused by increased renewals and general market rent increases at our stabilized properties as well as the increased income related to Ratio Utility Billing System (RUBS) Income in our Minneapolis, Minnesota market.properties. Residential revenues comprised 79.1%84.4% of total revenues for the year ended December 31, 20202022 compared to 78.7%83.0% of total revenues for the year ended December 31, 2019.2021. Residential economic occupancy year-over-year has remained comparable decreasing 0.2%decreased 1.6%, during the year ended December 31, 2020.2022.

For the year ended December 31, 2020,2022, total commercial revenues increased $464decreased $948 or 1.8%4.3%, in comparison to the same period in 2019. During2021. The decrease was primarily attributed to the disposition of three commercial properties which accounts for $772 of the decrease during the year ended December 31, 2020, we disposed of three commercial properties which account for $387 in decreased commercial rent. The decrease in gross potential rent because of the disposals is offset by $1,335 in lease buyout revenue relating to a disposal of a commercial property and decreased rental incentives of $205 related to an office building located in Minneapolis, Minnesota.2022 The remaining difference in commercial revenues is related to common area maintenance estimatesearly termination fees which decreased $665$173 for the year ended December 31, 20202022, as compared to the same period in 2019.2021. The common area maintenance estimatesearly termination fees will vary from year to year and are dependent on operational expensesleases on commercial properties.

Expenses

Residential expenses from operations of $52,686$64,647 during the year ended December 31, 2020 decreased $1,0682022 increased $7,193 or 2.0%12.5% in comparison to the same period in 2019.2021. The decrease wasincrease is attributed to a decreasean increase in repairs and maintenance expense of $1,269$2,908 or 6.0%13.5%. Properties acquired since January 1, 2021, attributed $937 to the increase in repairs and maintenance expense. Additionally, increased project and upgrade costs, that are considered to be deferred maintenance costs from the year ended 2021, due to COVID-19 restrictions attribute to the increase in repairs and maintenance expense during the year ended December 31, 2022. The increase is also attributed to an increase in property management fees of $871 or 6.7%, an increase in utility expense of $1,870 or 20.7%, as well as decreased utilities expense of $99 or 1.2%. These known decreases are offset by increasedan increase in real estate taxes of $418$956 or 4.5% and property management expenses of $328 or 2.6%8.9%. Actual property management fees remained unchanged and continue to approximate 5% of net collected rents. The main reason for the increases in property management fees, utility expenses and real estate taxes and property management expenses is related to eight residential property acquisitions during the year ended December 31, 2020,properties acquired since January 1, 2021, which accountsaccount for $177$665, $559 and $334$529 of the increase, respectively. The primary driver of decreased operational expenses, specifically related to repairs and maintenance expense, is due to the COVID-19 pandemic causing residential lease renewal rates to increase approximately 1.8% as compared to the same period in 2019. As residents choose to remain in their current apartment units, preventing general maintenance and unit upgrades to be performed, there is potential a portion of the decrease in repairs and maintenance is deferred and will be realized as the COVID-19 pandemic passes, and the units become available to be upgraded.

Commercial expenses from operations of $6,883$6,491 during the year ended December 31, 20202022 decreased $299$824 or 4.2%11.3% in comparison to the same period in 2019.2021. For the year ended December 31, 2022 property management fees decreased by $428 or 35.2%. The decrease is also attributable to a decrease in overalladvertising and marketing expenses in an office building located in Minneapolis, Minnesota in efforts to lease up vacant space. The decrease is also attributed to the COVID-19 pandemic, causing shelter-in-place ordersa decrease in many locations where our commercial properties are located, resultingreal estate taxes of $417 or 14.2%, due to a property in decreased repairsMinneapolis, Minnesota receiving a real estate tax refund and maintenance expenses of $128 or 5.7%. Decreased utilityproperty in Fargo, ND whose tenant is responsible for real estate taxes in 2022.

Interest expense of $152$19,994 during the year ended December 31, 2022 increased $1,852 or 12.9%10.2% in comparison to the same period in 2019, also attributed to the overall decrease.

2021. Interest expense related to financing activities increased by $1,677 during 2022. One property in Minnesota had a secondary mortgage taken out which attributes to $1,036 of $17,097the increase. Capitalized interest expense related to construction in progress decreased $154 during the year ended December 31, 2020 decreased $1,185 or 6.5% in comparison to the same period in 2019. Pay offs of higher interest rate loans during 2020, decreased the overall weighted average interest

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Table of Contents

rate on our consolidated mortgage debt by 30 basis points. The lower consolidated mortgage rate decreased total interest paid on mortgages by $689 as compared to the same period in 2019, bringing mortgage interest expense as a percentage of income to 13.7% versus 15.2% in 2019. Additionally, interest expense on construction in progress, also contributed to the decrease in interest expense. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense by $517.2022.

Depreciation and amortization expense of $21,214$24,679 during the year ended December 31, 2020 decreased $2812022 increased $2,476 or 1.3%11.2% in comparison to the same period in 2019. The decrease is primarily due2021. Properties acquired since January 1, 2021, contributed approximately $2,122 to the write offincrease in depreciation expense, which is offset by $206 of certain lease intangibles at an office building location in Minneapolis, Minnesota.reduced depreciation expense related to the disposition of four properties during the year ended December 31, 2022. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the yearyears ended December 31, 20202022 and 2019 was2021 were relatively consistent at 17.0%18.3% and 17.9%17.2%, respectively.

Other income of $4,461 for the year ended December 31, 2020 increased $3,916 or 718.5% in comparison to the same period in 2019. Realized gains of $3,383 on the sale of three commercial properties during the year ended December 31, 2020 is the primary factor of the increase as compared to the same period in 2019. Additionally, during the year ended December 31, 2020, we recognized gains from involuntary conversion of $360, relating to the finalization of a 2017 hail claim in Omaha, Nebraska. During the year ended December 31, 2019, net losses included an amount resulting from the evaluation of a commercial property in Fargo, North Dakota, where it was determined that the future economic benefit of a portion of the property was non-recoverable. As such, during the year ended December 31, 2019, we experienced a loss on involuntary conversion of $816 due to the partial demolition of that property, netting to total gain on involuntary conversion of $516 for the same period.

REIT administration expenses of $4,217$5,249 for the year ended December 31, 20202022, increased $105$866 or 2.6%19.8% in comparison to the same period in 2019. The increase2021, which is attributableattributed to two joint venture’s development fee of $600 in 2022, and an increase ofin REIT advisory fees paid.paid of $335.

Net Operating Income

We measure the performanceOther income of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included herein, as well as the above table for more information on NOI performance by segment.

Net Income

Net income$10,530 for the year ended December 31, 2020was $26,980 compared2022 increased $5,921 or 128.5% in comparison to $16,059 for the year ended December 31, 2019.same period in 2021. The increase is dueprimarily attributed to the explanation noted above which includes decreased operational expense in part, caused by COVID-19, decreased interest expense due to debt refinancing, and gains on sale of real estate properties.      

three commercial and two residential properties for $11,090 in 2022 as compared to only one commercial and one residential properties in 2021 for $1,710. This is offset by the increase in net loss allocations from Sterling’s ownership in six joint ventures for $2,078 in 2022.

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Results of Operations for the Years Ended December 31, 2019 and 2018

    

Year ended December 31, 2019

    

Year ended December 31, 2018

    

Residential

    

Commercial

 ��  

Total

    

Residential

    

Commercial

    

Total

(unaudited)

(unaudited)

(in thousands)

(in thousands)

Real Estate Revenues

    

$

94,763

    

$

25,576

    

$

120,339

    

$

89,783

    

$

26,268

    

$

116,051

Real Estate Expenses

Real Estate Taxes

9,372

2,706

12,078

8,870

2,754

11,624

Property Management

12,470

975

13,445

11,761

904

12,665

Utilities

8,198

1,174

9,372

7,746

1,460

9,206

Repairs and Maintenance

21,030

2,235

23,265

18,533

2,141

20,674

Insurance

2,684

92

2,776

2,138

98

2,236

Total Real Estate Expenses

53,754

7,182

60,936

49,048

7,357

56,405

Net Operating Income

$

41,009

$

18,394

59,403

$

40,735

$

18,911

59,646

Interest

18,282

18,329

Depreciation and amortization

21,495

21,350

Administration of REIT

4,112

4,100

Loss on lease terminations

(22)

Other income

(545)

(6,089)

Net Income

$

16,059

$

21,978

Net Income Attributed to:

Noncontrolling Interest

$

10,525

$

14,604

Sterling Real Estate Trust

$

5,534

$

7,374

Dividends per share (1)

$

1.0450

$

1.0175

Earnings per share

$

0.6000

$

0.8400

Weighted average number of common shares

9,268

8,791

(1)Does not take into consideration the amounts distributed by the operating partnership to limited partners.

Revenues

Property revenues totaled approximately $120,339 for the year ended December 31, 2019 which constituted an increase of approximately $4,288 or 3.7% compared to the same period in 2018. Residential property revenues increased approximately $4,980 and commercial property revenues decreased approximately $692.

The following table illustrates changes the occupancy percentage for the twelve month periods indicated:

December 31,

December 31,

    

2019

2018

Residential occupancy

93.7

%

93.6

%

Commercial occupancy

91.8

%

90.2

%

Residential revenues for the year ended December 31, 2019 increased $4,980 in comparison to the same period for 2018.  Residential properties acquired since January 1, 2018 contributed approximately $2,308 to the increase in total residential revenues in the twelve months ended December 31, 2019. The remaining increase is due to increased rent charges at our stabilized properties, decreased vacancy, as well as increased collection efforts on receivable balances written off. Income related to Ratio Utility Billing System (RUBS) income in our Minneapolis market also contributed to the overall residential income increase. Residential revenues comprised 78.7% of total revenues for the year ended December 31, 2019 compared to 77.3% of total revenues for the year ended December 31, 2018.  Residential occupancy year-over-year has remained comparable increasing 0.1%, during the year ended December 31, 2019.

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ForFurthermore, the year ended December 31, 2019, total commercial revenues decreased $692 in comparison to the same period for 2018. The decrease was primarily attributable to the sale of three commercial properties in 2018, as well as rental incentives recorded in 2019 for an office building in Minneapolis, Minnesota. Commercial revenues comprised 21.3% of the total revenues for the year ended December 31, 2019 compared to 22.7% of total revenues for the year ended December 31, 2018. Commercial occupancy year-over-year has remained comparable, increasing 1.6%, during the year ended December 31, 2019. The increase is primarily due to fourth quarter leasing activityoffset by the Trust receiving $1,000 from related parties, in reimbursement for expenses paid that occurredwere associated with capital projects in properties located in Minnesota.2021.

Expenses

Residential expenses from operations of $53,754 during the year ended December 31, 2019 increased $4,706 or 9.6%Construction in comparison to the same period in 2018. The increase was attributed to an increase in repairsProgress and maintenance expense of $2,497 or 13.5%, related to upgrades occurring on properties in the North Dakota region. Increases in real estate taxes of $502 or 5.7% and property insurance of $546 or 25.5% also contributed to the overall operational expense increase.  Actual property management fees increased $709 or 6%, during the year ended December 31, 2019 and continue to approximate 5% of net collected rents; however, other property management related expenses have increased due to increased competition for labor.  

Commercial expenses from operations of $7,182 during the year ended December 31, 2019 decreased $175 or 2.4% in comparison to the same period in 2018.  The decrease was attributed to a decrease in utilities expense of $286 or 19.59%. The utility decrease was offset by an increase to repairs and maintenance expense of $94 or 4.4%, during the year ended December 31, 2019. These operational expense variances primarily relate to the demolition and disposition of a commercial property in Fargo, North Dakota. Property management expense increased by $71 of 7.9%, during the year ended December 31, 2019 which offset the decrease in utility expense.

Interest expense of $18,282 during the year ended December 31, 2019 decreased $47 or 0.3% in comparison to the same period in 2018.  Interest expense was approximately 15.19% and 15.79% of rental income for the year ended December 31, 2019 and 2018, respectively. The decrease of interest expense primarily relates to increased construction in progress. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense.  Pay offs of higher interest rate loans during the year end 2019 decreased the overall rated average interest rate on our consolidated mortgage debt.  Interest expense on mortgages for the years ended December 31, 2019 and 2018 as a percentage of revenue was 14.7% and 14.9% respectively.

Depreciation and amortization expense of $21,495 during the year ended December 31, 2019 increased $145 or 0.7% in comparison to the same period in 2018. The increase was primarily due to normal increases in monthly amortization expense.

Other income (expense) of $545 for the year ended December 31, 2019 decreased $5,544 or 91% in comparison to the same period in 2018.  The decrease was primarily attributed to disposition activity in the prior period that did not occur in the current period. In addition, during the year ended December 31, 2018 we recognized a gain on involuntary conversion of $1,467 and a gain on sale of real estate investments of $3,715, where no such capital transactions occurred during the year ended December 31, 2019. Furthermore, during the year ended December 31, 2019, we incurred an $816 loss on involuntary conversion due to the evaluation and analysis of a commercial property in Fargo, ND, where the future economic benefit of a portion of the property was determined to be non-recoverable. Based on the facts and circumstances surrounding the demolition, we will not be recognizing insurance proceeds related to the loss.

REIT administration expenses of $4,112 for the year ended December 31, 2019 increased $12 or 0.3% in comparison to the same period in 2018.

Net Operating Income

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important

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supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included herein, as well as the above table for more information on NOI performance by segment.

Net Income

Net income for the year ended December 31, 2019was $16,059 compared to $21,978 for the year ended December 31, 2018. During the year ended December 31, 2018, the Company recognized gains in other income totaling $5,181, as discussed above, which resulted in higher net income in the prior period than the current period.

COVID-19 ImpactDevelopment Projects

The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its businesscapitalizes direct and geographies, including how it will impact its tenants and business partners. A number of uncertainties continue to exist at this time including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the surge in COVID-19 cases in many states. While the Trust did not incur significant disruptionscertain indirect project costs incurred during the year ended December 31, 2020 fromdevelopment period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the COVID-19 pandemic, the effects of the ongoing COVID-19 pandemic could have material adverse effects on our business and results of operations so long as COVID-19 continues to impact the U.S. economy. The extent to which the economic disruption associated with the COVID-19 pandemic impacts our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.  In particular, during the year ended December 31, 2020, the Trust continued to monitor state and federal legislative actions and efforts in regard to the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen a number of tenantsdevelopment is considered substantially complete, the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenantscapitalization of certain indirect costs such as real estate taxes, interest, and at this time is unable to predict the impact that COVID-19 and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.

During the year ended December 31, 2020, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of factors. Notfinancing costs cease, all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.

Property Acquisitions and Dispositions

Property Acquisitions and Dispositions during the year ended December 31, 2020

During the year ended December 31, 2020, we acquired nine properties for a total of $29,775. This was completed through issuing approximately 535,000 limited partnership units of the operating partnership valued at $19.25 per unit for an aggregate consideration of approximately $10,293, 1031 tax-deferred exchange funds of $5,658, new loans of $3,225, assumed liabilities $6,193, and cash of $4,406.

We disposed of three commercial properties during the year ended December 31, 2020. The Trust disposed of an office building in Bismarck, North Dakota for $7,000, a retail property located in Apple Valley, Minnesota for $3,670 and an office building in St. Cloud, Minnesota for $2,050.

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Property Acquisitions and Dispositions during the year ended December 31, 2019

During the year ended December 31, 2019, there were no acquisitions or dispositions. During 2019, market saw an increase in investors, driving up overall acquisition prices, thus lowering capitalization rates below the target thresholds set by the Board.

Property Acquisitions and Dispositions during the year ended December 31, 2018

We acquired nine properties for a total of $31,501 during the year ended December 31, 2018. Total consideration for the acquisitions was the issuance of approximately $7,819 in limited partnership units of the operating partnership, 1031 tax-deferred exchange funds of $11,326, assumed loans of $2,104, assumed liabilities of $576 and cash of $9,676.  

During the year ended December 31, 2018, the operating partnership sold three properties.  We sold an industrial property located in Redwood Falls, Minnesota for $5,200 and recognized a gain of $935 in April 2018.  We sold a retail property located in Austin, Texas for $3,615 and recognized a gain of $1,266 in July 2018.   We sold one of two buildingsproject-related costs included in an office property locatedconstruction in Bismarck, North Dakota for $4,250process are reclassified to land and recognized a gain of $1,514 in July 2018.

See Notes 17building and 18 to the Consolidated Financial Statements included herein for more information regarding our acquisitions and dispositions during the years ended December 31, 2020, 2019 and 2018.

Construction in Progress and Development Projectsother improvements.

Construction in progress as of December 31, 20202022, consists primarily of construction associated with the Goldmark Office Park buildingat several residential properties located in Fargo, North Dakota common area updates at Bell Plaza located in Minneapolis, Minnesota, the Montreal Courts Apartments located in Little Canada, Minnesota and the Bayview Apartments located in Fargo, North Dakota.Minnesota. The Goldmark Office ParkPrairiewood Meadows construction consists of three commercial office buildings.the re-development of one building due to a fire, a new clubhouse for residents, and parking lot repairs. Current expectations are that the projects which include building renovations, tenant improvements, and common area upgrades, are towill be completed in phases with estimated completion in the first quarter of 2021. The2023, and the current project budget is approximately $4,882approximates $3,683, of which $4,812$3,085 has been incurred and is included in construction in progress. The Bell Plaza Atrium remodel includes upgradesRosedale Estates project is primarily related to the building’s lobby, common area conference rooms, restrooms, and updated HVAC and thermostats throughout the building.a new parking structure. Current expectations are that the project will be completed in the first quarter of 20212024, and the current project budget approximates $1,500is approximately $5,142, of which $1,312 has been incurred and included in construction in progress. The Montreal Courts development consists of a new clubhouse. Current expectations are that the project will be completed in the first quarter of 2021 and the current project budget approximates $1,963 of which $1,900$129 has been incurred and is included in construction in progress. Remaining construction in progress projects are primarily related to building and roof system, roof replacements on multiple residential properties, residential exterior window systems, and new deck systems on multiple residential properties.

The BayviewTrust has two on-going developments through ventures in unconsolidated affiliates.

Park Hill Apartments, development consists of new windows and siding. Current expectations are that the project willcurrently being developed in Dallas, Texas, is expected to be completed in the firstthird quarter of 20212023 and the current project budget approximates $1,501$53,138 of which $1,432$37,714 has been incurred and is included in construction in progress.as of December 31, 2022.

DuringKessler Apartments, currently being developed in Fort Worth, Texas is expected to be completed in the year endedthird quarter of 2024 and the current project budget approximates $55,000 of which $8,709 has been incurred as of December 31, 2020, the operating partnership invested in three joint ventures, which are developing apartment complexes in Savage, Maple Grove and Rogers, Minnesota.2022.

Funds From Operations (FFO)

Funds From Operations (FFO) applicable to common shares and limited partnership units means net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.

Historical cost accounting for real estate assets implicitly assumes the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. The term Funds From Operations (FFO) was created to address this problem. It was intended to be a

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standard supplemental measure of REIT operating performance that excluded historical cost depreciation from — or “added back” to — GAAP net income.

Our management believes this non-GAAP measure is useful to investors because it provides supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses this non-GAAP measure to evaluate our financial results, develop budgets and manage expenditures. The method used to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Management encourages the review of the reconciliation of this non-GAAP financial measure to the comparable GAAP results.

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Since the introduction of the definition of FFO, the term has come to be widely used by REITs. In the view of National Association of Real Estate Investment Trusts (“NAREIT”), the use of the definition of FFO (combined with the primary GAAP presentations required by the Securities and Exchange Commission) has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making it easier than before to compare the results of one REIT with another.

While FFO applicable to common shares and limited partnership units are widely used by REITs as performance metrics, all REITs do not use the same definition of FFO or calculate FFO in the same way. The FFO reconciliation presented here is not necessarily comparable to FFO presented by other real estate investment trusts. FFO should also not be considered as an alternative to net income as determined in accordance with GAAP as a measure of a real estate investment trust’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO applicable to common shares and limited partnership units does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of sufficient cash flow to fund a real estate investment trust’s needs or its ability to service indebtedness or to pay dividends to shareholders.

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The following tables include calculations of FFO, and the reconciliations to net income, for the years ended December 31, 2020, 2019,2022, 2021 and 2018,2020, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

Reconciliation of Net Income Attributable to Sterling to FFO Applicable to Common Shares and Limited Partnership Units

Year ended December 31, 2020

Year ended December 31, 2019

Year ended December 31, 2018

Year ended December 31, 2022

Year ended December 31, 2021

Year ended December 31, 2020

Weighted Avg

Per

Weighted Avg

Per

Weighted Avg

Per

Weighted Avg

Weighted Avg

Weighted Avg

Shares and

Share and

Shares and

Share and

Shares and

Share and

Shares and

Shares and

Shares and

    

Amount

    

Units(1)

    

Unit (2)

    

Amount

    

Units(1)

    

Unit (2)

    

Amount

    

Units(1)

    

Unit (2)

    

Amount

    

Units

    

Amount

    

Units

    

Amount

    

Units

    

(unaudited)

(unaudited)

(in thousands, except per share data)

(in thousands, except per share data)

Net Income attributable to Sterling Real Estate Trust

$

9,405

9,694

$

0.97

$

5,534

9,268

$

0.60

$

7,374

8,791

$

0.84

$

8,921

10,632

$

8,794

10,160

$

9,405

9,694

Add back:

Noncontrolling Interest - OPU

17,645

18,187

10,647

17,831

14,768

17,607

Noncontrolling Interest - Operating Partnership Units

15,628

18,626

15,783

18,235

17,645

18,187

Depreciation & Amortization from continuing operations

21,214

21,495

21,350

24,679

22,203

21,214

Pro rata share of unconsolidated affiliate depreciation & amortization

380

378

377

Pro rata share of unconsolidated affiliate depreciation and amortization

3,312

718

380

Loss on impairment of real estate investments

561

Subtract:

Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments

(3,383)

(3,715)

Gain on sale of depreciable real estate

(11,090)

(1,710)

(3,383)

Funds from operations applicable to common shares and limited partnership units (FFO)

$

45,261

27,881

$

1.62

$

38,054

27,099

$

1.40

$

40,154

26,398

$

1.52

$

42,011

29,258

$

45,788

28,395

$

45,261

27,881

(1)Please see Note 10 and Note 12 to the consolidated financial statements included above for more information.
(2)Net Income is calculated on a per share basis.  FFO is calculated on a per share and unit basis.

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Liquidity and Capital Resources

Our principal demands for funds will be for the: (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions, (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption plans and (vi) capital improvements and property related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests from our shareholders and the unit holders of our operating partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary. We expect to meet cash needs for acquisitions and other real-estate investments from cash flow from operations, net proceeds of share offerings and debt proceeds.

Evaluation of Liquidity

Wecontinually evaluate our liquidity and ability to fund future operations, debt obligations, and any repurchase requests. As part of our analysis, we consider among other items, the credit quality of tenants and lease expirations.

Our principal demands for funds will be for the: (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions, (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption plans and (vi) capital improvements, development projects, and property related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests to our shareholders and the unit holders of our operating partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary.

At December 31, 2022, our unrestricted cash resources consisted of cash and cash equivalents totaling $3,257. Our unrestricted cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of $107,577, which could potentially be used as collateral to secure additional financing in future periods.

The Trust has a $4,915 variable rate (SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in December 2026; and a $5,000 variable rate (SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires December 2026. The lines of credit are secured by specific properties. At December 31, 2022, the Bremer lines of credit secured one letter of credit totaling $50, leaving $8,857 available and unused under the agreements. The Trust anticipates renewing the line of credit expiring in the next 12 months to continue to hold it as a cash resource to the Trust.

The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us.

During the year ended December 31, 2022, we did not sell any common shares in private placements. During the year ended December 31, 2022, we issued 342,000 and 177,000 common shares under the dividend reinvestment plan and optional share purchases, respectively which raised gross proceeds of $11,531. During the year ended December 31, 2021, we did not sell any common shares in private placements. During the year ended December 31, 2021, we issued 363,000 and 203,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively which raised gross proceeds of $10,952.

Additionally, to reduce our cash investment and liquidity needs, the Trust utilizes the UPREIT structure whereby we can acquire property in whole or in part by issuing partnership units in lieu of cash payments. During the year end December 31, 2022, the operating partnership issued approximately 560,000 limited partnership units of the operating partnership valued at $23.00 per unit for an aggregate consideration of approximately $12,870 for the purchase of real estate investments. During the year end December 31, 2021, the Trust issued approximately 144,000 limited partnership units of the operating partnership valued at $20.00 per unit for an aggregate consideration of approximately $2,883 for the purchase of real estate investments.

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The Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units exchanged through the UPREIT structure. In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations. The Board typically determines the fair value on an annual basis. The Trustees determine the fair value, in their sole discretion and use data points to guide their determination which is typically based on a consensus of opinion. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise.

As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments or opinions that may, or may not, prove to be correct.  The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units.  In addition, the Board’s estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.

Cash on hand, together with cash from operations and access to the lines of credit is expected to provide sufficient capital to meet the Company’s needs for at least the next 12 months and as appropriate, we will use cash flows from operations, net proceeds from share offerings, debt proceeds, and proceeds from the disposition of real estate investments to meet long term liquidity demands.

Credit Quality of Tenants

We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.

To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenant’s operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our properties’ performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.

Lease Expirations and Occupancy

There is 192 square feetOur residential leases are for a term of commercial space, relating to 18 leases scheduled to expire in the next twelve months. One commercial lease is considered material which is an office building located in Edina, Minnesota.one year or less. The Advisor, with the assistance of our property managers, actively managemanages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where tenants elect not to renew, we may seek replacement tenants or try to sell the property.

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Cash Flow Analysis

Our objectives are to generate sufficient cash flow over time to provide shareholders with increasing dividends and to seek investments with potential for strong returns and capital appreciation throughout varying economic cycles. We have funded 100% of dividends paid with operating cash flows. In setting a dividend rate, we focus primarily on expected returns from investments we have already made to assess the sustainability of a particular dividend rate over time.

Year Ended

Year Ended

December 31,

December 31,

    

2020

    

2019

    

2022

    

2021

(in thousands)

(in thousands)

Net cash flows provided by operating activities

$

44,647

$

41,326

$

40,770

$

45,055

Net cash flows used in investing activities

$

(29,978)

$

(19,373)

$

(107,960)

$

(59,141)

Net cash flows used in financing activities

$

(4,416)

$

(34,636)

Net cash flows provided by financing activities

$

19,114

$

47,107

Operating Activities

Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance cost, and real estate taxes. Additionally, we incur general and administrative expenses, advisory fees, acquisition and disposition expenses and financing fees.

Net cash provided by operating activities was $44,647$40,770 and $41,326$45,053 for the years ended December 31, 20202022 and 2019,2021, respectively, which consists primarily of net income from property operations, gains on sale of real estate investments, decreased liabilities, and adjustmentadjusted for non-cash depreciation and amortization.

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Investing Activities

Our investing activities generally consist of real estate-related transactions (purchases and sales of properties) and payments of capitalized property-related costs such as intangible assets.  

Net cash used in investing activities was $29,978$107,960 and $19,373$59,119 for the years ended the yearsyear ended December 31, 20202022 and 2019,2021, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the years ended December 31, 20202022 and 2019,2021, cash flows used in investing activities related specifically to the acquisition of properties and capital expenditures was $41,200$91,600 and $15,445,$53,900, respectively. DuringFor the yearyears ended December 31, 2020, a note receivable2022 and 2021, cash flows used in investing activities related to the purchase of $363 bearing a 6.5% interest rate, payable over five yearssecurities was issued as well as two notes receivable equaling $400 bearing a 6% interest rate payable over three years. In addition,$29,130 and $-, respectively. Proceeds received from the sale of real estate investments during the years ended December 31, 20202022 and 2019, proceeds of $1,2882021, offset this amount by $25,463 and $2,596 were received from involuntary conversions,$5,610, respectively. During the year ended December 31, 2020, proceeds of $12,502 were generated from the sale of three commercial properties. No properties were acquired or disposed of during the year ended December 31, 2019.

Financing Activities

Our financing activities generally consist of funding property purchases by raising proceeds and securing mortgage notes payable as well as paying dividends, paying syndication costs, and making principal payments on mortgage notes payable.

Net cash used inprovided by financing activities was $4,416$19,114 and $34,636$47,107, respectively, for the years ended December 31, 20202022 and 2019, respectively.2021. During the year ended December 31, 2020,2022, we paid $22,738$25,310 in dividends and distributions, redeemed $3,537$2,077 of shares and units, received $37,860$26,500 from a note payable, received $37,569 from new mortgage notes payable, and made mortgage principal payments of $18,463.$22,231. For the year ended December 31, 2019,2021, we paid $21,872$22,622 in dividends and distributions, redeemed $2,023$5,566 of shares and units, received $116,180 from new mortgage notes payable, and made mortgage principal payments of $28,388, and issued $15,087 in new financing.$43,641.

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Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 20202022, to December 31, 20202022 totaling $10,256$12,222 or $1.059$1.1500 per share, of which $3,643$4,507 was cash dividends and $6,613$7,715 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $44,647$40,770 from our cash flows from operations and $422 provided by distributions from unconsolidated affiliates.operations.

We declared cash dividends to our shareholders during the period from January 1, 20192021, to December 31, 20192021 totaling $9,681$10,761 or $1.045$1.0600 per share, of which $3,426$3,842 was cash dividends and $6,253$6,918 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $41,326$45,053 from our cash flows from operations.

We continue to provide cash dividends to our shareholders from cash generated by our operations.  The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement.  We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate these cash flows and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.

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The following table presents certain information regarding our dividend coverage:

Year Ended

Year Ended

December 31,

December 31,

    

2020

    

2019

    

2022

    

2021

(in thousands)

(in thousands)

Cash flows provided by operations (includes net income of $26,980 and $16,059, respectively)

$

44,647

$

41,326

Cash flows provided by operations (includes net income of $24,532 and $24,438, respectively)

$

40,770

$

45,055

Distributions in excess of earnings received from unconsolidated affiliates

 

422

 

126

 

504

 

Gain (Loss) on sales of real estate and non-real estate investments

 

3,383

 

Gain on sales of real estate and non-real estate investments

 

10,529

 

1,710

Dividends declared

 

(10,256)

 

(9,681)

 

(12,222)

 

(10,760)

Excess

$

38,196

$

31,771

$

39,581

$

36,005

Limited Partnership Units

The operating partnership agreement provides that our operating partnership will distribute to the partners (subject to certain limitations) cash from operations on a quarterly basis (or more frequently, if we so elect) in accordance with the percentage interests of the partners. We determine the amounts of such distributions in our sole discretion.

For the year ended December 31, 2020,2022, we declared quarterly distributions totaling $19,322$21,482 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, and October 15, 202017, 2022, and January 15, 2021.17, 2023. Distributions were paid at a rate of $0.26469$0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the year ended December 31, 2019,2021, we declared quarterly distributions totaling $18,627$19,319 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, October 15, 20192021, and January 15, 2020.18, 2022. Distributions were paid at a rate of $0.26125$0.2650 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

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Sources of Dividends and Distributions

For the year ended December 31, 2020,2022, we paid aggregate dividends of $10,113,$11,854, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates.activities. Our funds from operations, or FFO, was $45,261,$42,011, therefore, our management believes our distribution policy is sustainable over time. For the year ended December 31, 2019,2021, we paid aggregate dividends of $9,495$10,629 which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates.activities. Our FFO was $38,054$45,788 for the year ended December 31, 2019.2021. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.

Cash Resources

At December 31, 2020, our cash resources consisted of cash and cash equivalents totaling approximately $11,716. Our cash reserves can be used for working capital needs and other commitments.  In addition, we had unencumbered properties with a gross book value of $47,624, which could potentially be used as collateral to secure additional financing in future periods.  

At December 31, 2020, there was no balance outstanding on the lines of credit totaling $28,215. Of the $28,215 available as of December 31, 2020, one variable rate line of credit secured two letters of credit totaling $746, leaving $27,469 available and unused under the agreements. See Note 6 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.

The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the year ended December 31, 2020, we did not sell any common shares in private placements. During the year ended December 31, 2020, we issued 356,000 and 187,000 common shares under the dividend reinvestment plan and

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optional share purchases, respectively which raised gross proceeds of $10,101. During the year ended December 31, 2019, we did not sell any common shares in private placements. During the year ended December 31, 2019, we issued 342,000 and 173,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively which raised gross proceeds of $9,438.

At December 31, 2020, our restricted deposits of $15,919 consisted of lenders’ escrows and funds restricted through lender or other agreements. Included in this amount is $6,994 of 1031 exchange escrow funds.

During the year ended December 31, 2020, we issued limited partnership units valued at approximately $10,293 in connection with seven of our nine property acquisitions.

During the year ended December 31, 2019, no partnership units were issued in relation to property acquisitions.

Off-Balance Sheet Arrangements

As of December 31, 2020 and 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

The table below presents our obligations and commitments to make future payments under our debt obligations as of December 31, 2020.

Payments Due by Year (in thousands)

    

2021

2022

2023

2024

2025

Thereafter

Total

Long-term debt (a):

Fixed rate (b)

$

30,040

$

26,595

$

49,886

$

18,873

$

50,489

$

247,228

$

423,111

Interest (c)

16,597

15,452

14,277

12,345

10,875

31,241

100,787

Special assessments

40

41

39

41

36

452

649

$

46,677

$

42,088

$

64,202

$

31,259

$

61,400

$

278,921

$

524,547

(a)Amounts exclude capitalized loan fees of $1,833, net of accumulated amortization, as of December 31, 2020. Fixed rate amounts for each year include scheduled principal amortization payments.
(b)Included in fixed rate debt is $43,613 of variable rate mortgage debts that have been swapped to fixed rate mortgage debts maturing in December 2027 through June 2030.
(c)Represents expected interest payments on our consolidated debt obligations as of December 31, 2020.

Inflation

Substantially all of our multifamily property leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore will expose us to the effect of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases.

As of December 31, 2020, most of our commercial leases require tenants to reimburse us for a share of our operating expenses. As a result, we are able to pass on much of any increases to our property operating expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the year-ended December 31, 2020, inflation did not have a material impact on our revenues or net income.

Critical Accounting Policies and Estimates

The following discloses accounting policies and estimates we believe are most “critical” to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments. These judgments

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often result from the need to make estimates about the effect of matters that are inherently uncertain. GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. This discussion addresses our judgment pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.  See also Note 2 to the consolidated financial statements.

Acquisition of Real Estate Investments

The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.

Impairment of Long-Lived Assets

The Company periodically evaluates its long-lived assets, including its investments in real estate, for indicators of impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company’s ability to hold and its intent with regard to each asset. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.

Business Interruption Proceeds

In the Trust’s normal course of business, we periodically receive insurance recoveries for business interruption. The Trust received insurance recoveries for business interruption of $999 and $838 during the years ended December 31, 2020 and 2019, respectively. When insurance proceeds are received, they are reflected in the statement of operations as real estate rental income.

REIT Status

We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains, as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to distribute to our shareholders 100% of our taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result.  

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the Trust shares in 2020 and 2019.  In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in 2020 and 2019.  In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations.  The Board typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to

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comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their condition.

Determination of price is a matter within the Board’s sole discretion. The Trust does not determine price based on any rote formula or specific factors. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted, or discounts are applied to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor.

As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments or opinions that may, or may not, prove to be correct.  The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units.  In addition, the Board’s estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.

Furthermore, in reaching an estimate of the value of the shares and limited partnership units, the Board applied a liquidity discount to one valuation scenario in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange, but did not apply a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third party, or reflect the costs that are likely to be incurred in connection with an appropriate exit strategy, whether that strategy might be a listing of the limited partnership units or common shares on a national securities exchange or a merger or sale of our portfolio.

There have been no material changes in our Significant Accounting Policies as disclosed in Note 2 to our consolidated financial statements for the year ended December 31, 2020 included elsewhere in this report.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Principal Activity and Significant Accounting Policies— Recently Issued Accounting Pronouncements, to the consolidated financial statements that are a part of this Annual Report on Form 10-K.

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Recent Developments

Common Share Dividends. On January 15, 2021,17, 2023, we paid a dividend or distribution of $0.26469$0.2875 per share on our common shares of beneficial interest or limited partnership units, to common shareholders and limited unit holders of record on December 31, 2020. All future dividends remain subject to the discretion of our Board of Trustees.2022.

Share and Unit Price Increase. The BoardWe have evaluated subsequent events through the date of Trustees approved an increasethis filing. We are not aware of any other subsequent events which would require recognition or disclosure in the common share price from $19.25 per share to $20.00 per share effective January 1, 2021.

Financing: On January 28, 2021 we obtained new financing on a commercial property for $2,031.

Sterling Management Development: Effective January 1, 2021, Alloy Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC and Goldmark Property Management. In connection with this restructuring transaction, the indirect ownership structure and percentages of the new entity remain materially consistent with that of the Advisor prior to January 1, 2021. Ms. Chaffee, our Chief Financial Officer, acquired a less than 1% ownership interest in Alloy in connection with the transactions. The Chief Financial Officer, Chief Investment Officer and General Counsel of the Trust also serve as the Chief Financial Officer, Chief Investment Officer and General Counsel of Alloy Enterprises, Inc.

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Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurancesthat the transactions will be completedconsolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Trust is exposed to certain risk arising from both its business operations and economic conditions and principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Trust manages economic risks, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities. The principal material financial market risk to which we are exposed, is interest-rate risk, which the Trust manages through the use of derivative financial instruments. Specifically, the Trust enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. During the year ended December 31, 2022, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. OurThese swaps have an aggregated notional amount of $106,033 for the year ended December 31, 2022. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.

As of December 31, 2022, The Trust had $106,033 of variable-rate borrowings, with the total outstanding balance fixed through interest rate swaps. Even though our goal is to maintain a fairly low exposure to marketinterest rate risk, for changeswe may become vulnerable to significant fluctuations in interest rates relates primarily toon any future repricing or refinancing long-termof our fixed rate obligations, the opportunity cost of fixed rate obligations in a changing interest rate environment and ouror variable rate lines of credit.

The following table shows the scheduled maturities and principal amortization of our indebtedness as of December 31, 2020 for each of the next five years and thereafter and the weighted average interest rates by year.

2021

2022

2023

2024

2025

Thereafter

Total

Debt:

Fixed and variable rate debt:

Mortgage notes payable (a)

$

30,040

$

26,595

$

49,886

$

18,873

$

50,489

$

247,228

$

423,111

Weighted average interest rate on debt:

Fixed and variable rate debt

Mortgage notes payable (a)

4.10%

4.16%

4.36%

4.12%

3.52%

3.99%

4.01%

(a)Amounts exclude capitalized loan fees of $1,833, net of accumulated amortization, as of December 31, 2020. Fixed rate amounts for each year include scheduled principal amortization payments.

The table incorporates only those interest rate exposures that existed as of December 31, 2020. It does not consider those interest rate exposuresdebt or positions that could arise after that date. The information presented herein is merely an estimate and has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the interest rate exposures that arise during future periods, our hedging strategies at that time and future changes in interest rates.debt.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature pages.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Sterling Real Estate Trust’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Sterling Real Estate Trust’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on thatthe evaluation, and solely because of the material weaknesses in internal control over financial reporting described below, Sterling Real Estate Trust’s Chief Executive Officer and Chief Financial Officer have concluded that Sterling Real Estate Trust’s disclosure controls and procedures were not effective.effective to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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Report of Management on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our internal control system was designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements.  The system of internal control over financial reporting provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees.  The framework upon which management relied in evaluating the effectiveness of our internal control over financial reporting was set forth in Internal Controls – Integrated Framework (2013) published by the Committee of Sponsoring Organization of the Treadway Commission.

Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:

i.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets;assets,
ii.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorization of our management and trustees; and
iii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Based on the results of our evaluation, our management concluded that our internal controlscontrol over financial reporting were notwas effective as of December 31, 2020. Projections2022. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, that creates a reasonable possibility that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis. Management has concluded that the following material weakness existed at December 31, 2020.

In the normal course of business, the Trust uses derivatives to manage the exposure to interest rate volatility on debt instruments. During 2020, the Trust entered and designated seven interest rate swap contracts as cash flow hedges. During the review of the Trust’s internal controls over financial reporting, it was noted that at hedge inception, Management prepared a hedge designation memo documenting the hedging relationship and how hedge effectiveness would be measured on a quarterly basis. That memo documented that the Trust would utilize the shortcut method under ASC 815-20-25. The shortcut method was not available because each interest-bearing liability (the hedged debt) was prepayable which precluded the use of that method under ASC 815-20-25-104(e).

Internal controls surrounding management’s review of the appropriate documentation were designed assuming that Management utilized the hypothetical derivative method rather than the short-cut method and failed to identify the drafting error in the internal documentation of the method used to test the effectiveness of the hedging relationship. In addition to the above material weakness, the contemporaneous documentation and fair value hedge effectiveness requirements of ASC 815 were not applied appropriately for the hedging relationships at inception. As a result, hedge accounting was inappropriately applied to the designated hedges at inception.

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The remediation plan related the material weakness in our internal control over financial reporting with respect to accounting for derivatives transactions has been implemented as of the date of filing. The remedial actions include:

i.Improved training, education and accounting reviews designed to ensure that all relevant personnel involved in derivative transactions understand and apply hedge accounting in compliance with generally accepted accounting principles, including ASC 815 and its related interpretations.
ii.Enlisting the use of a third-party specialist for any new hedging relationship entered into subsequent to the date of the financial statements being issued, to evaluate the effectiveness of the hedging relationship at the inception of each hedge.

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies and procedures may deteriorate.  

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the fourth quarter ended December 31, 20202022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEMITEM 9B. OTHER INFORMATION

None.

PART III

The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) is incorporated by reference to our definitive proxy statement for the 20212023 Annual Meeting of Shareholders to be filed with the SEC or filed by amendment to this Annual Report on or before April 30, 2021.May 1, 2023.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The financial statements listed below are included in this report

Reports of Independent Registered Public Accounting Firms (PCAOB ID Number 49 and PCAOB ID Number 23)

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2022 and 2021

Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020

Notes to Consolidated Financial Statements

Real Estate and Accumulated Depreciation (Schedule III)

(a)(3) Exhibits

See the Exhibit Index filed as part of this Annual Report on Form 10-K.

ITEM 16. FORM 10-K SUMMARY

Not applicable.

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Graphic

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021,

AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND

OTHER COMPREHENSIVE INCOME, SHAREHOLDERS’ EQUITY AND CASH FLOWS

FOR THE YEARS ENDED

DECEMBER 31, 2022, 2021 AND 2020,

INCLUDING NOTES

and

REPORTS OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

PAGE

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

51

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

55

Consolidated Statements of Operations and Other Comprehensive Income

56

Consolidated Statements of Shareholders’ Equity

57

Consolidated Statements of Cash Flows

58

Notes to Consolidated Financial Statements

60

Real Estate and Accumulated Depreciation (Schedule III)

85

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Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2020 and 2019

Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018

Notes to Consolidated Financial Statements

Real Estate and Accumulated Depreciation (Schedule III)

(a)(3) Exhibits

See the Exhibit Index filed as part of this Annual Report on Form 10-K.

ITEM 16. FORM 10-K SUMMARY

Not applicable.

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Sterling Trust Logo

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2019,

AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND

OTHER COMPREHENSIVE INCOME, SHAREHOLDERS’ EQUITY AND CASH FLOWS

FOR THE YEARS ENDED

DECEMBER 31, 2020, 2019 AND 2018,

INCLUDING NOTES

and

REPORTS OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

PAGE

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

55

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

58

Consolidated Statements of Operations and Other Comprehensive Income

59

Consolidated Statements of Shareholders’ Equity

60

Consolidated Statements of Cash Flows

61

Notes to Consolidated Financial Statements

63

Real Estate and Accumulated Depreciation (Schedule III)

92

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Graphic

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders the Audit Committee, and the Board of DirectorsTrustees of Sterling Real Estate Trust:Trust

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sterling Real Estate Trust and its subsidiaries (the "Company")Company) as of December 31, 20202022 and 2019,2021, the related consolidated statements of operations and other comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the periodyear then ended, December 31, 2020, and the related notes to the consolidated financial statements and schedule (collectively, the financial statement schedules (collectively referred to as the "consolidated financial statements")statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the periodyear then ended, December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company's consolidatedCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(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 auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditsaudit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.

Our auditsaudit 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 regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

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Critical Audit MatterMatters

The critical audit mattermatters communicated below is a matterare matters arising from the current period audit of the financial statements that waswere communicated or required to be communicated to the Audit Committeeaudit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattermatters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing separate opinions on the critical audit mattermatters or on the accounts or disclosures to which it relates.

they relate.ImpairmentEvaluation of Long-Lived Assetsreal estate investments for impairment

Critical Audit Matter Description

The Company’s real estate investments and related intangible assets were $776.3 million and $5.3 million, respectively, as of December 31, 2022. As described in Note 2, to the consolidated financial statements, at the end of each reporting period, the Company evaluates whetherperforms impairment testing on a quarterly basis or whenever events or changes in circumstances indicate the carrying amount of its real estate investments may not be recoverable. As part of the Company’s impairment indicator analysis, management considers numerous potential indicators exist for any properties held. Impairmentof impairment of operating properties. These indicators could include but are not limited to a substantial decline in or continued low occupancy rate, continued difficulty in leasing space, significant financially troubled tenants, a change in plan to sell a property prior to the end of its useful life or holding period, a significant decrease in market price not in line with general market trends, and any other quantitative or qualitative events or factors deemed significant by the Company’sTrust’s management or Boardboard of Trustees.

Iftrustees. The Company identified indicators are present,of impairment for certain real estate investments and, in such cases, further assessed the assets for recoverability by comparing the net carrying value to estimated future cash flows on an undiscounted cash flow analysis is performed on the identified properties and compared to the carrying amount. The estimation of future undiscounted cash flows requires significant assumptions including, but not limited to, vacancy rates, rental rates, lease terms, credit quality of tenants, holding period, property location, capital expenditures, lease origination costs, selling prices, projected cash flows from disposition of a property, capitalization rates, and discount rates. If the future undiscounted cash flows are less than the carrying amount of the long-lived asset, an impairment loss is recognized for the difference between the estimated fair value and the carrying amount.

These factors and assumptions used by management in the impairment analysis are highly affected by future economic conditions and therefore involve a high degree of subjectivity. We identified the Company's consideration of impairment to be a critical audit matter because of the significance of the assumptions made to evaluate whether events or changes in circumstances have occurred that indicate the carrying amounts of investment properties may not be recoverable.

How We Addressed the Matter in Our Audit

We obtained an understanding and evaluated the design and implementation of controls over management's periodic assessment of impairment which include identification of impairment indicators and completeness and accuracy of data.basis.

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We evaluated management'sidentified the determination of the existence of impairment analysisindicators for the Company’s real estate investments and related intangible assets as a critical audit matter because of long-lived assetsthe significant judgments made by performingmanagement, including the evaluation of the impact of the factors described above. Auditing management’s judgments used in the determination of impairment indicators involved a high degree of auditor judgment and increased audit effort. Further, auditing the Company’s undiscounted cash flow model required a high degree of auditor judgment and increased audit effort as estimates underlying the calculation, including terminal capitalization rates, were based on assumptions affected by expected future market and economic conditions.

Our audit procedures thatrelated to the Company’s evaluation of real estate investments for impairment included the following, among others, evaluating the indicators of impairment identified by management and comparingothers.

We tested the underlying data used within the analyses to actual resultsin management’s analysis for completeness and accuracy. Whereaccuracy, agreed such data to source documents and the underlying accounting records and evaluated management’s conclusions around potential indicators of impairment.

We evaluated the accuracy of management’s conclusions around potential indicators of impairment by developing an independent expectation of potential impairment indicators on a property by property basis, considering information such as historical trends, current year property level operating performance, and changes in expected hold periods, among others, and compared our expectation to management’s analysis.

For the Company’s real estate investments that were assessed by management using an undiscounted cash flow calculations were required,model, we comparedinspected relevant industry data to consider market conditions. Further, we tested that the significant assumptions usedutilized in estimating property undiscounted cash flows, such as terminal capitalization rates, were within an observable market range.

Evaluation of purchase price allocation of real estate acquisitions

As described in Note 2 and 19 to independent expectationsthe consolidated financial statements, the transaction consideration exchanged in the Company’s real estate acquisitions during 2022 amounted to $94.8 million. The transactions were accounted for as asset acquisitions and resulted in the Company recording approximately $9.9 million of land and land improvements, approximately $83.6 million of building and improvements and approximately $1.3 million of other net assets and assumed liabilities. Management allocates the purchase price in an asset acquisition to the assets acquired and liabilities assumed based on current economic and market conditions. We also testedupon their estimated relative fair values at the accuracydate of the historicalacquisition.

We identified the allocation of the purchase price to the assets acquired and contractual future amounts usedliabilities assumed in the asset acquisitions referred to develop future cash flowsabove as a critical audit matter because of the significant judgments made by management when determining the estimates of fair value of certain assets acquired. Auditing management’s estimates and potential scenarios.judgments involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists, due to the impact these estimates have on the allocation of the purchase price.

Our audit procedures related to the allocation of the purchase price to the assets acquired and liabilities assumed in the asset acquisitions referred to above included the following, among others:

We obtained and read the purchase agreements.
We tested the underlying data used in management’s fair value estimates for completeness and accuracy and agreed the inputs to source documents.
We utilized valuation specialists to assist in performing the following procedures:
oEvaluated the appropriateness of the valuation methodology utilized by management to estimate fair value.
oObtained independently sourced market data for certain significant assumptions, including comparable land sales, market rent, discount rates and capitalization rates, among others, and compared them to management’s estimates.
oAssessed the reasonableness and recalculated management’s allocation of the purchase price to the assets acquired and liabilities assumed.

52

Table of Contents

/s/ Baker TillyRSM US LLP

We have served as the Company'sCompany’s auditor since 2013.2021.

Minneapolis, Minnesota

March 15, 2023

PCAOB ID: 49

53

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders, the Audit and Disclosure Committee, and the Board of Trustees of Sterling Real Estate Trust:

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of operations and other comprehensive income, shareholders’ equity and cash flows of Sterling Real Estate Trust (the "Company") for the year ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Baker Tilly US, LLP (formerly known

We served as Baker Tilly Virchow Krause, LLP)the Company’s auditor from 2013 until 2021.

Chicago, Illinois

March 31, 2021

5754

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of December 31, 20202022 and 20192021

December 31,

December 31,

    

2020

    

2019

(in thousands)

ASSETS

Real estate investments

Land and land improvements

$

119,088

$

114,666

Building and improvements

712,560

676,228

Construction in progress

13,640

11,134

Real estate investments

845,288

802,028

Less accumulated depreciation

(160,575)

(146,316)

Real estate investments, net

684,713

655,712

Cash and cash equivalents

11,716

9,002

Restricted deposits

15,919

8,380

Investment in unconsolidated affiliates

9,659

7,915

Notes receivable

2,026

1,300

Assets held for sale

831

Lease intangible assets, less accumulated amortization of $15,019 in 2020 and $15,558 in 2019

7,367

9,133

Other assets, net

10,798

8,244

Total Assets

$

743,029

$

699,686

LIABILITIES

Mortgage notes payable, net

$

421,278

$

393,164

Dividends payable

7,447

7,118

Tenant security deposits payable

4,908

4,439

Lease intangible liabilities, less accumulated amortization of $1,963 in 2020 and $1,881 in 2019

994

1,207

Liabilities related to assets held for sale

5

Accrued expenses and other liabilities

16,869

14,711

Total Liabilities

451,501

420,639

COMMITMENTS and CONTINGENCIES - Note 16

SHAREHOLDERS' EQUITY

Beneficial interest

109,366

102,373

Noncontrolling interest

Operating partnership

181,621

174,221

Partially owned properties

2,346

2,416

Accumulated other comprehensive (loss) income

(1,805)

37

Total Shareholders' Equity

291,528

279,047

$

743,029

$

699,686

December 31,

December 31,

    

2022

    

2021

(in thousands)

ASSETS

Real estate investments

Land and land improvements

$

129,682

$

125,338

Building and improvements

834,356

763,003

Construction in progress

7,110

8,361

Real estate investments

971,148

896,702

Less accumulated depreciation

(194,849)

(179,155)

Real estate investments, net

776,299

717,547

Cash and cash equivalents

3,257

51,507

Restricted deposits

9,323

9,149

Investment in securities

29,371

Investment in unconsolidated affiliates

29,423

18,658

Notes receivable

8,448

7,457

Lease intangible assets, less accumulated amortization

5,290

6,246

Other assets, net

27,312

10,302

Total Assets

$

888,723

$

820,866

LIABILITIES

Mortgage notes payable, net

$

506,167

$

493,142

Notes payable

26,500

Lines of credit

1,008

Dividends payable

8,493

7,567

Tenant security deposits payable

6,368

5,225

Lease intangible liabilities, less accumulated amortization

646

811

Accrued expenses and other liabilities

16,075

18,604

Total Liabilities

565,257

525,349

COMMITMENTS and CONTINGENCIES - Note 17

SHAREHOLDERS' EQUITY

Beneficial interest

123,996

116,856

Noncontrolling interest

Operating partnership

183,048

176,954

Partially owned properties

2,640

2,657

Accumulated other comprehensive income (loss)

13,782

(950)

Total Shareholders' Equity

323,466

295,517

$

888,723

$

820,866

See Notes to Consolidated Financial Statements

5855

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2020, 20192022, 2021 and 20182020

Year Ended

Year Ended

December 31,

December 31,

2020

    

2019

    

2018

2022

    

2021

    

2020

(in thousands, except per share data)

(in thousands, except per share data)

Income from rental operations

Real estate rental income

$

124,616

$

120,339

$

109,933

$

135,060

$

129,324

$

124,616

Tenant reimbursements

6,118

124,616

120,339

116,051

Expenses

Expenses from rental operations

Operating expenses, excluding real estate taxes

47,071

48,858

44,781

Operating expenses

56,893

51,063

47,071

Real estate taxes

12,498

12,078

11,624

14,245

13,706

12,498

Depreciation and amortization

21,214

21,495

21,350

24,679

22,203

21,214

Interest

17,097

18,282

18,329

19,994

18,142

17,097

Gain on lease terminations

(22)

97,880

100,713

96,062

115,811

105,114

97,880

Loss on impairment of property

561

Administration of REIT

4,217

4,112

4,100

5,247

4,381

4,217

Total expenses

102,097

104,825

100,162

121,619

109,495

102,097

Income from operations

22,519

15,514

15,889

13,441

19,829

22,519

Other income

Equity in income of unconsolidated affiliates

263

759

634

Equity in (losses) gains of unconsolidated affiliates

(2,339)

(261)

263

Other income

455

301

273

1,293

1,935

455

Gain on sale of real estate and non-real estate investments

3,383

3,715

Gain/(loss) on involuntary conversion

360

(515)

1,467

4,461

545

6,089

Gain on sale or conversion of real estate investments

11,090

1,710

3,383

Gain on involuntary conversion

1,047

1,225

360

Total other income

11,091

4,609

4,461

Net income

$

26,980

$

16,059

$

21,978

$

24,532

$

24,438

$

26,980

Net income (loss) attributable to noncontrolling interest:

Operating Partnership

17,645

10,647

14,768

Net income attributable to noncontrolling interest:

Operating partnership

15,628

15,783

17,645

Partially owned properties

(70)

(122)

(164)

(17)

(139)

(70)

Net income attributable to Sterling Real Estate Trust

$

9,405

$

5,534

$

7,374

$

8,921

$

8,794

$

9,405

Net income per common share, basic and diluted

$

0.97

$

0.60

$

0.84

Net income attributable to Sterling Real Estate Trust per common share, basic and diluted

$

0.84

$

0.87

$

0.97

Comprehensive income:

Net income

$

26,980

$

16,059

$

21,978

$

24,532

$

24,438

$

26,980

Other comprehensive (loss) gain - change in fair value of interest rate swaps

(1,842)

67

35

Other comprehensive gain (loss) - change in fair value of interest rate swaps

14,732

855

(1,842)

Comprehensive income

25,138

16,126

22,013

39,264

25,293

25,138

Comprehensive income attributable to noncontrolling interest

16,373

10,569

14,628

24,989

16,193

16,373

Comprehensive income attributable to Sterling Real Estate Trust

$

8,765

$

5,557

$

7,385

$

14,275

$

9,100

$

8,765

Weighted average Common Shares outstanding

9,694

9,268

8,791

Weighted average common shares outstanding, basic and diluted

10,632

10,160

9,694

See Notes to Consolidated Financial Statements

5956

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020, 20192022, 2021 AND 20182020

Accumulated

Noncontrolling

Distributions

Total

Interest

Accumulated

Common

Paid-in

in Excess of

Beneficial

Operating

Partially Owned

Comprehensive

  

Shares

  

Capital

  

Earnings

  

Interest

  

Partnership

  

Properties

  

Income (Loss)

  

Total

(in thousands)

BALANCE AT DECEMBER 31, 2017

8,488

$

113,995

$

(23,179)

$

90,816

$

179,844

$

3,180

$

(65)

$

273,775

Shares issued under trustee compensation plan

3

57

57

57

Contribution of assets in exchange for the issuance of noncontrolling interest shares

7,819

7,819

Shares/units redeemed

(75)

(1,315)

(1,315)

(1,116)

(2,431)

Dividends declared

(8,936)

(8,936)

(17,955)

(26,891)

Dividends reinvested - stock dividend

325

5,711

5,711

5,711

Issuance of shares under optional purchase plan

226

4,176

4,176

4,176

Change in fair value of interest rate swaps

35

35

Distributions paid to consolidated real estate entity noncontrolling interests

(478)

(478)

Net income

7,374

7,374

14,768

(164)

21,978

BALANCE AT DECEMBER 31, 2018

8,967

$

122,624

$

(24,741)

$

97,883

$

183,360

$

2,538

$

(30)

$

283,751

Shares issued pursuant to trustee compensation plan

3

62

62

62

Shares/units redeemed

(50)

(891)

(891)

(1,132)

(2,023)

Dividends declared

(9,681)

(9,681)

(18,626)

(28,307)

Dividends reinvested - stock dividend

342

6,145

6,145

6,145

Issuance of shares under optional purchase plan

173

3,293

3,293

3,293

UPREIT units converted to REIT common shares

1

28

28

(28)

Change in fair value of interest rate swaps

67

67

Net income

5,534

5,534

10,647

(122)

16,059

BALANCE AT DECEMBER 31, 2019

9,436

$

131,261

$

(28,888)

$

102,373

$

174,221

$

2,416

$

37

$

279,047

Shares issued pursuant to trustee compensation plan

3

64

64

64

Contribution of assets in exchange for the issuance of noncontrolling interest shares

10,293

10,293

Shares/units redeemed

(127)

(2,321)

(2,321)

(1,216)

(3,537)

Dividends declared

(10,256)

(10,256)

(19,322)

(29,578)

Dividends reinvested - stock dividend

356

6,511

6,511

6,511

Issuance of shares under optional purchase plan

187

3,590

3,590

3,590

Change in fair value of interest rate swaps

(1,842)

(1,842)

Net income

9,405

9,405

17,645

(70)

26,980

BALANCE AT DECEMBER 31, 2020

9,855

$

139,105

$

(29,739)

$

109,366

$

181,621

$

2,346

$

(1,805)

$

291,528

Accumulated

Noncontrolling

Distributions

Total

Interest

Accumulated

Common

Paid-in

in Excess of

Beneficial

Operating

Partially Owned

Comprehensive

  

Shares

  

Capital

  

Earnings

  

Interest

  

Partnership

  

Properties

  

Income (Loss)

  

Total

(in thousands)

BALANCE AT DECEMBER 31, 2019

9,436

$

131,261

$

(28,888)

$

102,373

$

174,221

$

2,416

$

37

$

279,047

Shares issued under trustee compensation plan

3

64

64

64

Contribution of assets in exchange for the issuance of noncontrolling interest shares

10,293

10,293

Shares/units redeemed

(127)

(2,321)

(2,321)

(1,216)

(3,537)

Dividends and distributions declared

(10,256)

(10,256)

(19,322)

(29,578)

Dividends reinvested - stock dividend

356

6,511

6,511

6,511

Issuance of shares under optional purchase plan

187

3,590

3,590

3,590

Change in fair value of interest rate swaps

(1,842)

(1,842)

Net income

9,405

9,405

17,645

(70)

26,980

BALANCE AT DECEMBER 31, 2020

9,855

$

139,105

$

(29,739)

$

109,366

$

181,621

$

2,346

$

(1,805)

$

291,528

Shares issued pursuant to trustee compensation plan

3

57

57

57

Contribution of assets in exchange for the issuance of noncontrolling interest shares

2,883

2,883

Shares/units redeemed

(82)

(1,552)

(1,552)

(4,014)

(5,566)

Dividends and distributions declared

(10,761)

(10,761)

(19,319)

(30,080)

Dividends reinvested - stock dividend

363

6,888

6,888

6,888

Issuance of shares under optional purchase plan

203

4,064

4,064

4,064

Change in fair value of interest rate swaps

855

855

Contributions from consolidated real estate entity noncontrolling interests

450

450

Net income

8,794

8,794

15,783

(139)

24,438

BALANCE AT DECEMBER 31, 2021

10,342

$

148,562

$

(31,706)

$

116,856

$

176,954

$

2,657

$

(950)

$

295,517

Shares issued pursuant to trustee compensation plan

3

65

65

65

Contribution of assets in exchange for the issuance of noncontrolling interest shares

12,870

12,870

Shares/units redeemed

(53)

(1,155)

(1,155)

(922)

(2,077)

Dividends and distributions declared

(12,222)

(12,222)

(21,482)

(33,704)

Dividends reinvested - stock dividend

341

7,468

7,468

7,468

Issuance of shares under optional purchase plan

177

4,063

4,063

4,063

Change in fair value of interest rate swaps

14,732

14,732

Net income

8,921

8,921

15,628

(17)

24,532

BALANCE AT DECEMBER 31, 2022

10,810

$

159,003

$

(35,007)

$

123,996

$

183,048

$

2,640

$

13,782

$

323,466

See Notes to Consolidated Financial Statements

6057

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020, 20192022, 2021 and 20182020

Year Ended

December 31,

    

2020

    

2019

    

2018

(in thousands)

OPERATING ACTIVITIES

Net income

$

26,980

$

16,059

$

21,978

Adjustments to reconcile net income to net cash from operating activities

Gain on sale of real estate investments

(3,383)

(3,715)

(Loss)/Gain on involuntary conversion

(360)

515

(1,467)

Equity in income of unconsolidated affiliates

(263)

(759)

(634)

Distributions of earnings of unconsolidated affiliates

361

759

634

Allowance for uncollectible accounts receivable

540

203

560

Depreciation

19,770

19,644

19,165

Amortization

1,418

1,805

2,127

Amortization of debt issuance costs

634

636

708

Effects on operating cash flows due to changes in

Other assets

(219)

(234)

(2,980)

Tenant security deposits payable

328

153

85

Accrued expenses and other liabilities

(1,159)

2,545

1,961

NET CASH PROVIDED BY OPERATING ACTIVITIES

44,647

41,326

38,422

INVESTING ACTIVITIES

Purchase of real estate investment properties

(10,064)

(20,419)

Capital expenditures and tenant improvements

(31,136)

(15,445)

(10,273)

Proceeds from sale of real estate investments and non-real estate investments

12,502

12,482

Proceeds from involuntary conversion

1,288

2,596

1,112

Investment in unconsolidated affiliates

(2,264)

(5,350)

(81)

Distributions in excess of earnings received from unconsolidated affiliates

422

126

162

Notes receivable issued, net of payments received

(726)

(1,300)

NET CASH USED IN INVESTING ACTIVITIES

(29,978)

(19,373)

(17,017)

FINANCING ACTIVITIES

Payments for financing, debt issuance and lease costs

(530)

(136)

(707)

Payments on investment certificates and subordinated debt

(100)

(50)

Principal payments on special assessments payable

(498)

(597)

(284)

Proceeds from issuance of mortgage notes payable and subordinated debt

67,950

15,087

23,728

Principal payments on mortgage notes payable

(48,553)

(28,388)

(15,060)

Advances on lines of credit

30,964

3,811

Payments on lines of credit

(30,964)

(3,811)

Proceeds from issuance of shares under optional purchase plan

3,590

3,293

4,176

Shares/units redeemed

(3,537)

(2,023)

(2,431)

Dividends/distributions paid

(22,738)

(21,872)

(21,265)

NET CASH USED IN FINANCING ACTIVITIES

(4,416)

(34,636)

(11,893)

NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS

10,253

(12,683)

9,512

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF YEAR

17,382

30,065

20,553

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF YEAR

$

27,635

$

17,382

$

30,065

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF YEAR

Cash and cash equivalents

$

11,716

$

9,002

$

21,212

Restricted deposits

15,919

8,380

8,853

TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF YEAR

$

27,635

$

17,382

$

30,065

Year Ended

December 31,

    

2022

    

2021

    

2020

(in thousands)

OPERATING ACTIVITIES

Net income

$

24,532

$

24,438

$

26,980

Adjustments to reconcile net income to net cash provided by operating activities

Gain on sale or conversion of real estate investments

(11,090)

(1,710)

(3,383)

Loss on impairment of property

561

Gain on involuntary conversion

(1,047)

(1,225)

(360)

Change in fair value of securities

(322)

Equity in loss (gain) of unconsolidated affiliates

2,339

261

(263)

Distributions of earnings of unconsolidated affiliates

261

233

361

Allowance for uncollectible accounts receivable

(281)

(667)

540

Depreciation

22,161

20,918

19,770

Amortization

2,518

1,285

1,418

Amortization of debt issuance costs

675

608

634

Effects on operating cash flows due to changes in

Other assets

(209)

807

(177)

Tenant security deposits payable

1,143

349

328

Accrued expenses and other liabilities

(471)

(242)

(1,159)

NET CASH PROVIDED BY OPERATING ACTIVITIES

40,770

45,055

44,689

INVESTING ACTIVITIES

Gross purchase of securities

(29,130)

-

-

Proceeds from maturity of securities

81

-

-

Purchase of real estate investment properties

(81,974)

(35,915)

(13,377)

Capital expenditures and tenant improvements

(9,623)

(18,007)

(31,136)

Proceeds from sale of real estate investments and non-real estate investments

25,463

5,610

12,502

Proceeds from involuntary conversion

1,579

4,095

1,288

Investment in unconsolidated affiliates

(13,869)

(9,493)

(2,264)

Distributions in excess of earnings received from unconsolidated affiliates

504

422

Notes receivable issued net of payments received

(991)

(5,431)

(726)

NET CASH USED IN INVESTING ACTIVITIES

(107,960)

(59,141)

(33,291)

FINANCING ACTIVITIES

Payments for financing, debt issuance

(408)

(1,283)

(484)

Payments on investment certificates and subordinated debt

(25)

(100)

Principal payments on special assessments payable

(498)

Proceeds from issuance of mortgage notes payable and subordinated debt

37,569

116,180

71,175

Principal payments on mortgage notes payable

(22,231)

(43,641)

(48,553)

Advances on lines of credit

1,008

818,689

30,964

Payments on lines of credit

(818,689)

(30,964)

Proceeds from notes payable

26,500

Proceeds from issuance of shares under optional purchase plan

4,063

4,064

3,590

Shares/units redeemed

(2,077)

(5,566)

(3,537)

Dividends/distributions paid

(25,310)

(22,622)

(22,738)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

19,114

47,107

(1,145)

NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS

(48,076)

33,021

10,253

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD

60,656

27,635

17,382

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

$

12,580

$

60,656

$

27,635

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

Cash and cash equivalents

$

3,257

$

51,507

$

11,716

Restricted deposits

9,323

9,149

15,919

TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD

$

12,580

$

60,656

$

27,635

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020, 20192022, 2021 and 20182020 (Continued)

Year Ended

Year Ended

December 31,

December 31,

    

2020

    

2019

    

2018

    

2022

    

2021

    

2020

(in thousands)

(in thousands)

SCHEDULE OF CASH FLOW INFORMATION

Cash paid during the period for interest, net of capitalized interest

$

16,491

$

17,684

$

17,575

$

19,305

$

17,332

$

16,491

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Dividends reinvested

$

6,511

$

6,145

$

5,711

$

7,468

$

6,888

$

6,511

Dividends declared and not paid

2,608

2,465

2,281

3,108

2,740

2,608

UPREIT distributions declared and not paid

4,838

4,653

4,547

5,385

4,827

4,838

UPREIT units converted to REIT common shares

28

Shares issued pursuant to trustee compensation plan

64

62

57

65

57

64

Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT

10,293

7,819

12,870

2,883

10,293

Increase in land improvements due to increase in special assessments payable

231

639

447

219

235

231

Unrealized (loss) gain on interest rate swaps

(1,842)

67

35

Acquisition of assets with new financing

3,225

Unrealized gain (loss) on interest rate swaps

14,732

855

(1,842)

Acquisition of assets through assumption of debt and liabilities

6,193

2,680

406

569

6,193

Capitalized interest and real estate taxes related to construction in progress

644

138

91

250

644

See Notes to Consolidated Financial Statements

Statement

s

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

Note 1 – Organization

Sterling Real Estate Trust, d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002.  Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.  Code.

Sterling previously established an operating partnership (“Sterling Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of December 31, 20202022 and 2019,2021, Sterling owned approximately 35.03%36.60% and 34.63%36.22%, respectively, of the operating partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Sterling and all subsidiaries for which we maintain a controlling interest.

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates..

Principles of Consolidation

The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly-ownedwholly owned limited liability companies and partially-owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.

As of December 31, 2022, the Trust owned approximately 36.60% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the LLLP Agreement and the redemptions plans, these persons have the right to request the Operating Partnership redeem their OP Units following a specified restricted period. All redemptions are at the sole discretion of the Trust, acting for itself or in its capacity as General Partner of the Operating Partnership, and further subject to the conditions and limitations of the LLLP Agreement and redemption plans, as the same may be amended or modified from time to time. If the Trust accepts a redemption request, the redemption of OP Units shall be made in cash in an amount equal to the fair value of an equivalent number of common shares of the Trust. In lieu of delivering cash, however, the Trust, as the Operating Partnership’s general partner, may, at its option and in its sole and absolute discretion, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Trust so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Trust’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Trust issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Trust an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”).  In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

Principal Business Activity

Sterling currently owns directly and indirectly, 179 properties.  The Trust’s 133 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings.  The Trust owns 46 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, and medical properties.  The Trust’s mix of properties is 74.4% residential and 25.6% commercial (based on cost) with a total carrying value of $684,713 at December 31, 2020. The Trust has 1 property held for sale located in Waite Park, Minnesota at December 31, 2020.  The carrying value of assets held for sale at December 31, 2020 is $829. Currently our focus is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

limited to multifamily apartment properties.  We currently have no plans

In instances where the Trust determines that it is not the primary beneficiary of a VIE or the Trust does not control the joint venture but can exercise influence over the entity with respect to our commercial properties. Weits operations and major decisions, the Trust will consider unsolicited offersuse the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Trust’s operations but instead its share of operations will be reflected as equity in earnings (loss) of unconsolidated entity on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated entity on the consolidated balance sheets. See Note 5 for purchaseadditional details regarding variable interest entities where the Trust uses the equity method of commercial properties on a case by case basis.investing.

Residential Property

    

Location

    

No. of Properties

    

Units

North Dakota

112

6,378

Minnesota

16

3,147

Missouri

1

164

Nebraska

4

639

133

10,328

Commercial Property

    

Location

    

No. of Properties

    

Sq. Ft

North Dakota

20

772,000

Arkansas

2

28,000

Colorado

1

17,000

Iowa

1

33,000

Louisiana

1

15,000

Michigan

1

12,000

Minnesota

13

668,000

Mississippi

1

15,000

Nebraska

1

19,000

Wisconsin

5

63,000

46

1,642,000

The operating partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s sole significant asset is its investment in the operating partnership. The Trust is the primary beneficiary of the Operating Partnership and accordingly consolidated the Operating Partnership. As a result, substantially all of the Trust’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Trust’s debt is an obligation of the Operating Partnership, and the Trust guarantees the unsecured debt obligations of the Operating Partnership. The Trust may acquire property using a reverse like-kind exchange structure (a “Reverse 1031 Like-Kind Exchange”) under the Code to defer taxable gains on the subsequent sale of real estate property. As such, the acquired property (the “Parked Property”) remains in the possession of a VIE whose legal equity interests are owned by a qualified intermediary engaged to execute the Reverse 1031 Like-Kind Exchange until the subsequent sale transaction and the Reverse 1031 Like-Kind Exchange are completed. Although the VIE is legally owned by the qualified intermediary, the Trust retains essentially all of the legal and economic benefits and obligations related to the VIE (which holds the legal title to the Parked Property prior to the completion of the Reverse 1031 Like-Kind Exchange) and, as its designated manager, has the key decision-making power over the Parked Property. The VIE (including the Parked Property) is included in the Trust’s consolidated financial statements as a consolidated VIE until legal title is transferred to the Trust upon completion of the Reverse 1031 Like-Kind Exchange.

Concentration of Credit Risk

Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.

Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate Investments

Real estate investments are recorded at cost less accumulated depreciation.  Ordinary repairs and maintenance are expensed as incurred.

The Trust allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the estimatedrelative acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, and (v) assumed financing that is determined to be above or below market, if any. Transaction costs related to acquisitions are accounted for as asset acquisitions are capitalized as incurred and capitalizedincluded as a cost of the property under the guidance of ASU 2017-01.

For tangible assets acquired, including land, building and other improvements, the Trust considers available comparable market and industry information in estimating acquisition date fair value. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs. The Trust allocates a portion of the purchase price to the estimated acquired in-place lease intangibles based on factors available in third party appraisals or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, and lease origination costs for similar leases as well as lost rental payments during an assumed lease-up period. The Trust also evaluates each acquired lease as compared to current market rates. If an acquired lease is determined to be above or below market, the Trust allocates a portion of the purchase price to such above or below market leases based upon the present value of the difference between the contractual lease payments and estimated market rent payments over the remaining lease term. Renewal periods are included within the lease term in the calculation of above and below market lease values if, based upon factors known at the acquisition date, market participants would consider it reasonably assured that the lessee would exercise such options. Fair value estimates used in acquisition accounting, including the discount rate used, require the Trust to consider various factors, including, but not limited to, market knowledge, demographics, age and physical condition of the property, geographic location, and size and location of tenant spaces within the acquired investment property.

The portion of the purchase price allocated to acquire in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Trust incurred amortization expense pertaining to acquired in-place lease value intangibles of $1,234, $1,629 and $2,021 for the years ended December 31, 2020, 2019 and 2018, respectively.

The portion of the purchase price allocated to acquire above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to rental income. Amortization pertaining to above market lease intangibles of $186, $214 and $222 for the years ended December 31, 2020, 2019 and 2018, respectively, was recorded as a reduction to income from rental operations. Amortization pertaining to below market lease intangibles of $212, $261 and $280 for the years ended December 31, 2020, 2019 and 2018, respectively, was recorded as an increase to income from rental operations.accompanying balance sheet.

Furniture and fixtures are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(Dollar amounts in thousands, except share and per share data)

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:

Buildings and improvements

    

40 years

Furniture, fixtures and equipment

 

5-9 years

Depreciation expense for the years ended December 31, 2020, 2019 and 2018 totaled $19,770, $19,644 and $19,165 respectively.

The Trust’s real estate investmentsinvestment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Trust separately determines whether impairment indicators exist for each property.

Examples of situations considered to be impairment indicators include, but are not limited to:

oa substantial decline or continued low occupancy rate;negative cash flows;
ocontinued low occupancy rates;
ocontinued difficulty in leasing space;
osignificant financially troubled tenants;
oa change in plan to sell a property prior to the end of its useful life or holding period;
oa significant decrease in market price not in line with general market trends; and
oany other quantitative or qualitative events or factors deemed significant by the Trust’s management or boardBoard of trustees.Trustees.

If the presence of one or more impairment indicators as described above is identified at the end of the reporting period or throughout the year with respect to a real estatean investment property, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows. A real estateAn investment property is considered to be impaired when the estimated future undiscounted cash flows are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

less than its current carrying value.  When performing a test for recoverability or estimating the fair value of an impaired real estate investment property, the Trust makes complex or subjective assumptions which include, but are not limited to:

oprojected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;
oprojected capital expenditures and lease origination costs;expenditures;
oprojected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;
ocomparable selling prices; and
oproperty specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of real estate investments.

Based on evaluation, there were was one impairment loss of $561 during the year ended December 31, 2022. There were 0no impairment losses during the years ended December 31, 2020, 20192021 and 2018.2020.

Properties Held for Sale

We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component or group of components of an entity either has been disposed of or is classified as held for sale.  

In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of (1) its carrying amount or (2) fair value less costs to sell.  In addition, a property being held for sale ceases to be depreciated.  We classify operating properties as properties held for sale in the period in which all of the following criteria are met:

management, having the authority to approve the action, commits to a plan to sell the asset;
the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;
the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;
the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

The results of operations of a component of an entity that either has been disposed of or is classified as held-for-sale under the requirements of ASC 360 is reported in discontinued operations in accordance with ASC 205, Presentation of Financial Statements (“ASC 205”) if such disposal or classification represents a strategic shift that has (or will have) a major effect on our operations and financial results.

The Trust had 1 property held for sale as of December 31, 2020. There were 0 properties held for sale as of December 31, 2019.  See Note 17.

Construction in Progress

The Trust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes.  At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes and interest and financing costs cease and all project-related costs included in construction in process are reclassified to land and building and other improvements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

Construction in progress as of December 31, 2020 consists primarily of construction associated with the Goldmark Office Park building located in Fargo, North Dakota, common area updates at Bell Plaza located in Minneapolis, Minnesota, the Montreal Courts Apartments located in Little Canada, Minnesota and the Bayview Apartments located in Fargo, North Dakota. The Goldmark Office Park consists of three commercial office buildings. Current expectations for the projects, which include building renovations and common area upgrades, are to be completed in phases with estimated completion in the first quarter of 2021. The current project budget is approximately $4,882 of which $4,812 has been incurred and is included in construction in progress. The Bell Plaza Atrium remodel includes upgrades to the building’s lobby, common area conference rooms, restrooms, and updated HVAC and thermostats throughout the building. Current expectations are that the project will be completed in the first quarter of 2021 and the current project budget approximates $1,500 of which $1,312 has been incurred and included in construction in progress. The Montreal Courts development consists of a new clubhouse. Current expectations are that the project will be completed in the first quarter of 2021 and the current project budget approximates $1,963 of which $1,900 has been incurred and is included in construction in progress. The Bayview Apartments development consists of new windows and siding. Current expectations are that the project will be completed in the first quarter of 2021 and the current project budget approximates $1,501 of which $1,432 has been incurred and is included in construction in progress.

Cash and Cash Equivalents and Restricted Deposits

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents. Restricted deposits include funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrows and escrow deposits required by lenders on certain properties to be used for future building renovations or tenant improvementsimprovements. As of December 31, 2022 and potential Internal Revenue Code Section 1031 tax deferred exchanges (1031 Exchange).December 31, 2021, the Trust did not hold any U.S. Treasury Bills ‘Securities’ in cash and cash equivalents. As of December 31, 2022, all U.S. Treasury Bills are classified as Level 1 investments in the fair value hierarchy.

Investments in U.S. Treasury Bills

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(Dollar amounts in thousands, except share and per share data)

Treasury Bills are short-term debt obligations with maturities of one year or less issued by the U.S. Treasury Department and backed by the U.S. Government. Treasury Bills yield no interest, but are issued at a discount to the redemption price. We classify our investments in U.S. Treasury Bills as investments in securities. We use quoted market prices to determine the fair value of our investments in U.S. Treasury Bills.

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings (losses), contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. NaNNo impairment losses were recorded related to the unconsolidated affiliates for the years ended December 31, 2020, 20192022, 2021 and 2018.2020.

We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operations and financial policies of the investee, and entities where the Trust has joint control and other attributes.  We will also use the equity method for investments that do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810.  For a joint venture accounted for under the equity method, our share of net earnings and losses is reflected in income when earned and distributions are credited against our investment in the joint venture as received.Other Assets

In determining whether an investment in a limited liability company or tenant in common arrangement is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structureOther assets are comprised of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns.Asfollowing as of December 31, 2020, our2022 and 2021:

    

December 31, 2022

    

December 31, 2021

(in thousands)

Due from related party

$

50

$

336

Accounts receivable, net

5,821

5,342

Insurance claim receivable

3,846

145

Fair value of interest rate swap

13,782

698

Other assets

181

192

Financing fees, less accumulated amortization

86

18

Lease costs, less accumulated amortization

1,799

2,065

Prepaid expenses

1,747

1,506

Total other assets, net

$

27,312

$

10,302

Note receivable,

Notes receivable are issued periodically and are secured and interest bearing. The Trust has one note receivable for a commercial tenant  bearing a 6.5% per annum interest rate which matures in common arrangements do not qualify2025.

Accrued Expenses and Other liabilities

Accrued Expenses and other liabilities are comprised of the following as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. As of December 31, 2020, our investment in the joint ventures do not qualify as variable interest entities, as they do not meet the control requirements for consolidation or significant influence requirements, as defined in ASC 810,2022 and do meet the definition of joint ventures.2021:

    

December 31, 2022

    

December 31, 2021

(in thousands)

Special assessments payable

$

647

$

690

Due to related party

1,408

473

Accounts payable - trade

2,340

3,272

Retainage payable

3

86

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

As of December 31, 2020 and 2019, the unconsolidated affiliates held total assets of $66,112 and $31,261 and mortgage notes payable of $41,559 and  $16,690, respectively.  

Fair value of interest rate swap

1,648

Deferred insurance proceeds

2

476

Accrued interest expense

1,318

1,323

Accrued real estate taxes

7,275

6,653

Accrued unearned rent

2,936

3,055

Other liabilities

146

928

Total accrued expenses and other liabilities

$

16,075

$

18,604

The operating partnership is a 50% owner of Grand Forks Marketplace Retail Center through 100% ownership in a limited liability company.  Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at December 31, 2020 and 2019 of $10,036 and $10,264, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at December 31, 2020 and 2019 of $6,232 and $6,426 respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 60% interest in a limited liability company that is currently developing a 190-unit multifamily property. As of December 31, 2020, the operating partnership has contributed $3,401 in cash to SE Savage. SE Savage holds land located in Savage, Minnesota, with total assets of $27,014 and $5,464 as of December 31, 2020 and 2019, respectively. Current expectations are that the project will be completed in the fourth quarter of 2021 and the current project budget approximates $37,800 of which $23,200 has been incurred as of December 31, 2020. The Company is jointly and severally liable for the full mortgage balance of $19,436 as of December 31, 2020.

The operating partnership owns a 60% interest in a limited liability company that intends to develop a 160-unit multifamily property. As of December 31, 2020, the operating partnership has contributed $2,975 in cash to SE Maple Grove. SE Maple Grove holds land located in Maple Grove, Minnesota, with total assets of $13,106 and $3,455 as of December 31, 2020 and 2019, respectively. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $33,000 of which $9,600 has been incurred as of December 31, 2020. The Company is jointly and severally liable for the full mortgage balance of $5,710 as of December 31, 2020.

The operating partnership owns a 60% interest in a limited liability company that intends to develop a 165-unit multifamily property. As of December 31, 2020, the operating partnership has contributed $999 in cash to SE Rogers. SE Rogers holds land located in Rogers, Minnesota, with total assets of $4,161 as of December 31, 2020. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $34,300 of which $3,300 has been incurred as of December 31, 2020. The Company is jointly and severally liable for the full mortgage balance, which had 0 balance as of December 31, 2020.

Receivables

Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, beginning with the adoption of ASC 842 as of January 1, 2019, the operating partnership recognizes an adjustment to rental income. Prior to adoption of ASC 842, the Company recognized a provision for uncollectible amounts or a direct write-off of the specific rent receivable. Receivables are included in Other assets in the accompanying consolidated balance sheets.

Notes receivable are issued periodically and are secured and interest bearing.

Accounts receivable are included in Other assets in the accompaning consolidated balances sheets.

Financing and Lease Costs

Financing costs have been capitalized and are being amortized over the life of the financing (line of credit) using the effective interest method.  Unamortized financing costs are written off when debt is retired before the maturity date and included in interest expense at that time.  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

Lease costs incurred in connection with new leases have been capitalized and are being amortized over the life of the lease using the straight-line method. We record the amortization of leasing costs in depreciation and amortization on the consolidated statements of operations and comprehensive income. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense.

Financing and lease costs are included in other assets in the accompanying consolidated balance sheets.

Debt Issuance Costs

We amortize external debt issuance costs related to notes and mortgage notes using the effective interest rate method, over the estimated life term of the related debt. We record debt issuance costs net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit as financing fees in other assets, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.

Lease Intangibles

Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases and the value of leases with above or below market lease terms. Lease intangibles are amortized over the term of the related lease.

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined 0 impairment charges were necessary for the years ended December 31, 2020, 2019 and 2018.

Noncontrolling Interest

A noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity.  In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest, and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the consolidated statements of operations and other comprehensive income.  

Operating Partnership: Interests in the operating partnership held by limited partners are represented by operating partnership units.  The operating partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.

Partially Owned Properties: The Trust reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Trust that are not wholly owned by the Trust.  The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interest in partially owned properties in the consolidated statementstatements of operations and other comprehensive income.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to beneficial and noncontrolling interest.

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DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income like other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions similar to corporate distributions.

A summary of the tax characterization of the dividends paid to shareholders of the Company’s common stock for the years ended December 31, 2020, 20192022, 2021 and 20182020 follows:

Tax Year Ended December 31,

Tax Year Ended December 31,

Dividend

%

Dividend

%

Dividend

%

Dividend

%

Dividend

%

Dividend

%

2020

2020

2019

2019

2018

2018

2022

2022

2021

2021

2020

2020

Tax status

Ordinary income

$

0.8994

84.95

%

$

0.8791

84.12

%

$

0.7258

71.33

%

$

0.6374

55.43

%

$

0.9833

92.76

%

$

0.8994

84.95

%

Capital gain

%

0.0048

0.46

%

%

%

0.0767

7.24

%

%

Return of capital

0.1593

15.05

%

0.1611

15.42

%

0.2917

28.67

%

0.5126

44.57

%

%

0.1593

15.05

%

$

1.0587

100.00

%

$

1.0450

100.00

%

$

1.0175

100.00

%

$

1.1500

100.00

%

$

1.0600

100.00

%

$

1.0587

100.00

%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(Dollar amounts in thousands, except share and per share data)

We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all our taxable income; therefore, 0no provisions or liabilities for income taxes have been recorded in the consolidated financial statements.

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP. The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of December 31, 20202022 and 20192021 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2017.2019.

The operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.

Revenue Recognition

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted with the purpose that average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $302 and $550 for the years ended December 31, 2022 and 2021, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of December 31, 2022 and 2021, was $3,756 and $3,569, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimated. The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of December 31, 2020,2022, all leases analyzed under the Trust’s lease classification process were determined to be operating leases.

As of December 31, 2020, we derived 79.1% of our revenues from residential leases that are generally for terms of one-year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis.  Residential leases are renewable upon consent of both parties on an annual or monthly basis.

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DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

As of December 31, 2020, we derived 20.9% of our revenues from commercial leases primarily under long-term lease agreements.  Substantially all commercial leases contain fixed escalations, or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize variable income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and reimbursements are included within “real estate rental income” along with the associated base rent in the accompanying consolidated financial statements.

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment decreased revenue by $93 and $44 for the years ended December 31, 2020 and 2019 and increased revenue by $99 for the year ended December 31, 2018. The straight-line receivable balance included in other assets on the consolidated balance sheets as of the years ended December 31, 2020 and 2019 was $3,012 and $3,331 respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which are immaterial, are recognized in the subsequent year.

Upon adoption of ASU 2016-02 on January 1, 2019, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different, and the non-lease component is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in real estate rental income beginning January 1, 2019 in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental income.

Lease income related to the Trust’s operating leases is comprised of the following:

Year ended December 31, 2020

    

Residential

    

Commercial

    

Total

(in thousands)

Lease income related to fixed lease payments

$

95,162

$

20,609

$

115,771

Lease income related to variable lease payments

5,412

5,412

Other (a)

(721)

(125)

(846)

Lease Income (b)

$

94,441

$

25,896

$

120,337

(a)For the year ended December 31, 2020, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.
(b)Excludes other rental income for the year ended December 31, 2020 of $4,279, which is accounted for under the revenue recognition standard.

Year ended December 31, 2019

    

Residential

    

Commercial

    

Total

(in thousands)

Lease income related to fixed lease payments

$

91,930

$

19,578

$

111,508

Lease income related to variable lease payments

6,077

6,077

Other (c)

(934)

(176)

(1,110)

Lease Income (d)

$

90,996

$

25,479

$

116,475

(c)For the year ended December 31, 2019, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.
(d)Excludes other rental income for the year ended December 31, 2019 of $3,864, which is accounted for under the revenue recognition standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

As of December 31, 2020, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.

Years ending December 31,

    

Amount

(in thousands)

2021

$

16,068

2022

13,991

2023

12,688

2024

11,950

2025

11,527

Thereafter

50,660

$

116,884

Business Interruption Proceeds

In the Trust’s normal course of business, we periodically receive insurance recoveries for business interruption. The Trust received insurance recoveries for business interruption of $903 and $879 during the years ended December 31, 2020 and 2019, respectively.  When insurance proceeds are received, they are reflected in the statement of operations as real estate rental income, in the period they are received.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had 0no dilutive potential common shares as of December 31, 2020, 20192022, 2021 and 20182020 and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods. As the calculation does not include net income attributable to the Operating Partnership, Operating Partnership Units are not included in the calculation, and does not have any impact on earnings per share.

For the years ended December 31, 2020, 20192022, 2021 and 2018,2020, Sterling’s denominators for the basic and diluted earnings per common share were approximately 10,632,000, 10,160,000, and 9,694,000, 9,268,000, and 8,791,000, respectively.

Insurance Policies and Claims Liabilities

The Trust maintains business insurance programs with deductible limits, which cover property, business automobile and general liability claims. Dependent on the program maintained, the Trust may accrue estimated losses using a reserve for known claims and estimates based on historical loss experience. The calculations used to estimate potential property claim reserves are based on numerous assumptions, some of which are subjective. The Trust will adjust its property claim reserves, if necessary, in the event future loss experience differs from historical loss patterns. As of December 31, 2020, claims liability relating to total known claims was $280. There were 0 unreported claims as of December 31, 2020. As of December 31, 2019, claims liability was $204, which is included in other liabilities on the consolidated balance sheets.

Reclassifications

Certain reclassifications considered necessary for a fair presentation have been made to the prior period financial statements in order to conform to the current yearyear’s presentation.  These reclassifications have not changed the results of operations or equity.

Recent Accounting Pronouncements

In March 2020,Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The standard provides for optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. On July 27, 2017, theaccompanying Consolidated Financial Conduct Authority (FCA), tasked with overseeing the London Interbank Offered Rate (LIBOR) announced theStatements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

benchmark interest rate will be phased out by the end of 2021. As a result, existing and future contracts indexed to LIBOR will need to be renegotiated to reference another rate.

We adopted the standard effective as of January 1, 2020, using the optional transition method to apply the standard as of the effective date. The Trust elected to apply the optional expedients for all of the Trust’s hedging relationships. The Trust will disregard the potential change in the designated hedged risk that may occur due to reference rate reform when the Trust assesses whether the hedged forecasted transaction is probable in accordance with the requirements of Topic 815. The Trust will continue current hedge accounting for our existing cash flow hedges when the hedged risk changes by assuming the reference rate will not be replaced for the remainder of the hedging relationships for our assessment of hedge effectiveness and all subsequent hedge effectiveness assessments.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which superseded FASB ASC Topic 840.  The standard for operating leases as lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating and finance leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term.

We adopted this standard effective as of January 1, 2019, using the optional transition method to apply the standard as of the effective date. The Company elected to apply the package of practical expedients for the leases as lessor for its residential and commercial leases and these leases will continue to be accounted for as operating leases as of the effective date. Further, the Company elected the practical expedient to combine lease and non-lease components for leases as lessor. Finally, the Company evaluated taxes collected from lessees, lessor costs paid directly by lessees, and initial direct costs and determined that the guidance was consistent with existing practice. Based on these evaluations, the Company determined that for leases as lessor, as of January 1, 2019, there was no impact on lease revenue or related expenses.

In April 2020, the FASB met to discuss lease modifications guidance in Topic 842 as it relates to lease concessions amidst the COVID-19 pandemic. The FASB determined that requiring the analysis of all leases in which concessions are made would be costly and complex for both the lessees and lessors. As such, the FASB has made the decision to allow companies to avoid lease modification accounting when lease concessions do not result in a significant change in cash flow. The Trust has elected to apply the lease modification guidance in Topic 842 for concessions and deferrals made during the COVID-19 pandemic as it relates to the Trust’s residential leases, as the cash flows related to these concessions and deferrals do not cause a significant change in the cash received from the leases.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.

NOTE 3 – segment reporting

We report our results in 2two reportable segments: residential and commercial properties. Our residential properties include multifamily properties. Our commercial properties include retail, office, industrial, and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and certain general and administrative expenses.  The accounting policies of each segment are consistent with those described in Note 2 of this report.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements for the years ended December 31, 20202022 and 2019.2021.

Year ended December 31, 2020

Year ended December 31, 2019

Year ended December 31, 2018

Year ended December 31, 2022

Year ended December 31, 2021

Year ended December 31, 2020

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

(in thousands)

(in thousands)

(in thousands)

(in thousands)

(in thousands)

(in thousands)

Income from rental operations

$

98,576

$

26,040

$

124,616

$

94,763

$

25,576

$

120,339

$

89,783

$

26,268

$

116,051

$

113,968

$

21,092

$

135,060

$

107,284

$

22,040

$

129,324

$

98,576

$

26,040

$

124,616

Expenses from rental operations

52,686

6,883

59,569

53,754

7,182

60,936

49,048

7,357

56,405

64,647

6,491

71,138

57,454

7,315

64,769

52,686

6,883

59,569

Net operating income

$

45,890

$

19,157

$

65,047

$

41,009

$

18,394

$

59,403

$

40,735

$

18,911

$

59,646

$

49,321

$

14,601

$

63,922

$

49,830

$

14,725

$

64,555

$

45,890

$

19,157

$

65,047

Depreciation and amortization

21,214

21,495

21,350

24,679

22,203

21,214

Interest

17,097

18,282

18,329

19,994

18,142

17,097

Administration of REIT

4,217

4,112

4,100

5,247

4,381

4,217

Gain on lease terminations

(22)

Other income

(4,461)

(545)

(6,089)

(10,530)

(4,609)

(4,461)

Net income

$

26,980

$

16,059

$

21,978

$

24,532

$

24,438

$

26,980

Segment Assets and Accumulated Depreciation

As of December 31, 2020

    

Residential

    

Commercial

    

Total

(in thousands)

Real estate investments

$

647,083

$

198,205

$

845,288

Accumulated depreciation

(118,363)

(42,212)

(160,575)

$

528,720

$

155,993

684,713

Cash and cash equivalents

11,716

Restricted deposits and funded reserves

15,919

Investment in unconsolidated affiliates

9,659

Note receivable

2,026

Assets held for sale

831

Intangible assets, less accumulated amortization

7,367

Other assets, net

10,798

Total Assets

$

743,029

As of December 31, 2019

    

Residential

    

Commercial

    

Total

(in thousands)

Real estate investments

$

605,813

$

196,215

$

802,028

Accumulated depreciation

(104,170)

(42,146)

(146,316)

$

501,643

$

154,069

655,712

Cash and cash equivalents

9,002

Restricted deposits and funded reserves

8,380

Investment in unconsolidated affiliates

7,915

Note receivable

1,300

Intangible assets, less accumulated amortization

9,133

Other assets, net

8,244

Total Assets

$

699,686

As of December 31, 2022

    

Residential

    

Commercial

    

Total

(in thousands)

Real estate investments

$

779,424

$

191,724

$

971,148

Accumulated depreciation

(147,115)

(47,734)

(194,849)

Total real estate investments, net

$

632,309

$

143,990

$

776,299

Lease intangible assets, less accumulated amortization

839

4,451

5,290

Cash and cash equivalents

3,257

Restricted deposits

9,323

Investment in securities

29,371

Investment in unconsolidated affiliates

29,423

Notes receivable

8,448

Other assets, net

27,312

Total Assets

$

888,723

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

As of December 31, 2021

    

Residential

    

Commercial

    

Total

(in thousands)

Real estate investments

$

692,722

$

203,980

$

896,702

Accumulated depreciation

(133,100)

(46,055)

(179,155)

Total real estate investments, net

$

559,622

$

157,925

$

717,547

Lease intangible assets, less accumulated amortization

6,246

6,246

Cash and cash equivalents

51,507

Restricted deposits

9,149

Investment in unconsolidated affiliates

18,658

Notes receivable

7,457

Other assets, net

10,302

Total Assets

$

820,866

NOTE 4 - RESTRICTED DEPOSITS AND FUNDED RESERVES

    

At December 31,

2020

2019

(in thousands)

Tenant security deposits

$

4,730

$

4,325

Real estate tax and insurance escrows

2,058

2,058

Replacement reserves

2,137

1,997

Other restricted escrows

6,994

$

15,919

$

8,380

Tenant Security Deposits

We have set aside funds to repay tenant security deposits upon tenant move-out.

Real Estate Tax and Insurance Escrows

Pursuant to the terms of certain mortgages, we have established and maintain real estate tax escrows and insurance escrows to pay real estate taxes and insurance. We are required to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums.

Replacement Reserves

Pursuant to the terms of certain mortgages, we have established and maintain several replacement reserve accounts. We make monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals.

Other Restricted Escrows

Other restricted escrows consist of proceeds received on the disposal of a commercial building located in Bismarck, North Dakota. The proceeds are required to be held as restricted funds under Section 1031 of the Internal Revenue Code (like-kind exchange).

    

As of December 31,

As of December 31,

2022

2021

(in thousands)

Tenant security deposits

$

6,242

$

5,165

Real estate tax and insurance escrows

1,336

1,355

Replacement reserves

1,745

1,791

Other funded reserves

838

$

9,323

$

9,149

NOTE 5 - Lease intangibles– Investment in unconsolidated affiliates

Total Investment in Unconsolidated Affiliates at

Unconsolidated Affiliates

Date Acquired

Trust Ownership Interest

December 31,
2022

December 31, 2021

Banner Building

2007

66.67%

$

(614)

$

60

Grand Forks INREIT, LLC

2003

50%

4,961

2,493

SE Savage, LLC

2019

60%

1,660

2,946

SE Maple Grove, LLC

2019

60%

1,836

2,823

SE Rogers, LLC

2020

60%

2,413

2,986

ST Oak Cliff, LLC

2021

70%

9,098

4,324

SE Brooklyn Park, LLC

2021

60%

2,914

3,026

SE Fossil Creek, LLC

2022

70%

7,155

-

$

29,423

$

18,658

The operating partnership owns a 66.67% interest as tenant in common in an office building in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at December 31, 2022 and 2021 of $6,951 and $6,329, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The following table summarizesoperating partnership is a 50% owner of a tenant in common through 100% ownership in a limited liability company. The property is located in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at December 31, 2022 and 2021 of $9,520 and $9,794, respectively. The Trust is jointly and severally liable for the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:full mortgage balance.

Lease

Accumulated

Lease

As of December 31, 2020

    

Intangibles

    

Amortization

    

Intangibles, net

Lease Intangible Assets

(in thousands)

In-place leases

$

19,768

$

(13,727)

$

6,041

Above-market leases

2,618

(1,292)

1,326

$

22,386

$

(15,019)

$

7,367

Lease Intangible Liabilities

Below-market leases

$

(2,957)

$

1,963

$

(994)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

The Operating Partnership owns a 60% interest in a limited liability company that holds a multifamily property. The property is encumbered by a first mortgage with a balance of $30,726 at December 31, 2022. The Trust is jointly and severally liable for the full mortgage balance. At December 31, 2021, the property was encumbered by a first mortgage of $26,210, and a second mortgage to Sterling Properties, LLLP of $6,129. Additionally, at December 31, 2022, SE Savage, LLC has an outstanding Promissory Note with Sterling Properties, LLLP, for $1,397, and is an unsecured obligation of SE Savage, LLC. The note is considered to be additional at-risk funds to the Operating Partnership, in SE Savage, LLC, and is included in Notes Receivable on the Consolidated Balance Sheet at December 31, 2022.

The Operating Partnership owns a 60% interest in a limited liability company that holds a multifamily property. The entity is encumbered by a first mortgage with a balance at both December 31, 2022 and December 31, 2021 of $24,788.  The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at December 31, 2022 and December 31, 2021 of $3,643 and $727, respectively.

The Operating Partnership owns a 60% interest in a limited liability company that is currently developing a multifamily property. The LLC holds land located in Rogers, Minnesota, with total assets of $32,864 and $22,847 at December 31, 2022 and December 31, 2021, respectively.  The entity encumbered by a first mortgage has a balance of $25,742 and $15,688 at December 31, 2022 and December 31, 2021, respectively. The Company is jointly and severally liable for the full mortgage balance. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at December 31, 2022 of $2,938.

The Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of December 31, 2022, the Operating Partnership has contributed $9,300 in cash to the entity. The entity holds land located in Dallas, Texas with total assets of $40,404 and $7,394 at December 31, 2022 and December 31, 2021, respectively. The entity is encumbered by a construction mortgage with a balance of $23,409 at December 31, 2022. There was no balance outstanding related to the construction mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company, with an unrelated third party. The entity is currently developing a multifamily property. The entity is located in Brooklyn Park, Minnesota, with total assets of $30,490 and $5,478 at December 31, 2022 and December 31, 2021, respectively. The entity is encumbered by a first mortgage that has a balance of $24,448 at December 31, 2022.  There was no balance outstanding related to the first mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.

During the second quarter of 2022, the Operating Partnership entered into a joint venture arrangement. Through the joint venture, the Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of December 31, 2022, the Operating Partnership has contributed $7,190 in cash to the entity. The entity holds land located in Fort Worth, Texas with total assets of $11,083 at December 31, 2022.

The following is a summary of the financial position of the unconsolidated affiliates at December 31, 2022 and 2021.

    

December 31,
2022

    

December 31, 2021

(in thousands)

ASSETS

Real estate investments

$

218,747

$

134,839

Accumulated depreciation

(16,490)

(10,940)

202,257

123,899

Cash and cash equivalents

3,093

1,131

Restricted deposits

1,034

650

Intangible assets, less accumulated amortization

542

41

Other assets, net

827

909

Total Assets

$

207,753

$

126,630

68

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(Dollar amounts in thousands, except share and per share data)

Lease

Accumulated

Lease

As of December 31, 2019

    

Intangibles

    

Amortization

    

Intangibles, net

Lease Intangible Assets

(in thousands)

In-place leases

$

21,480

$

(14,051)

$

7,429

Above-market leases

3,211

(1,507)

1,704

$

24,691

$

(15,558)

$

9,133

Lease Intangible Liabilities

Below-market leases

$

(3,088)

$

1,881

$

(1,207)

LIABILITIES

Mortgage notes payable, net

$

152,246

$

87,996

Tenant security deposits payable

192

108

Accrued expenses and other liabilities

8,217

8,029

Total Liabilities

$

160,655

$

96,133

SHAREHOLDERS' EQUITY

Total Shareholders' Equity

$

47,098

$

30,497

Total liabilities and shareholders' equity

$

207,753

$

126,630

The following is a summary of results of operations of the unconsolidated affiliates for the years ended the years ended December 31, 2022, 2021 and 2020.

The year ended December 31,

2022

2021

2020

(in thousands)

Income from rental operations

$

9,545

$

4,746

$

3,001

Expenses from rental operations

3,668

1,632

928

Net operating income

$

5,877

$

3,114

$

2,073

Depreciation and Amortization

5,678

1,248

688

Interest

4,148

2,275

970

Other Income

(91)

-

(24)

Net (loss) income

$

(3,858)

$

(409)

$

439

NOTE 6 - Lease intangibles

The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:

Lease

Accumulated

Lease

As of December 31, 2022

    

Intangibles

    

Amortization

    

Intangibles, net

Lease Intangible Assets

(in thousands)

In-place leases

$

15,528

$

(10,960)

$

4,568

Above-market leases

1,897

(1,175)

722

$

17,425

$

(12,135)

$

5,290

Lease Intangible Liabilities

Below-market leases

$

(2,379)

$

1,733

$

(646)

Lease

Accumulated

Lease

As of December 31, 2021

    

Intangibles

    

Amortization

    

Intangibles, net

Lease Intangible Assets

(in thousands)

In-place leases

$

15,455

$

(10,381)

$

5,074

Above-market leases

2,617

(1,445)

1,172

$

18,072

$

(11,826)

$

6,246

Lease Intangible Liabilities

Below-market leases

$

(2,525)

$

1,714

$

(811)

69

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(Dollar amounts in thousands, except share and per share data)

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

Intangible

Intangible

Intangible

Intangible

Years ending December 31,

    

Assets

    

Liabilities

    

Assets

    

Liabilities

(in thousands)

(in thousands)

2021

$

1,121

$

184

2022

987

164

2023

849

151

$

1,597

$

151

2024

849

151

757

151

2025

849

151

757

151

2026

606

80

2027

498

42

Thereafter

2,712

193

1,075

71

$

7,367

$

994

$

5,290

$

646

The weighted average amortization period for the intangible assets (in-place leases, above-market leases) and intangible liabilities (below-market leases) acquired as of December 31, 20202022 was 6.72.9 years.

The portion of the purchase price allocated to acquire above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to rental income. Amortization pertaining to above market lease intangibles of $145, $154, and $186 for the years ended December 31, 2022, 2021 and 2020, respectively, was recorded as a reduction to income from rental operations. Amortization pertaining to below market lease intangibles of $164, $183, and $213 for the years ended December 31, 2022, 2021 and 2020, respectively, was recorded as an increase to income from rental operations.

NOTE 67 – LINES OF CREDIT

We have a $18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2021; a $4,915 variable rate (floating LIBORSOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in June 2022December 2026; and a $5,000 variable rate (floating LIBORSOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires June 2022December 2026. The lines of credit are secured by properties in Duluth, Edina, and Moorhead, Minnesota, and Dickinson, Grand Forks and Fargo, North Dakota.specific properties. At December 31, 2020,2022, the $4,915 variable rateBremer line of credit with Bremer Bank secured 2 letterssecures one letter of credit totaling $746,$50, leaving $27,469$8,857 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. As of December 31, 2022 and December 31, 2021, there was a balance of $1,008 and $-, respectively.

Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage, debt to net worth ratios, and debt yield ratios. As of December 31, 2020, 1 property was out of compliance. An annual waiver was received from the lender. As of December 31, 2019, 3 residential2022 and 2021, no properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis.  An annual waiver was received from the lender.compliance.

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DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

NOTE 78 - MORTGAGE NOTES PAYABLE

On December 29, 2022, the Trust entered into a $26,500 note payable. The note payable bears interest at a rate of one percentage point under the “Prime Rate” as published in the Wall Street Journal, with principal plus accrued and unpaid interest due and payable on February 1, 2023. The Borrower may prepay the New Promissory Note without penalty. As of December 31, 2021, the Trust did not have any outstanding balances on notes payable.

The following table summarizes the Company’s mortgage notes payable.  

Principal Balance At

Principal Balance At

December 31,

December 31,

December 31,

December 31,

2020

2019

2022

2021

(in thousands)

(in thousands)

Fixed rate mortgage notes payable (a)

$

415,665

$

395,038

$

508,305

$

490,413

Variable rate mortgage notes payable

7,446

-

-

5,237

Mortgage notes payable

423,111

395,038

508,305

495,650

Less unamortized debt issuance costs

1,833

1,874

2,138

2,508

$

421,278

$

393,164

$

506,167

$

493,142

(a)Includes $43,613$106,033 and $12,960$108,734 of variable rate mortgage debt that was swapped to a fixed rate as of December 31, 20202022 and 2019,2021, respectively.

As of December 31, 2020,2022, we had 114115 fixed rate and 2 variable rate mortgage loansloan with effective interest rates ranging from 2.14%2.43% to 6.85% per annum, and a weighted average effective interest rate of 4.03%3.79% per annum on fixed rate loans and 2.28% per annum on variable rate loans.annum.

As of December 31, 2019,2021, we had 121114 fixed rate and 0one variable rate mortgage loansloan with effective interest rates ranging from 3.15%2.09% to 7.25%6.85% per annum, and a weighted average effective interest rate of 4.31%3.83% per annum.annum on fixed rate loans and 2.10% per annum on variable rate loans.

The majority of the Company’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs. Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits with the lender.

Certain Additionally, certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of December 31, 2020, 42022, eight loans on residential properties were out of compliance due to various unit renovation and parking lotincreased repair and maintenance costs related to unit renovations and increased utility costs. The loans were secured by various properties with a total outstanding balance of $17,687. Annual waivers were received from the lenders on all loans out of compliance as of December 31, 2022. As of December 31, 2021, five loans were out of compliance due increased repair and maintenance costs related to unit renovations, bad debtsdebt allowance, and increased vacancies in the North Dakota and Minnesota markets. The loans were secured by various properties located in Bismarck and Fargo, North Dakota, and Crookston, Minnesota with a total outstanding balance of $6,496.$9,915. Annual waivers have beenwere received from the lenders on $5,425 of the loanall loans out of compliance. Annual waivers were not received from 1 lender on a loan with an aggregate balance of $1,071. Ascompliance as of December 31, 2019, 10 loans on residential properties were out of compliance due to various unit renovation and parking lot repair and maintenance costs, bad debts and increased vacancies in the North Dakota markets. The loans were secured by properties located in Bismarck, Fargo and Grand Forks, North Dakota with a total outstanding balance of $16,361 at December 31, 2019. Annual waivers have been received from the lenders on $10,435 of the loans out of compliance. Annual waivers were not received from 1 lender on loans with an aggregate balance of $5,926. Subsequently, the loans were paid off.2021.

We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:

Years ending December 31,

    

Amount

    

Amount

(in thousands)

(in thousands)

2021

$

30,040

2022

26,595

2023

49,886

$

53,341

2024

18,873

22,376

2025

50,489

53,130

2026

45,546

2027

77,845

Thereafter

247,228

256,067

Total payments

$

423,111

$

508,305

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

NOTE 89 – DERIVATIVES AND HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we have used interest rate derivatives to manage our exposure to interest rate movements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Trust making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.

As of December 31, 2020,2022, the Trust used 912 interest rate swaps to hedge the variable cash flows associated with variable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in “Accumulated other comprehensive (loss) income” and are reclassified into interest expense as interest payments are made on the Company’s variable rate debt. During the next 12 months, the Trust estimates that an additional $373$2,311 will be reclassified as an increasea decrease to interest expense.

The following table summarizes the Trust’s interest rate swaps designated as cash flow hedges as of December 31, 2020, which effectively convert one-month floating rate LIBOR to a fixed rate:2022:

Fixed

Fixed

Effective Date

Notional

Interest Rate

Maturity Date

Notional

Interest Rate

Maturity Date

November 1, 2019

$

6,977

3.15%

November 1, 2029

$

6,575

3.15%

November 1, 2029

November 1, 2019

$

4,848

3.28%

November 1, 2029

$

4,572

3.28%

November 1, 2029

January 10, 2020

$

3,150

3.39%

January 10, 2030

$

2,979

3.39%

January 10, 2030

June 11, 2020

$

1,579

3.07%

June 15, 2030

June 11, 2020

$

3,060

3.07%

June 15, 2030

June 15, 2020

$

1,712

2.94%

June 15, 2030

June 15, 2020

$

4,530

2.94%

June 15, 2030

July 1, 2020

$

4,957

2.79%

June 10, 2030

$

4,743

2.79%

June 10, 2030

December 2, 2020

$

12,800

2.91%

December 2, 2027

$

12,362

2.91%

December 2, 2027

July 1, 2021

$

25,678

2.99%

July 1, 2031

November 10, 2021

$

28,047

3.54%

August 1, 2029

December 1, 2021

$

10,813

3.32%

December 1, 2031

August 15, 2022

$

1,491

3.07%

June 15, 2030

August 15, 2022

$

2,888

3.07%

June 15, 2030

August 15, 2022

$

1,614

2.94%

June 15, 2030

August 15, 2022

$

4,271

2.94%

June 15, 2030

The following table summarizes the Company’s interest rate swaps that were designated as cash flow hedges of interest rate risk:

Number of Instruments

Notional

Number of Instruments

Notional

Interest Rate Derivatives

December 31, 2020

December 31, 2019

December 31, 2020

December 31, 2019

December 31, 2022

December 31, 2021

December 31, 2022

December 31, 2021

Interest rate swaps

9

3

$

43,613

$

12,960

12

12

$

106,033

$

108,734

The table below presents the estimated fair value of the Company’s derivative financial instruments as well as their classification in the accompanying consolidated balance sheets. The valuation techniques are described in Note 910 to the consolidated financial statements.

Derivatives

Derivatives designated as

December 31, 2020

December 31, 2019

December 31, 2022

December 31, 2021

cash flow hedges:

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Other assets, net

$

Other assets, net

$

58

Other assets, net

$

13,782

Other assets, net

$

698

Interest rate swaps

Accrued expenses and other liabilities

$

1,805

Accrued expenses and other liabilities

$

21

Accrued expenses and other liabilities

$

Accrued expenses and other liabilities

$

1,648

The carrying amount of the swaps have been adjusted to their fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting an asset and liability for the fair value of the future net payments forecasted under the swap.  The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income. The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive (loss) income for the years ended December 31, 2020 and 2019:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

Location of Gain

Amount of (Gain)/Loss

Reclassified from

Amount of (Gain)/Loss

Derivatives in

Recognized in Other

Accumulated other

Reclassified from

Cash Flow Hedging

Comprehensive Income

Comprehensive Income

AOCI into Income

Relationships

on Derivatives

(AOCI) into Income

Year Ended

2020

2020

Interest rate swaps

$

1,842

Interest expense

$

242

2019

2019

Interest rate swaps

$

(67)

Interest expense

$

28

The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive income (loss) for the years ended December 31, 2022 and 2021:

Location of Gain

Amount of (Gain)/Loss

Reclassified from

Derivatives in

Recognized in Other

Accumulated other

Amount of (Gain)/Loss

Cash Flow Hedging

Comprehensive Income

Comprehensive Income

Reclassified from

Relationships

on Derivatives

(AOCI) into Income

AOCI into Income

2022

2022

Interest rate swaps

$

(14,732)

Interest expense

$

94

2021

2021

Interest rate swaps

$

(855)

Interest expense

$

670

Credit-risk-related Contingent Features

The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the
Trust could also be declared in default on its corresponding derivative obligation. As of December 31, 2020,2022, the termination value of derivatives in a liability position was $1,805.$0 and the termination value of derivatives in an asset position was $13,782. As of December 31, 2020,2022, the Trust has pledged the properties related to the loans which are hedged as collateral.

NOTE 910 - FAIR VALUE MEASUREMENT

The following table presents the carrying value and estimated fair value of the Company’s financial instruments:

December 31, 2020

December 31, 2019

December 31, 2022

December 31, 2021

Carrying

Carrying

Carrying

Carrying

    

Value

    

Fair Value

    

Value

    

Fair Value

    

Value

    

Fair Value

    

Value

    

Fair Value

(in thousands)

(in thousands)

Financial assets:

Note receivable

$

2,026

$

2,117

$

1,300

$

1,389

Investment in securities

$

29,371

$

29,371

$

$

Notes receivable

$

8,448

$

9,789

$

7,457

$

9,840

Derivative assets

$

$

$

58

$

58

$

13,782

$

13,782

$

698

$

698

Financial liabilities:

Mortgage notes payable, net

$

421,278

$

443,100

$

393,164

$

415,183

Mortgage notes payable

$

508,305

$

466,245

$

495,650

$

508,285

Derivative liabilities

$

1,805

$

1,805

$

21

$

21

$

$

$

1,648

$

1,648

The carrying values shown in the table are included in the consolidated balance sheets under the captions indicated in Note 8.10. ASC 820-10 established a three-level valuation hierarchy for fair value measurement.  Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.

These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable;
Level 3 – Instruments whose significant inputs are unobservable.

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DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable.
Level 3 – Instruments whose significant inputs are unobservable.

The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following table presents the Trust’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

(in thousands)

December 31, 2020

Derivative liabilities

$

$

1,805

$

$

1,805

December 31, 2019

December 31, 2022

Derivative assets

$

$

13,782

$

$

13,782

December 31, 2021

Derivative assets

$

$

58

$

$

58

$

$

698

$

$

698

Derivative liabilities

$

$

21

$

$

21

$

$

1,648

$

$

1,648

Derivatives: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although the TrustThe Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2020 and 2019, the Trust has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Trust has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the TrustCompany has considered any applicable credit enhancements. The Trust’s derivative instruments are further described in Note 8.

Fair Value Disclosures

The following table presents the Company’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

December 31, 2020

Mortgage notes payable, net

$

$

$

443,100

$

443,100

Note receivable

$

$

$

2,117

$

2,117

December 31, 2019

Mortgage notes payable, net

$

$

$

415,183

$

415,183

Note receivable

$

$

$

1,389

$

1,389

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

December 31, 2022

U.S. Treasury Bills

$

29,371

$

$

$

29,371

Mortgage notes payable

$

$

$

466,245

$

466,245

Notes receivable

$

$

$

9,789

$

9,789

December 31, 2021

Mortgage notes payable

$

$

$

508,285

$

508,285

Notes receivable

$

$

$

9,840

$

9,840

U.S. Treasury Bills: The Trust estimates the fair value of its Treasury Bills by using quoted market prices.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

Mortgage notes payable: The Trust estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Trust for similar debt instruments of comparable maturities by the Trust’s lenders. Judgment is used in determining the appropriate rate for each of the Trust’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 5.75% to 6.00% and from 3.25% to 3.35% and from 3.75% to 3.80% for December 31, 20202022 and 2019,2021, respectively. The fair value of the Trust’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value.  The Trust’s mortgage notes payable are further described in Note 7.

Notes receivable. receivable: The Trust estimates the fair value of its notes receivable by discounting future cash flows of each instrument at rates currently offered to the Trust for similar note instruments of comparable maturities by the Trust’s lenders. Judgment is used in determining the appropriateThe fair value rate for each of the Trust’s individual notes based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying collateral. The rates used rangeranged from 3.25% to 3.35% and from 3.75% to 3.80% for7.25% December 31, 20202021 and 2019,2022, respectively.  The Trust’s notes receivable are further described in Note 2.

NOTE 1011 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of December 31, 20202022 and 2019,2021, outstanding limited partnership units totaled 18,279,00018,730,000 and 17,811,000,18,212,000, respectively. Total aggregate distributions per unit for the years ended December 31, 2022, 2021 and 2020 2019were $1.1500, $1.0600 and 2018 were $1.0587, $1.0450, and $1.0175,  respectively. The operating partnership declared fourth quarter distributions of $4,838$5,385 and $4,653,$4,827, to limited partners payable in January 20212023 and 2020,2022, respectively.  

During the year ended December 31, 2020,2022, there were 0 limited partnership units of the operating partnership exchanged for common shares of the trust. During the year ended December 31, 2019, there were 1,000 limited partnership units of the operating partnership exchanged for 1,000 common shares of the Trust, pursuant to redemption requests.  The aggregate value of these transactions was $28.  During the year ended December 31, 2018, there were 0no limited partnership units of the operating partnership exchanged for common shares of the trust.

AtProvided the Trust’s redemption plan exists, and subject to the conditions and limitations contained in such redemption plan (including, without limitation, applicable holding periods and ownership limitations), and further subject to the conditions and limitations set forth in the LLLP Agreement of the Operating Partnership, a Limited Partner may request the redemption of its limited partnership units for cash (a “Redemption Request”) or the exchange of its limited partnership units for Sterling common shares (an “Exchange Request”). Such request must be made in accordance with the redemption plan. Upon receipt of any Redemption or Exchange Request, as the case may be, the Trust may, at its sole and absolute discretion, acting for itself or as General Partner of the limited partnership, and so long as our redemption plans exist, and applicable holding periods are met,Limited Partners may request the operating partnershipOperating Partnership, elect to redeem theiror exchange such limited partnership units. The operating partnershipTrust may, choose to offer the Limited Partner: (i) cash forin its sole discretion, terminate, amend or suspend the redemption or, atplan if such action is determined to be in the requestbest interest of the Limited Partner, (ii) offer shares in lieu of cash for the redemption on a basis of 1 limited partnership unit for one Sterling common share (the “Exchange Request”).  The Exchange Request shall be exercised pursuant to a Notice of Exchange.  If the issuance of Sterling common shares pursuant to an Exchange Request will cause the shareholder to exceed the ownership limitations, among other reasons, payment will be made to the Limited Partner in cash.  No Limited Partner may exercise an Exchange Request more than twice during any calendar year, and Exchange Requests may not be made for less than 1,000 limited partnership units.  If a Limited Partner owns fewer than 1,000 limited partnership units, all of the limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.Operating Partnership.

NOTE 1112 – REDEMPTION PLANS

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans.

Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $40,000$55,000 worth of securities. As of December 31, 2020,2022, there were $7,325$14,684 worth of securities left to be redeemed under the redemption plan. Currently, the fixed redemption price is $19.00$21.85 per share or unit under the plans which price became effective January 1, 2021.2022. Prior to January 1, 2022, the redemption price was $19.00 per share or unit under the plan. Prior to January 1, 2021, the redemption price was $18.25 per share or unit under the plan.  Prior to January 1, 2020, the redemption price was $18.00 per share or unit under the plan.

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We may redeem securities under the plans provided the aggregate total has not been exceeded if we have sufficient funds to do so. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plans, either or both of them, if it determines to do so in its sole discretion.

During the years ended December 31, 2020, 20192022, 2021 and 2018,2020, the Company redeemed 127,000, 50,00053,000, 82,000 and 75,000127,000 common shares valued at $2,321, $891$1,155, $1,552 and $1,315,$2,321, respectively. In addition, during the years ended December 31, 2020, 20192022, 2021 and 2018,2020, the Company redeemed 66,000, 64,00042,000, 211,000 and 64,00066,000 units valued at $1,216, $1,132$922, $4,014 and $1,116,$1,216, respectively.

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NOTE 1213 – BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the beneficial interest of Sterling. As of December 31, 20202022 and 2019,2021, there were 9,855,00010,810,000 and 9,436,00010,342,000 common shares outstanding. We had 0no preferred shares outstanding as of either date.

Dividends paid to holders of common shares were $1.0588$1.1500 per share, $1.0450$1.0600 per share and $1.0175$1.0587 per share for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, respectively.

NOTE 1314 – DIVIDEND REINVESTMENT PLAN

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges. On July 20, 2012, we registered with the Securities Exchange Commission 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012. On July 11, 2017, we registered with the Securities Exchange Commission an additional 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 11, 2017. On November 3, 2020, we registered with the Securities Exchange Commission an additional 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on November 3, 2020.

Under this plan, eligible shareholders may elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional optional cash purchases of our common shares, not to exceed $10 per fiscal quarter without our prior approval. The purchase price per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional optional cash purchases, as determined by our Board of Trustees. In addition, eligible shareholders may not in any calendar year purchase or receive via transfer more than $40 additional optional cash purchases of Common Shares.

The estimated value per common share was $19.25$23.00 and $19.00$20.00 at December 31, 20202022 and 2019,2021, respectively. See discussion of determination of estimated value in Note 18.

Therefore, the purchase price per common share for dividend reinvestments was $18.29$21.85 and $18.05$19.00 and for additional optional cash purchases was $19.25$23.00 and $19.00$20.00 at December 31, 20202022 and 2019,2021, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten-day notice to participants.

In the year ended December 31, 2022, 342,000 shares were issued pursuant to dividend reinvestments and 177,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2021, 363,000 shares were issued pursuant to dividend reinvestments and 203,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2020, 356,000 shares were issued pursuant to dividend reinvestments and 187,000 shares were issued pursuant to additional optional cash purchases under the plan.  In the year ended December 31, 2019, 342,000 shares were issued pursuant to dividend reinvestments and 173,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2018, 325,000 shares were issued pursuant to dividend reinvestments and 226,000 shares were issued pursuant to additional optional cash purchases under the plan.

NOTE 15 – RELATED PARTY TRANSACTIONS

Effective January 1, 2021, Trustmark Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC and GOLDMARK Property Management, Inc. In connection with this restructuring transaction, the owners of Trustmark Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management, Inc. Trustmark Enterprises, Inc. is owned in part by the Trust’s Chief Executive Officer and Trustee Mr. Kenneth P. Regan, by Trustee Mr. James S. Wieland, and by President Joel S.

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NOTE 14 – RELATED PARTY TRANSACTIONSThomsen. In addition, Mr. Regan serves as the Executive Chairman of the Advisor, and Messrs. Wieland, and Thomsen serve on the Board of Governors of both the Advisor and GOLDMARK Property Management, Inc.

Sterling Management, LLC (the “Advisor”), is a North Dakota limited liability company formed in November 2002. The Advisor is responsible for managing day-to-day affairs, overseeing capital projects, and identifying, acquiring, and disposing investments on behalf of the trust.

GOLDMARK Property Management, Inc., is a North Dakota corporation formed in 1981. GOLDMARK Property Management, Inc. performs property management services for the Trust.

We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. Mr. Wieland, a Trustee, also serves as a Board Member of Bell Bank. Mr. Wieland could have an indirect material interest in any such engagement and related transactions.

The Trust has a historical and ongoing relationship with Trumont Group and Trumont Construction. Trumont Group provides development services for current joint venture projects in which the Operating Partnership is an investor. Trumont Construction has been engaged to construct the properties associated with these joint ventures. Mr. Regan, Chief Executive Officer and trustee, is a partner in both Trumont Group and Trumont Construction and has a direct material interest in any engagement or related transaction, the Trust enters into, with these entities.

Property Management Fee

During the years ended December 31, 2020, 20192022, 2021 and 2018,2020, we paid property management and administrative fees to GOLDMARK Property Management, in an amount equal to approximatelyInc. of $13,833, $12,836, and $12,796, respectively. Management fees which approximate 5% of net collected rents, account for $5,499, $5,271, and $4,851 of the properties managed. GOLDMARK Property Management is owned in part by Kenneth Regan, James Wieland and Joel Thomsen. Forthese fees during the years ended December 31, 2020, 20192022, 2021 and 2018, we paid management fees, on-site staff costs, and other miscellaneous fees required to run the properties of $12,796, $12,486, and  $11,827 respectively, to GOLDMARK Property Management.2020. In addition, during the years ended December 31, 2020, 20192022, 2021, and 2018,2020, we paid repair and maintenance related payrollexpenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling $7,744, $6,536, and $6,549, $6,076 and $5,217, respectively.

Board of Trustee Fees

We incurred Trustee fees of $62, $57 and $68 during the years ended December 31, 2020, 2019 and 2018, respectively.  As of December 31, 2020, and 2019 we owed our Trustees $27 and $29 for unpaid board of trustee fees, respectively.  There is no cash retainer paid to Trustees.  Instead, we pay Trustees the following specific number of shares for meetings attended:

Board Chairman – Board Meeting

105 shares/meeting

Trustee – Board Meeting

75 shares/meeting

Committee Chair – Committee Meeting

30 shares/meeting

Trustee – Committee Meeting

30 shares/meeting

Common shares earned in accordance with the plan are calculated on an annual basis.  Shares earned pursuant to the Trustee Compensation Plan are issued on or about July 15 for Trustees’ prior year of service.  Non-independent Trustees are not compensated for their service on the Board or Committees.  respectively

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have 0no paid employees. The following is a brief descriptionAdvisor may receive fees related to management of the currentTrust, acquiring, disposing, or developing real estate property, project management fees, and compensation that may be received by the Advisorfinancing fees related to lending relationships, under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 26, 2020,24, 2022, and is effective until March 31, 2021.  2023.

The below table summarizes the fees incurred to our Advisor.

Management Fee: 0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

Year Ended December 31,

2022

2021

2020

(in thousands)

Fee:

Advisory

$

3,683

$

3,348

$

3,116

Acquisition

$

1,321

$

375

$

708

Disposition

$

703

$

146

$

319

Financing

$

83

$

224

$

133

Project Management

$

450

$

572

$

365

During the years ended December 31, 2020, 2019 and 2018, we incurred advisory management fees of $3,116, $2,996 and  $2,909 with Sterling Management, LLC, our Advisor. As of December 31, 2020 and 2019, we owed our Advisor $278 and $503, respectively, for unpaid advisory management and operational fees. There were 0 fees owed to the Advisor as of December 31, 2018. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations.  

Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by a majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

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DuringThe below table summarizes the years ended December 31, 2020, 2019 and 2018, we incurred acquisition fees of $708, $0, and $740, respectively, with our Advisor. There were 0 acquisition fees owedpayable to our Advisor as of December 31, 2020 and 2019.  

Disposition Fee: For its services in the effort to sell any investment for us, the Advisor receives a disposition fee of 2.5% of the sales price of each property disposition, capped at $375 per disposition.

During the years ended December 31, 2020, 2019 and 2018, we incurred disposition fees of $319, $0, and $327 with our Advisor. As of December 31, 2020, we owed our advisor $175 for disposition fees. There were 0 disposition fees owed to our Advisor as of December 31, 2019.

Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility. The finance fee shall be capped at $38 per loan, refinance, line of credit or other credit facility.

During the years ended December 31, 2020, 2019 and 2018 we incurred financing fees of $133, $11 and  $77 with our Advisor for loan financing and refinancing activities. There were no financing fees owed to our Advisor as of December 31, 2020 and 2019.

Development Fee: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.

Total Cost

Fee

Range of Fee

Formula

0 – 10M

5.0

%

0 –.5M

0M – 5.0% x (TC – 0M)

10M - 20M

4.5

%

.5 M – .95M

.50M – 4.5% x (TC – 10M)

20M – 30M

4.0

%

.95 M – 1.35M

.95M – 4.0% x (TC – 20M)

30M – 40M

3.5

%

1.35 M – 1.70M

1.35M – 3.5% x (TC – 30M)

40M – 50M

3.0

%

1.70 M – 2.00M

1.70M – 3.0% x (TC – 40M)

TC = Total Project Cost

During the years ended the year ended December 31, 2020, we incurred $794 of development fees with our advisor.  NaN development fees were incurred for the years ended December 31, 2019 and 2018. As of December 31, 2020, and 2019, we owed our Advisor a total of $79 and $104 for unpaid development fees as part of a 10% hold back, respectively.

Project Management Fee: 6% of all completed capital improvement projects on real estate investments owned by the Trust are paid to the Advisor.

During the years ended December 31, 2020 and 2019, we incurred $365 and $67, respectively, in project management fees incurred with our Advisor for capital improvement projects. As of December 31, 2020 and 2019, we owed our advisor $51 and $67, in unpaid project management fees, respectively.

Payable at

December 31,

December 31,

2022

2021

(in thousands)

Fee:

Advisory

$

632

$

296

Acquisition

$

387

$

-

Development

$

-

$

79

Disposition

$

72

$

-

Financing

$

-

$

38

Project Management

$

12

$

98

Operating Partnership Units Issued in Connection with Acquisitions

During the year ended December 31, 2020, we2022, 510,000 Operating Partnership units were issued 208,000 operating partnership (OP) units to entities affiliated with Messrs. Regan and Weiland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $4,671.  

During the year ended December 31, 2019, we issued 0 operating partnership (OP) units to entities affiliated with any related parties.  

During the year ended December 31, 2018, we issued directly or indirectly, 234,000 operating partnership (OP) units to entitiesan entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $4,327.  

$11,741.

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Commissions2021, there were no Operating Partnership units issued directly or indirectly, to affiliated entities.  

During the year ended December 31, 2020, 208,000 Operating Partnership units were issued to an entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $4,671.

Commissions

During the years ended December 31, 2022, 2021 and 2020, we incurred real estate commissions of $308$567, $312, and $633, to GOLDMARK Property Management and GOLDMARK Commercial Real Estate, respectively. During the year ended December 31, 2019 there were 0 commissions incurred. During the year ended 2018, we incurred real estate commissions of $384,respectively, to GOLDMARK Commercial Real Estate, Inc., in which is controlled by Messrs. Regan and Wieland. There were 0 outstanding commissions owed as of December 31, 2020 or 2019.  

Subordinated Debt

Wieland jointly own a controlling interest. As of December 31, 2022, there were commissions of $183 payable to GOLDMARK Commercial Real Estate. As of December 2021 and 2020, and 2019, we owed related parties $25, for principal and interest on subordinated debt.there were no unpaid commissions to GOLDMARK Commercial Real Estate.

During the years ended December 31, 2022, 2021 and 2020, we incurred real estate commissions of $418, $217, and $308, respectively to GOLDMARK Property Management. As of December 31, 2022, there were commissions of $92 payable to GOLDMARK Property Management. As of December 31, 2021 and 2020 there were no unpaid commissions to GOLDMARK Property Management.

Rental Income

During the years ended December 31, 2020, 20192022, 2021 and 2018,2020, we received rental income of $57, $56$130, $106, and $55,$85, respectively, under an operating lease agreement with our Advisor.

During the years ended December 31, 2022, 2021 and 2020, we received no rental income, $19, and $57, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate, Inc.

During the years ended December 31, 2022, 2021 and 2020, 2019we received rental income of $267, $294, and 2018, we paid our Advisor $85, $61 and $50,$268, respectively, under an operating lease agreement.agreements with GOLDMARK Property Management, Inc.

During the years ended December 31, 2020, 20192022, 2021 and 2018,2020, we received rental income of $268, $262$859, $404, and $230,$484, respectively, under operating lease agreements with GOLDMARK Property Management.Bell Bank.

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Other operational costs

During the years ended December 31, 2022, 2021 and 2020, the Trust incurred $207, $276, and $240, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. At December 31, 2022 and 2021, there were no operational outstanding liabilities and $128, respectively.

During the years ended December 31, 2022 and 2020, the Trust received did not receive related parties reimbursement for expenses paid that were associated with capital projects. During the year ended December 31, 2021, the Trust received $1,000 from related parties for reimbursement for expenses paid that were associated with capital projects. No reimbursements for operational receivables were received during the year ended December 31, 2022. At December 31, 2022, operational receivables outstanding due from related parties was $50 and $336, respectively.

Debt Financing

At December 31, 2022 and 2021, the Trust had $64,123 and $66,365, respectively, of outstanding principal on loans entered into with Bell Bank. During the years ended December 31, 2022, 2021 and 2020, the Trust incurred interest expense on debt held with Bell Bank of $2,480, $2,508, and $2,438, respectively. Accrued interest at December 31, 2022 and 2021, related to this debt was $130 and $148, respectively.

A December 31, 2022 and 2021, the Trust had $26,500 and $-, respectively, of outstanding principal on notes payable entered into with Bell Bank. During the years ended December 31, 2022, 2021 and 2020, the Trust did not incur interest expense on note payable held with Bell Bank.

Mezzanine Financing

The Trust offers mezzanine financing to joint ventures, see note 5 for investment in unconsolidated affiliates.

As of December 31, 2022 and 2021, Sterling issued $5,854 and $6,855, respectively, in second mortgage financing to related entities.

During the years ended December 31, 2022 and 2021, the Trust earned interest income of $350 and $212, respectively, related to the second mortgage financing. No interest income was earned during the year ended December 31, 2020.

Insurance Services

The Trust retains insurance services from Bell Insurance. Policies provided by these services provide insurance coverage for the Trust’s Commercial segment as well as Director and Officer general and liability coverage. At December 31, 2022, 2021, and 2020 total premiums incurred for this policy were $48, $166 and $118, respectively.

Tenant Improvement Arrangements

During the year ended December 31, 2020, 20192021, the Trust paid $2,782 in tenant improvement costs associated with a lease agreement with Trustmark Enterprises, Inc. There were no tenant improvement costs incurred during the years ended December 31, 2022 and 2018,2020. At December 31, 2022, no costs were owed to related parties for tenant improvement costs.

Development Arrangements

Effective August 25, 2021, The Trust purchased a 70% interest in ST Oak Cliff Dallas, LLC. The purpose of the entity is to develop and construct a 318-unit multifamily property located in Dallas, Texas. The partnering investee, TG Oak Cliff Dallas, LLC is owned in part by Kenneth P. Regan, the Trust’s Chief Executive Officer and Trustee. Mr. Regan is also a partner in Trumont Group, the developer

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engaged by ST Oak Cliff Dallas, LLC to oversee the development of the property. Further, Mr. Regan is also a partner in Trumont Construction, the company who was engaged to oversee the day-to-day construction operations of the property.

During the years ended December 31, 2022 and 2021, the Trust incurred general operational liabilities relatedand paid $411 and $256, respectively, in development fees to business operations as well as costs incurred related to capital expenditures due to related parties. As ofTrumont Group. No such fees were paid during the year ended December 31, 2020,2020. At December 31, 2022 the Trust owed related parties $101.  There were 0 outstanding operational liabilities as of December 31, 2019.$- and $51, respectively, in development fees to Trumont Group.

Our Advisor manages insurance claims forDuring the Trusts as well as a related party. The Advisor handles filing, processing, disputingyears ended December 31, 2022 and closing all insurance claims. During June 2019,2021, the Trust incurred and a related party incurred damage from a large windstorm. The claim is currently still openpaid $799 and funds$71, respectively, in construction fees to Trumont Construction. No such fees were received frompaid during the insurance company to rehabilitate our properties. As this was an aggregate property claim, funds are and have been disbursed as repairs have been completed. As ofyear ended December 31, 20202020. At December 31, 2022 the Trust owed $71 and $29, respectively, in construction fees to Trumont Construction.

During the years ended December 31, 2022 and 2021, the Trust incurred and paid $639 and $41, respectively, in general construction costs to Trumont Construction. No such fees were paid during the year ended December 31, 2020. At December 31, 2022 there was 0 receivables outstanding related$81 of general construction costs were owed to the insurance funds. As ofTrumont Construction. At December 31, 2019, the Trust had a $892 receivable from our Advisor related2021, no general construction costs were owed to insurance funds.Trumont Construction.

NOTE 1516 - RENTALS UNDER OPERATING LEASES / RENTAL INCOME

Residential apartment units are rented to individual tenants with lease terms of one year or less. Gross revenues from residential rentals totaled  $98,576, $94,763 and  $89,783 for the years ended December 31, 2020, 2019 and 2018, respectively.

Commercial properties are leased to tenants under terms expiring at various dates through 2038. Lease terms often include renewal options.  For

As of December 31, 2022, we derived 84.4% of our revenues from residential leases that are generally for terms of one-year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis.  Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of December 31, 2022, we derived 15.6% of our revenues from commercial leases primarily under long-term lease agreements.  Substantially all commercial leases contain fixed escalations, or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize variable income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and reimbursements are included within “real estate rental income” along with the associated base rent in the accompanying consolidated financial statements.

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $302 for the year ended December 31, 2022, and increased revenue by $550 for the year ended December 31, 2021. The straight-line receivable balance included in other assets on the consolidated balance sheets as of the years ended December 31, 2020, 20192022 and 2018, gross revenues2021 was $3,756 and $3,569 respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial property rentals, including CAM income (common area maintenance) of $5,412, $6,077 and  $6,118, respectively, totaled  $26,040, $25,576 and  $26,268, respectively.tenants throughout the year based on estimates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

Lease income related to the Trust’s operating leases is comprised of the following:

Year ended December 31, 2022

    

Residential

    

Commercial

    

Total

(in thousands)

Lease income related to fixed lease payments

$

109,769

$

16,091

$

125,860

Lease income related to variable lease payments

4,510

4,510

Other (a)

(804)

332

(472)

Lease Income (b)

$

108,965

$

20,933

$

129,898

(a)For the year ended December 31, 2022, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.
(b)Excludes other rental income for the year ended December 31, 2022, of $5,162, which is accounted for under the revenue recognition standard.

Year ended December 31, 2021

    

Residential

    

Commercial

    

Total

(in thousands)

Lease income related to fixed lease payments

$

103,039

$

16,490

$

119,529

Lease income related to variable lease payments

4,576

4,576

Other (c)

(538)

630

92

Lease Income (d)

$

102,501

$

21,696

$

124,197

(c)For the year ended December 31, 2021, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.
(d)Excludes other rental income for the year ended December 31, 2021, of $5,127, which is accounted for under the revenue recognition standard.

Commercial space is rented under long-term agreements. Minimum future rentals on non-cancelable operating leases as of December 31, 20202022 are as follows:

Years ending December 31,

    

Amount

    

Amount

(in thousands)

(in thousands)

2021

$

16,068

2022

13,991

2023

12,688

$

15,216

2024

11,950

14,940

2025

11,527

14,556

2026

13,156

2027

11,719

Thereafter

50,660

42,734

$

116,884

$

112,321

NOTE 1617 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we own or may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(Dollar amounts in thousands, except share and per share data)

There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.

Risk of Uninsured Property Losses

We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.

Litigation

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.  While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the outcome of such matters will not have a material effect on the consolidated financial statements of the Trust.

Significant Risks and UncertaintiesNOTE 18 – DISPOSITIONS

The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. Several uncertainties continue to exist at this time, including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the recent surge in COVID-19 cases in many states. The Trust did not incur significant disruptions forDuring the year ended December 31, 2020 from2022, the COVID-19 pandemic. Operating Partnership sold five properties. We sold a retail property located in Savage, Minnesota for a sale price of $2,700 and recognized a gain of $1,328 in March 2022. We sold a residential property located in Moorhead, Minnesota for a sale price of $6,400 and recognized a gain of $2,012 in May 2022. We sold an office property located in Edina, Minnesota for a sale price of $15,320 and recognized a gain of $6,728 in August 2022. We sold a residential property located in East Grand Forks, MN for a sale price of $1,200 and recognized a loss of $171 in September 2022. We sold a retail property located in Bloomington, Minnesota for a sale price of $2,888 and recognized a gain of $1,193 in December 2022.

During the year ended December 31, 2021, the Operating Partnership sold two properties. We sold a retail property located in Waite Park, Minnesota, for a sale price of $900 and recognized a gain of $2 in April 2021. We sold a residential property located in Moorhead, Minnesota, for a sale price of $4,950 and recognized a gain of $1,708 in June 2021.

During the year ended December 31, 2020, the Trust continued to monitor stateOperating Partnership sold three properties. We sold a retail property located in Apple Valley, Minnesota, for a sale price of $3,670 and federal legislative actionsrecognized a gain of $1,456 in March 2020. We sold an office property located in St. Cloud, Minnesota, for a sale price of $2,050 and efforts regarding the eviction moratorium which affects almost all single-familyrecognized a gain of $1 in May 2020. We sold an office property located in Bismarck, North Dakota for a sale price of $7,000 and multifamily rental housing units. The Trust has seen several tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that the COVID-19 pandemic and the eviction moratorium will have on its future financial condition, resultsrecognized a gain of operations and cash flows $1,926 in December 2020.

due to numerous uncertainties

.  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 2018

(Dollar amounts in thousands, except share and per share data)

During the year ended December 31, 2020 the Trust received certain rent relief requests because of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering several factors. Not all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.

NOTE 17 – DISPOSITIONS

During the year ended December 31, 2020, the operating partnership sold 3 properties. We sold a retail property located in Apple Valley, Minnesota, for $3,670 and recognized a gain of $1,455 in March 2020. We sold an office property located in St. Cloud, Minnesota, for $2,050 and recognized a gain of $1 in May 2020. We sold an office property located in Bismarck, North Dakota for $7,000 and recognized a gain of $1,926 in December 2020.

During the year ended December 31, 2020, the Company entered into a purchase agreement to sell 1 retail property located in Waite Park, Minnesota.  The property qualified for held for sale accounting treatment on or prior to December 31, 2020, at which time depreciation and amortization ceased.  As such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of December 31, 2020. We expect to sell the property in the first quarter of 2021. The following table shows the net book value of assets held for sale.

December 31,

December 31,

2020

    

2019

(in thousands)

ASSETS

Real estate investments

Land and land improvements

$

150

$

Building and improvements

1,428

Real estate investments

1,578

Less accumulated depreciation

(749)

Real estate investments, net

829

Other assets, net

2

Total Assets

$

831

$

LIABILITIES

Tenant security deposits payable

$

5

$

Total Liabilities

$

5

$

During the year ended December 31, 2019, the operating partnership had 0 dispositions or assets held for sale.

During the year ended December 31, 2018, the operating partnership sold 3 properties.  We sold an industrial property located in Redwood Falls, Minnesota for $5,200 and recognized a gain of $935 in April 2018.  We sold a retail property located in Austin, Texas for $3,615 and recognized a gain of $1,266 in July 2018. We sold 1 of two buildings included in an office property located in Bismarck, North Dakota for $4,250 and recognized a gain of $1,514 in July 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

NOTE 18 – BUSINESS COMBINATIONS AND ACQUISITIONS19 –ACQUISITIONS

The Company completedacquired the following acquisitionsproperties during the year ended December 31, 2020:2022.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

1/12/20

Wolf Creek

Fargo, ND

Apartment complex

54 units

$

4,968

1/31/20

Columbia Park Village

Grand Forks, ND

Apartment complex

12 units

612

3/1/20

Belmont East & West

Bismarck, ND

Apartment complex

26 units

1,494

3/1/20

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,296

3/1/20

Hawn

Fargo, ND

Apartment complex

48 units

2,400

3/1/20

Rosser

Bismarck, ND

Apartment complex

24 units

1,296

8/28/20

Trustmark (a)

Fargo, ND

Office building

45,755 sq. ft.

6,500

9/15/20

Foxtail Townhomes

Fargo, ND

Apartment complex

30 units

1,450

12/17/20

Evergreen Terrace

Omaha, NE

Apartment complex

144 units

8,320

$

28,336

(b)

(a)This property was acquired utilizing Internal Revenue Code 1031 tax-deferred exchange funds.
(b)Acquisition price does not include capitalized closing costs and adjustments of $1,105, special assessments of $308, and additional costs incurred due to a difference in unit price of $26.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Total Acquisition Cost

2/28/22

Deer Park

Hutchinson, MN

Apartment Complex

138 units

$

15,073

5/31/22

Desoto Estates

Grand Forks, ND

Apartment Complex

68 units

5,863

5/31/22

Desoto Townhomes

Grand Forks, ND

Townhomes

24 units

3,226

5/31/22

Desoto Apartments

East Grand Forks, MN

Apartment Complex

24 units

1,230

6/10/22

Diamond Bend

Mandan, ND

Apartment Complex

78 units

10,919

9/13/22

Newgate Apartments

Bismarck, ND

Apartment Complex

46 units

2,444

12/1/22

Chandler 1898

Grand Forks, ND

Apartment Complex

12 units

498

12/29/22

Prose Fossil Creek

Fort Worth, TX

Apartment Complex

270 units

55,591

$

94,844

The acquisition of Prose Fossil Creek was made utilizing a Reverse 1031 Like-Kind Exchange that was entered into at closing. As such, as of December 29, 2022, Prose Fossil Creek is in the possession of a qualified intermediary engaged to execute the Reverse 1031 Like-Kind Exchange until the sale transaction and the Reverse 1031 Like-Kind Exchange are completed. The Trust retains essentially all of the legal and economic benefits and obligations related to Prose Fossil Creek prior to the completion of the Reverse 1031 Like-Kind Exchange. Accordingly, Prose Fossil Creek is included in the Trust’s consolidated financial statements as a consolidated VIE until legal title is transferred to the Trust upon completion of the Reverse 1031 Like-Kind Exchange.

Total consideration given for acquisitions throughthe year ended December 31, 20202022 was completed through issuing approximately 535,000560,000 limited partnership units of the operating partnership valued at $19.25$23.00 per unit for an aggregate consideration of approximately $10,293, 1031 tax-deferred exchange funds of $5,658, new loans of $3,225, assumed liabilities $6,193, and cash of $4,406.$12,870. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees and reflects the fair value at the time of issuance.

The Company did not acquire anyacquired the following properties during the year ended December 31, 2019.2021.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Purchase Price

6/1/21

Flagstone

Fargo, ND

Apartment Complex

120 units

$

7,723

6/1/21

Brownstone

Fargo, ND

Apartment Complex

72 units

4,362

6/1/21

Briar Pointe

Fargo, ND

Apartment Complex

30 units

1,929

7/1/21

Oxford

Fargo, ND

Apartment Complex

144 units

10,066

7/1/21

Pinehurst

Fargo, ND

Apartment Complex

210 units

14,718

$

38,798

The Company completed the following

Total consideration given for acquisitions during the year ended December 31, 2018:

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

3/1/18

Thunder Creek Apartments

Fargo, ND

Apartment complex

57 units

$

4,460

9/1/18

Chandler 1834

Grand Forks, ND

Apartment complex

12 units

630

9/17/18

Dairy Queen (a)

Apple Valley, MN

Retail building

5,348 sq. ft.

3,000

10/1/18

Hartford Apartments

Fargo, ND

Apartment complex

30 units

1,350

10/24/18

Bradbury Apartments

Bismarck, ND

Apartment complex

96 units

5,826

11/1/18

Cityside Apartments

Fargo, ND

Apartment complex

31 units

1,054

11/1/18

Morningside Apartments

Fargo, ND

Apartment complex

17 units

714

11/1/18

Fredericksburg Apartments

Omaha, NE

Apartment complex

173 units

11,319

12/31/18

Cityside Apartments (c)

Fargo, ND

Apartment complex

5 units

153

12/31/18

Cedars 4

Fargo, ND

Apartment complex

18 units

1,151

$

29,657

(b)

(a)This property was acquired utilizing Internal Revenue Code 1031 tax-deferred exchange funds.
(b)Acquisition price does not include capitalized closing costs and adjustments of $1,156 and special assessments of $105.

(c)Subsequent purchase of additional units on adjacent property; consolidated with property acquired on November 1, 2018 for management purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

Total consideration given for acquisitions through December 31, 20182021 was completed through issuing approximately 423,000144,000 limited partnership units of the operating partnership valued at $18.50$20.00 per unit for an aggregate consideration of approximately $7,819, 1031 tax-deferred exchange funds of $11,326, assumed loans of $2,104, assumed liabilities $576, and cash of $9,093.$2,883. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees and reflects the fair value at the time of issuance.

The Company acquired the following table summarizesproperties during the acquisition date fair values, before prorations, the Company recorded in conjunction with the acquisitions discussed above:year ended December 31, 2020.

Year Ended

December 31,

2020

2019

2018

Land, building, tenant improvements and FF&E

$

29,775

$

-

$

30,918

Mortgages notes payable assumed

(5,451)

-

(2,104)

Other liabilities

(742)

-

(576)

Net assets acquired

23,582

-

28,238

Equity/limited partnership unit consideration

(10,293)

-

(7,819)

Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange

(5,658)

-

(11,326)

New loans

(3,225)

-

-

Net cash consideration

$

4,406

$

-

$

9,093

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in 2020, 2019 and 2018.  In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in 2020, 2019 and 2018.  In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations.  The Board typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition.

Based on the results of the methodologies, the Board determined the fair value of the shares and limited partnership units to be $18.50 per share/unit effective January 1, 2018. The Board determined the fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019. The Board determined the fair value of the shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020. The Board determined the fair value of the shares and limited partnership units to be $20.00 per share/unit effective January 1, 2021.

Determination of price is a matter within the Board’s sole discretion. The Trust does not determine price based on any rote formula or specific factors or by reference to any public market. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor.

As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments or opinions that may, or may not, prove to be correct.  The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units.  In addition, the Board’s estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

1/12/20

Wolf Creek

Fargo, ND

Apartment complex

54 units

$

5,227

1/31/20

Columbia Park Village

Grand Forks, ND

Apartment complex

12 units

642

3/1/20

Belmont East & West

Bismarck, ND

Apartment complex

5,348 sq. ft.

1,568

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 20192022, 2021 AND 20182020

(Dollar amounts in thousands, except share and per share data)

Furthermore, in reaching an estimate of the value of the shares and limited partnership units, the Board applied a liquidity discount to one valuation scenario in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange and did not consider: a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third party or the costs that are likely to be incurred in connection with an appropriate exit strategy, whether that strategy might be a listing of the limited partnership units or common shares on a national securities exchange or a merger or sale of our portfolio.

3/1/20

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,358

3/1/20

Hawn

Fargo, ND

Apartment complex

48 units

2,524

3/1/20

Rosser

Bismarck, ND

Apartment complex

24 units

1,359

8/28/20

Trustmark (a)

Fargo, ND

Office building

units

6,588

9/15/20

Foxtail Townhomes

Fargo, ND

Apartment complex

30 units

1,434

12/17/20

Evergreen Terrace

Omaha, NE

Apartment complex

144 units

2,970

$

23,670

NOTE 19 – QUARTERLY FINANCIAL INFORMATION (unaudited)

Total consideration given for acquisitions during the year ended December 31, 2020, was completed through issuing approximately 535,000 limited partnership units of the operating partnership valued at $19.25 per unit for an aggregate consideration of approximately $10,293.  The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees and reflects the fair value at the time of issuance.

In 2022, cash flows were reclassified to updated presentation resulting prior period to be updated to align with reclassification. The following table sets forth selected quarterly consolidated financial data forsummarizes the Company:allocation of the purchase price, before prorations, the Company recorded in conjunction with the acquisitions discussed above:

Quarter (1)

2020

First

Second

Third

Fourth

(in thousands, except per share data)

Income from rental operations

$

29,906

$

30,821

$

30,866

$

33,023

Net Income

$

5,227

$

6,397

$

5,266

$

10,090

Net Income attributable to Sterling Real Estate Trust

$

1,813

$

2,202

$

1,844

$

3,546

Net Income per common share, basic and diluted

$

0.19

$

0.23

$

0.19

$

0.36

Weighted average common shares outstanding

9,562,000

9,611,000

9,740,000

9,862,000

Quarter (1)

2019

First

Second

Third

Fourth

(in thousands, except per share data)

Income from rental operations

$

29,831

$

30,270

$

30,173

$

30,065

Net Income

$

3,790

$

4,821

$

3,470

$

3,978

Net Income attributable to Sterling Real Estate Trust

$

1,288

$

1,647

$

1,213

$

1,386

Net Income per common share, basic and diluted

$

0.14

$

0.18

$

0.13

$

0.15

Weighted average common shares outstanding

9,091,000

9,209,000

9,322,000

9,444,000

(1)With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding.

Year Ended

December 31,

2022

2021

2020

Real estate investment acquired

$

93,515

$

39,344

$

29,775

Acquired lease intangible assets

1,732

-

46

Assumed Assets

3

23

38

Total Assets Acquired

$

95,250

$

39,367

$

29,859

Other liabilities

(406)

(569)

(6,189)

Net assets acquired

94,844

38,798

23,670

Equity/limited partnership unit consideration

(12,870)

(2,883)

(10,293)

Net cash consideration

$

81,974

$

35,915

$

13,377

NOTE 20 - SUBSEQUENT EVENTS

EffectiveOn January 1, 2021, Alloy Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC2023, Damon K. Gleave and Goldmark Property Management.  In connection with this restructuring transaction, the indirect ownership structure and percentages of the new entity remain materially consistent with that of the Advisor prior to January 1, 2021. Ms. Chaffee, our Chief Financial Officer, acquired a less than 1% ownership interestMichael P. Carlson owned shares in Alloy in connection with the transactions. The Chief Financial Officer, Chief Investment Officer and General Counsel of the Trust also serve as the Chief Financial Officer, Chief Investment Officer and General Counsel of AlloyTrustmark Enterprises, Inc.

On January 15, 2021,13, 2023, the Trust obtained financing on a residential property for $27,500.

On January 13, 2023, the Trust paid off a note for $26,500 with Bell Bank that was set to mature on February 1, 2023.

On January 17, 2023, we paid a dividend or distribution of $0.26469$0.2875 per share on our common shares of beneficial interest or limited partnership units, to common shareholders and limited unit holders of record on December 31, 2020.2022.

On January 28, 2021 we obtained new financing on a commercial property for $2,031.

On March 25, 2021,February 24, 2023, Barry L. Schmeiss resigned as Chief Investment Officer of the Board of Trustees declared a dividend and distribution of $.26500 per share on our common shares of beneficial interest or limited partnership units, to common shareholders and limited unit holders of record on March 31, 2021, payable on April 15, 2021.Trust.

Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

(Dollar amounts in thousands, except share and per share data)

We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.

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SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 20202022

(Dollar amounts in thousands)

Life on

Life on

which

which

Costs

depreciation

Costs

depreciation

capitalized

Date of

on latest

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Initial cost

subsequent

Gross Amount at which

Construction

income

Industrial

to company

to acquisition (a)

carried at close of period

or

statement is

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Guardian Building Products

Fargo, ND

$

2,640

$

820

$

2,554

$

55

$

(94)

$

875

$

2,460

$

3,335

$

518

08/29/2012

40

Fargo, ND

$

2,487

$

820

$

2,554

$

60

$

(94)

$

880

$

2,460

$

3,340

$

641

08/29/2012

40

Titan Machinery

Bismarck, ND

2,191

950

1,395

7

957

1,395

2,352

209

01/28/2015

40

Bismarck, ND

2,069

950

1,395

32

982

1,395

2,377

279

01/28/2015

40

Titan Machinery

Dickinson, ND

741

354

1,096

400

754

1,096

1,850

242

07/30/2012

40

Dickinson, ND

1,816

354

1,096

400

754

1,096

1,850

297

07/30/2012

40

Titan Machinery

Fargo, ND

2,665

781

1,947

515

1,296

1,947

3,243

401

10/30/2012

40

Fargo, ND

2,471

781

1,947

515

1,296

1,947

3,243

499

10/30/2012

40

Titan Machinery

Marshall, MN

1,707

300

3,648

81

381

3,648

4,029

844

11/01/2011

40

Marshall, MN

4,674

300

3,648

81

381

3,648

4,029

1,026

11/01/2011

40

Titan Machinery

Minot, ND

618

1,654

618

1,654

2,272

348

08/01/2012

40

Minot, ND

618

1,654

618

1,654

2,272

431

08/01/2012

40

Titan Machinery

North Platte, NE

325

1,269

325

1,269

1,594

159

01/29/2016

40

North Platte, NE

325

1,269

325

1,269

1,594

223

01/29/2016

40

Titan Machinery

Sioux City, IA

1,061

315

2,472

315

2,472

2,787

448

10/25/2013

40

Sioux City, IA

3,699

315

2,472

315

2,472

2,787

572

10/25/2013

40

Total

$

11,005

$

4,463

$

16,035

$

1,058

$

(94)

$

5,521

$

15,941

$

21,462

$

3,169

$

17,216

$

4,463

$

16,035

$

1,088

$

(94)

$

5,551

$

15,941

$

21,492

$

3,968

  

Life on

Life on

which

which

Costs

depreciation

Costs

depreciation

capitalized

Date of

on latest

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Initial cost

subsequent

Gross Amount at which

Construction

income

Land

to company

to acquisition (a)

carried at close of period

or

statement is

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Taco Bell

Denver, CO

$

409

$

669

$

$

$

$

669

$

$

669

$

06/14/2011

Denver, CO

$

389

$

669

$

$

$

$

669

$

$

669

$

06/14/2011

West 80

Rochester, MN

1,364

1,364

1,364

08/29/2016

Rochester, MN

1,364

1,364

1,364

08/29/2016

Total

$

409

$

2,033

$

$

$

$

2,033

$

$

2,033

$

$

389

$

2,033

$

$

$

$

2,033

$

$

2,033

$

  

9285

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 20202022

(Dollar amounts in thousands)

Life on

Life on

which

which

Costs

depreciation

Costs

depreciation

capitalized

Date of

on latest

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Initial cost

subsequent

Gross Amount at which

Construction

income

Medical

to company

to acquisition (a)

carried at close of period

or

statement is

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Bio-Life

Bismarck, ND

$

1,104

$

306

$

2,255

$

11

$

123

$

317

$

2,378

$

2,695

$

852

01/03/2008

9

-

40

Bismarck, ND

$

2,091

$

306

$

2,255

$

11

$

123

$

317

$

2,378

$

2,695

$

968

01/03/2008

9

-

40

Bio-Life

Grand Forks, ND

1,103

457

2,230

1

158

458

2,388

2,846

879

01/03/2008

10

-

40

Grand Forks, ND

2,150

457

2,230

1

158

458

2,388

2,846

994

01/03/2008

10

-

40

Bio-Life

Janesville, WI

1,104

250

1,857

123

250

1,980

2,230

717

01/03/2008

9

-

40

Janesville, WI

1,786

250

1,857

123

250

1,980

2,230

819

01/03/2008

9

-

40

Bio-Life

Mankato, MN

1,103

390

2,111

280

1,154

670

3,265

3,935

1,083

01/03/2008

11

-

40

Mankato, MN

2,271

390

2,111

280

1,154

670

3,265

3,935

1,273

01/03/2008

11

-

40

Bio-Life

Marquette, MI

213

2,793

123

213

2,916

3,129

1,019

01/03/2008

9

-

40

Marquette, MI

213

2,793

123

213

2,916

3,129

1,170

01/03/2008

9

-

40

Bio-Life

Onalaska, WI

1,104

208

1,853

323

208

2,176

2,384

754

01/03/2008

11

-

40

Onalaska, WI

1,723

208

1,853

323

208

2,176

2,384

880

01/03/2008

11

-

40

Bio-Life

Oshkosh, WI

1,103

293

1,705

146

293

1,851

2,144

696

01/03/2008

10

-

40

Oshkosh, WI

1,773

293

1,705

146

293

1,851

2,144

785

01/03/2008

10

-

40

Bio-Life

Sheboygan, WI

1,104

623

1,611

248

623

1,859

2,482

660

01/03/2008

10

-

40

Sheboygan, WI

2,022

623

1,611

248

623

1,859

2,482

768

01/03/2008

10

-

40

Bio-Life

Stevens Point, WI

1,103

119

2,184

123

119

2,307

2,426

822

01/03/2008

9

-

40

Stevens Point, WI

1,935

119

2,184

123

119

2,307

2,426

941

01/03/2008

9

-

40

Total

$

8,828

$

2,859

$

18,599

$

292

$

2,521

$

3,151

$

21,120

$

24,271

$

7,482

$

15,751

$

2,859

$

18,599

$

292

$

2,521

$

3,151

$

21,120

$

24,271

$

8,598

  

Life on

Life on

which

which

Costs

depreciation

Costs

depreciation

capitalized

Date of

on latest

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Initial cost

subsequent

Gross Amount at which

Construction

income

Residential

to company

to acquisition (a)

carried at close of period

or

statement is

to company

to acquisition (a)

carried at close of period

or

statement is

Property

  

Physical Location

  

Encumbrances

  

Land

  

Buildings

  

Land

  

Buildings

  

Land

  

Buildings

  

Total

  

Depreciation

  

Acquisition

  

computed

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Amberwood

Grand Forks, ND

$

2,570

$

426

$

3,304

$

3

$

113

$

429

$

3,417

$

3,846

$

374

09/13/2016

20

-

40

Grand Forks, ND

$

2,376

$

426

$

3,304

$

3

$

178

$

429

$

3,482

$

3,911

$

552

09/13/2016

20

-

40

Arbor I/400

Bismarck, ND

380

73

516

4

65

77

581

658

109

06/04/2013

40

Bismarck, ND

350

73

516

4

65

77

581

658

142

06/04/2013

40

Arbor II/404

Bismarck, ND

388

73

538

6

43

79

581

660

99

11/01/2013

40

Bismarck, ND

358

73

538

6

43

79

581

660

128

11/01/2013

40

Arbor III/406

Bismarck, ND

386

71

536

7

43

78

579

657

99

11/01/2013

40

Bismarck, ND

356

71

536

7

43

78

579

657

128

11/01/2013

40

Ashbury

Fargo, ND

2,423

314

3,774

26

25

340

3,799

4,139

387

12/19/2016

40

Fargo, ND

2,287

314

3,774

26

25

340

3,799

4,139

578

12/19/2016

40

Auburn II

Fargo, ND

892

105

883

12

87

117

970

1,087

323

03/23/2007

20

-

40

Fargo, ND

825

105

883

12

87

117

970

1,087

372

03/23/2007

20

-

40

Autumn Ridge

Grand Forks, ND

5,423

1,072

8,875

44

30

1,116

8,905

10,021

3,241

08/16/2004

9

-

40

Grand Forks, ND

5,162

1,072

8,875

44

67

1,116

8,942

10,058

3,687

08/16/2004

9

-

40

Barrett Arms

Crookston, MN

788

37

1,001

154

37

1,155

1,192

182

01/02/2014

20

-

40

Crookston, MN

723

37

1,001

177

37

1,178

1,215

241

01/02/2014

40

Bayview

Fargo, ND

2,669

284

3,447

59

266

343

3,713

4,056

1,146

12/31/2007

20

-

40

Fargo, ND

2,350

284

3,447

59

2,020

343

5,467

5,810

1,455

12/31/2007

20

-

40

Belmont East and West

Bismarck, ND

808

167

1,424

167

1,424

1,591

30

03/1/2020

40

Bismarck, ND

742

167

1,424

2

8

169

1,432

1,601

102

03/1/2020

40

Berkshire

Fargo, ND

440

31

406

4

6

35

412

447

132

03/31/2008

20

-

40

Fargo, ND

401

31

406

7

53

38

459

497

155

03/31/2008

20

-

40

Betty Ann

Fargo, ND

467

74

738

6

140

80

878

958

223

08/31/2009

40

Fargo, ND

421

74

738

6

140

80

878

958

267

08/31/2009

40

Birchwood 1

Fargo, ND

242

72

342

4

42

76

384

460

27

12/01/2017

40

Fargo, ND

228

72

342

4

42

76

384

460

46

12/01/2017

40

Birchwood 2

Fargo, ND

1,426

234

2,266

52

217

286

2,483

2,769

184

12/01/2017

40

Fargo, ND

1,342

234

2,099

52

288

286

2,387

2,673

290

12/01/2017

40

Bradbury Apartments

Bismarck, ND

1,948

1,049

4,922

46

1,049

4,968

6,017

279

10/24/18

40

Bismarck, ND

1,791

1,049

4,922

81

1,049

5,003

6,052

532

10/24/2018

40

Briar Pointe

Fargo, ND

1,283

384

1,551

384

1,551

1,935

61

06/01/2021

40

Bridgeport

Fargo, ND

5,041

613

7,676

3

46

616

7,722

8,338

787

12/19/2016

40

Fargo, ND

4,839

613

7,676

14

61

627

7,737

8,364

1,174

12/19/2016

40

Bristol Park

Grand Forks, ND

2,964

985

3,976

684

985

4,660

5,645

560

02/01/2016

40

Grand Forks, ND

2,801

985

3,976

779

985

4,755

5,740

804

02/01/2016

40

Brookfield

Fargo, ND

151

228

1,958

30

258

258

2,216

2,474

646

08/01/2008

20

-

40

Fargo, ND

1,945

228

1,958

30

318

258

2,276

2,534

761

08/01/2008

20

-

40

Cambridge (FKA 44th Street)

Fargo, ND

1,712

333

1,845

4

157

337

2,002

2,339

375

02/06/2013

40

Candlelight

Fargo, ND

1,776

613

1,221

(336)

416

277

1,637

1,914

328

11/30/2012

40

9386

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2020

(Dollar amounts in thousands)

Carling Manor

Grand Forks, ND

535

69

656

1

61

70

717

787

214

03/31/2008

40

Carlton Place

Fargo, ND

6,369

703

7,070

96

467

799

7,537

8,336

2,191

09/01/2008

20

-

40

Carr

Fargo, ND

529

66

759

4

41

70

800

870

76

01/17/2017

40

Cedars 4

Fargo, ND

134

1,068

10

134

1,078

1,212

55

12/31/18

40

Chandler 1802

Grand Forks, ND

667

133

1,114

31

133

1,145

1,278

197

01/02/2014

40

Chandler 1834

Grand Forks, ND

431

112

552

112

552

664

32

9/1/18

40

Chandler 1866

Grand Forks, ND

346

31

270

28

31

298

329

115

01/03/2005

20

-

40

Cherry Creek (FKA Village)

Grand Forks, ND

173

1,435

1

156

174

1,591

1,765

451

11/01/2008

40

Cityside Apartments

Fargo, ND

732

192

1,129

1

193

1,129

1,322

61

11/30/18

40

Columbia Park Village I

Grand Forks, ND

321

102

546

102

546

648

14

01/31/2020

40

Columbia West

Grand Forks, ND

2,673

294

3,367

1

538

295

3,905

4,200

1,098

09/01/2008

20

-

40

Country Club

Fargo, ND

1,066

252

1,252

2

223

254

1,475

1,729

333

05/02/2011

20

-

40

Countryside

Fargo, ND

653

135

677

68

135

745

880

166

05/02/2011

40

Courtyard

St. Louis Park, MN

3,273

2,270

5,681

779

2,270

6,460

8,730

1,133

09/03/2013

5

-

40

Dakota Manor

Fargo, ND

1,548

249

2,236

20

124

269

2,360

2,629

367

08/07/2014

40

Danbury

Fargo, ND

4,848

381

5,922

211

643

592

6,565

7,157

1,989

12/31/2007

20

-

40

Dellwood Estates

Anoka, MN

6,686

844

9,924

452

844

10,376

11,220

1,939

05/31/2013

20

-

40

Eagle Run

West Fargo, ND

3,898

576

5,787

128

119

704

5,906

6,610

1,521

08/12/2010

40

Eagle Sky I

Bismarck, ND

859

115

1,292

104

115

1,396

1,511

174

03/01/2016

40

Eagle Sky II

Bismarck, ND

859

135

1,279

173

135

1,452

1,587

169

03/01/2016

40

East Bridge

Fargo, ND

3,341

792

5,477

1

174

793

5,651

6,444

493

07/03/2017

40

Eastbrook

Bismarck, ND

696

145

1,233

145

1,233

1,378

26

01/31/2020

40

Echo Manor

Hutchinson, MN

992

141

875

103

141

978

1,119

162

01/02/2014

20

-

40

Emerald Court

Fargo, ND

66

830

11

162

77

992

1,069

288

03/31/2008

20

-

40

Essex

Fargo, ND

568

212

642

68

212

710

922

62

06/01/2017

40

Evergreen Terrace

Omaha, NE

5,451

820

7,573

820

7,573

8,393

16

12/17/20

40

Fairview

Bismarck, ND

2,692

267

3,978

39

887

306

4,865

5,171

1,280

12/31/2008

20

-

40

Flickertail

Fargo, ND

5,089

426

5,590

76

1,316

502

6,906

7,408

1,724

12/31/2008

40

Forest Avenue

Fargo, ND

351

61

637

8

64

69

701

770

130

02/06/2013

40

Foxtail Creek Townhomes

Fargo, ND

267

1,221

267

1,221

1,488

10

09/15/2020

40

Galleria III

Fargo, ND

717

118

681

1

292

119

973

1,092

188

11/09/2010

40

Garden Grove

Bismarck, ND

4,289

606

6,073

116

606

6,189

6,795

733

05/04/2016

5

-

40

Georgetown on the River

Fridley, MN

17,418

4,620

25,012

8

3,880

4,628

28,892

33,520

4,187

12/19/2014

5

-

40

Glen Pond

Eagan, MN

14,221

3,761

20,569

38

797

3,799

21,366

25,165

4,759

12/02/2011

20

-

40

Glen Pond Addition

Eagan, MN

876

15,408

876

15,408

16,284

128

09/30/2020

40

Granger Court I

Fargo, ND

2,078

279

2,619

25

82

304

2,701

3,005

500

06/04/2013

20

-

40

Griffin Court

Moorhead, MN

2,918

652

3,858

35

385

687

4,243

4,930

712

06/09/2014

5

-

40

Hannifin

Bismarck, ND

437

81

607

5

52

86

659

745

114

11/01/2013

40

Harrison and Richfield

Grand Forks, ND

5,312

756

6,346

4

316

760

6,662

7,422

2,240

07/01/2007

5

-

40

Hartford Apartments

Fargo, ND

881

154

1,233

14

154

1,247

1,401

69

10/1/18

40

Hawn

Fargo, ND

1,579

280

2,277

280

2,277

2,557

47

03/01/2020

40

Highland Meadows

Bismarck, ND

5,629

1,532

8,513

313

1,532

8,826

10,358

814

05/01/2017

5

-

40

Hunters Run I

Fargo, ND

503

50

419

2

(2)

52

417

469

142

03/23/2007

40

Hunters Run II

Fargo, ND

483

44

441

2

46

441

487

138

07/01/2008

40

94

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2020

(Dollar amounts in thousands)

Huntington

Fargo, ND

345

86

309

15

86

324

410

44

08/04/2015

40

Islander

Fargo, ND

793

98

884

49

115

147

999

1,146

220

07/01/2011

40

Jadestone

Fargo, ND

539

212

554

124

212

678

890

55

06/01/2017

20

-

40

Kennedy

Fargo, ND

383

84

588

7

91

91

679

770

125

02/06/2013

20

-

40

Library Lane

Grand Forks, ND

2,132

301

2,401

15

121

316

2,522

2,838

832

10/01/2007

20

-

40

Madison

Grand Forks, ND

296

95

497

52

95

549

644

72

09/01/2015

40

Maple Ridge

Omaha, NE

3,822

766

5,608

59

3,619

825

9,227

10,052

2,078

08/01/2008

20

-

40

Maplewood

Maplewood, MN

9,020

3,120

11,955

1,379

3,120

13,334

16,454

1,901

12/19/2014

5

-

40

Maplewood Bend I, II, III. IV, V, VI, VII, VIII & Royale

Fargo, ND

4,584

783

5,839

1

414

784

6,253

7,037

1,577

01/01/2009

20

-

40

Martha Alice

Fargo, ND

467

74

738

6

83

80

821

901

234

08/31/2009

20

-

40

Mayfair

Grand Forks, ND

80

1,043

3

123

83

1,166

1,249

335

07/01/2008

20

-

40

Monticello

Fargo, ND

611

60

752

7

32

67

784

851

141

11/08/2013

20

-

40

Montreal Courts

Little Canada, MN

17,635

5,809

19,565

15

1,389

5,824

20,954

26,778

3,788

10/02/2013

5

-

40

Morningside Apartments

Fargo, ND

496

85

673

85

673

758

36

11/30/18

40

Oak Court

Fargo, ND

2,651

270

2,210

14

412

284

2,622

2,906

765

04/30/2008

28

-

40

Oakview Townhomes

Grand Forks, ND

3,704

822

4,698

399

822

5,097

5,919

504

01/11/2017

40

Pacific Park I

Fargo, ND

570

95

777

3

65

98

842

940

162

02/06/2013

40

Pacific Park II

Fargo, ND

488

111

865

4

47

115

912

1,027

179

02/06/2013

40

Pacific South

Fargo, ND

301

58

459

2

60

459

519

91

02/06/2013

40

Park Circle

Fargo, ND

591

196

716

7

17

203

733

936

65

06/01/2017

40

Parkview Arms

Bismarck, ND

373

3,845

135

373

3,980

4,353

579

05/13/2015

5

-

40

Parkwest Gardens

West Fargo, ND

3,374

713

5,712

39

1,174

752

6,886

7,638

1,034

06/30/2014

20

-

40

Parkwood

Fargo, ND

126

1,143

7

16

133

1,159

1,292

348

08/01/2008

40

Pebble Creek

Bismarck, ND

3,876

260

3,704

(186)

260

3,518

3,778

1,101

03/19/2008

20

-

40

Plumtree

Fargo, ND

546

100

782

29

100

811

911

74

05/01/2017

40

Prairiewood Courts

Fargo, ND

308

1,730

28

132

336

1,862

2,198

629

09/01/2006

20

-

40

Prairiewood Meadows

Fargo, ND

1,995

736

1,077

11

16

747

1,093

1,840

226

09/30/2012

40

Quail Creek

Springfield, MO

5,979

1,529

8,046

102

1,529

8,148

9,677

1,220

02/03/2015

5

-

40

Robinwood

Coon Rapids, MN

4,353

1,380

6,133

669

1,380

6,802

8,182

982

12/19/2014

20

-

40

Rosedale Estates

Roseville, MN

14,700

4,680

20,591

650

4,680

21,241

25,921

3,218

12/19/2014

5

-

40

Rosegate

Fargo, ND

3,060

251

2,978

49

84

300

3,062

3,362

982

04/30/2008

20

-

40

Rosser

Bismarck, ND

749

156

1,216

156

1,216

1,372

25

03/01/2020

40

Roughrider

Grand Forks, ND

403

100

448

117

100

565

665

64

08/01/2016

5

-

40

Saddlebrook

West Fargo, ND

1,404

148

1,262

203

105

351

1,367

1,718

393

12/31/2008

40

Sage Park

New Brighton, MN

9,812

2,520

13,985

949

2,520

14,934

17,454

2,258

12/19/2014

5

-

40

Sargent

Fargo, ND

1,005

164

1,529

4

17

168

1,546

1,714

155

01/10/2017

40

Schrock

Fargo, ND

457

71

626

3

6

74

632

706

120

06/04/2013

40

Sheridan Pointe

Fargo, ND

2,096

292

2,387

21

35

313

2,422

2,735

426

10/01/2013

40

Sierra Ridge

Bismarck, ND

6,977

754

8,795

151

136

905

8,931

9,836

2,518

09/01/2006

40

Somerset

Fargo, ND

2,844

300

3,400

43

57

343

3,457

3,800

1,060

07/01/2008

40

Southgate

Fargo, ND

4,957

803

5,267

20

(45)

823

5,222

6,045

1,749

07/01/2007

20

-

40

Southview III

Grand Forks, ND

99

522

79

99

601

700

139

08/01/2011

40

Southview Villages

Fargo, ND

2,526

268

2,483

16

197

284

2,680

2,964

865

10/01/2007

20

-

40

Spring

Fargo, ND

465

76

822

66

15

142

837

979

167

02/06/2013

20

-

40

95

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2020

(Dollar amounts in thousands)

Stanford Court

Grand Forks, ND

291

3,866

359

291

4,225

4,516

783

02/06/2013

20

-

40

Stonefield-Clubhouse

Bismarck, ND

34

1,147

50

34

1,197

1,231

133

07/31/2016

40

Stonefield-Phase I

Bismarck, ND

8,041

2,804

13,068

227

246

3,031

13,314

16,345

2,002

08/01/2014

20

-

40

Stonefield-Phase II

Bismarck, ND

4,953

1,167

2,531

486

5,129

1,653

7,660

9,313

740

10/23/2014

40

Stonefield-Phase III

Bismarck, ND

1,079

238

1,317

1,317

10/23/2014

n/a

Stonybrook

Omaha, NE

6,612

1,439

8,003

1,565

1,439

9,568

11,007

2,595

01/20/2009

20

-

40

Summerfield

Fargo, ND

504

129

599

1

50

130

649

779

87

08/04/2015

40

Summit Point

Fargo, ND

3,513

681

5,434

22

145

703

5,579

6,282

726

10/01/2015

20

-

40

Sunchase

Fargo, ND

1,071

181

1,563

14

86

195

1,649

1,844

150

05/01/2017

40

Sunset Ridge

Bismarck, ND

7,852

1,759

11,012

36

48

1,795

11,060

12,855

3,205

06/06/2008

9

-

40

Sunview

Grand Forks, ND

144

1,578

1

183

145

1,761

1,906

495

12/31/2008

20

-

40

Sunwood

Fargo, ND

2,630

358

3,252

38

422

396

3,674

4,070

1,116

07/01/2007

20

-

40

Terrace on the Green

Moorhead, MN

697

2,588

11

265

708

2,853

3,561

560

09/30/2012

40

Thunder Creek

Fargo, ND

2,794

633

4,063

1

228

634

4,291

4,925

300

03/1/2018

25

-

40

Twin Oaks

Hutchinson, MN

3,074

816

3,245

122

816

3,367

4,183

522

10/01/2014

40

Twin Parks

Fargo, ND

2,022

119

2,072

43

219

162

2,291

2,453

642

10/01/2008

20

-

40

Valley Homes Duplexes

Grand Forks, ND

1,086

356

1,668

310

356

1,978

2,334

280

01/22/2015

40

Valley View

Golden Valley, MN

4,334

1,190

6,118

227

1,190

6,345

7,535

956

12/19/2014

5

-

40

Village Park

Fargo, ND

678

219

1,932

51

80

270

2,012

2,282

621

04/30/2008

20

-

40

Village West

Fargo, ND

2,314

357

2,274

61

121

418

2,395

2,813

715

04/30/2008

40

Washington

Grand Forks, ND

390

74

592

76

74

668

742

75

05/04/2016

40

Westcourt

Fargo, ND

2,433

287

2,914

28

143

315

3,057

3,372

548

01/02/2014

5

-

40

West Oak

Fargo, ND

541

85

692

37

85

729

814

77

01/17/2017

40

Westside

Hawley, MN

496

59

360

63

59

423

482

105

02/01/2010

40

Westwind

Fargo, ND

617

49

455

1

95

50

550

600

176

04/30/2008

20

-

40

Westwood

Fargo, ND

3,566

597

6,341

91

589

688

6,930

7,618

2,023

06/05/2008

20

-

40

Willow Park

Fargo, ND

3,531

288

5,286

39

707

327

5,993

6,320

1,639

12/31/2008

40

Wolf Creek

Fargo, ND

3,150

1,082

4,210

1,082

4,210

5,292

105

01/12/2020

40

Woodland Pines

Omaha, NE

6,288

842

10,596

592

842

11,188

12,030

595

11/30/18

40

Total

$

338,328

$

78,054

$

490,849

$

2,890

$

41,017

$

80,944

$

531,866

$

612,810

$

96,295

96

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2020

(Dollar amounts in thousands)

Life on

which

Costs

depreciation

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Office

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

32nd Avenue

Fargo, ND

$

$

601

$

3,300

$

121

$

172

$

722

$

3,472

$

4,194

$

1,413

03/16/2004

3

-

40

Bell Plaza

Bloomington, MN

32,182

6,912

35,798

1,799

6,912

37,597

44,509

9,485

08/13/2015

3

-

40

Trustmark

Fargo, ND

2,089

4,718

2,089

4,718

6,807

49

08/28/2020

40

First International Bank & Trust

Moorhead, MN

210

712

3

88

213

800

1,013

241

05/13/2011

10

-

40

Four Points

Fargo, ND

70

1,238

81

70

1,319

1,389

427

10/18/2007

5

-

40

Gate City

Grand Forks, ND

382

893

1

452

383

1,345

1,728

316

03/31/2008

40

Goldmark Office Park

Fargo, ND

12,800

1,160

12,446

65

3,931

1,225

16,377

17,602

4,566

07/01/2007

1

-

40

Great American Bldg

Fargo, ND

1,151

511

1,290

22

359

533

1,649

2,182

600

02/01/2005

28

-

40

Midtown Plaza

Minot, ND

1,087

30

1,213

97

30

1,310

1,340

489

01/01/2004

5

-

40

Parkway office building (FKA Echelon)

Fargo, ND

791

278

1,491

42

66

320

1,557

1,877

526

05/15/2007

9

-

40

Redpath

White Bear Lake, MN

2,461

1,195

1,787

1,195

1,787

2,982

220

02/01/2016

40

Regis

Edina, MN

2,991

7,633

2,991

7,633

10,624

2,294

01/01/2009

40

Wells Fargo Center

Duluth, MN

600

7,270

(115)

2,729

485

9,999

10,484

3,029

07/11/2007

4

-

40

Total

$

50,472

$

17,029

$

79,789

$

139

$

9,774

$

17,168

$

89,563

$

106,731

$

23,655

97

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 20202022

(Dollar amounts in thousands)

Brownstone

Fargo, ND

2,891

780

3,610

780

3,610

4,390

143

06/01/2021

40

Cambridge (FKA 44th Street)

Fargo, ND

1,614

333

1,845

4

237

337

2,082

2,419

480

02/06/2013

40

Candlelight

Fargo, ND

1,583

613

1,221

(326)

589

287

1,810

2,097

412

11/30/2012

40

Carling Manor

Grand Forks, ND

498

69

656

1

61

70

717

787

250

03/31/2008

40

Carlton Place

Fargo, ND

5,885

703

7,070

96

714

799

7,784

8,583

2,576

09/01/2008

20

-

40

Carr

Fargo, ND

583

66

759

4

41

70

800

870

116

01/17/2017

40

Cedars 4

Fargo, ND

134

1,068

29

134

1,097

1,231

111

12/31/2018

40

Chandler 1802

Grand Forks, ND

613

133

1,114

108

133

1,222

1,355

256

01/02/2014

40

Chandler 1834

Grand Forks, ND

399

112

552

39

112

591

703

61

09/1/2018

40

Chandler 1866

Grand Forks, ND

318

31

270

59

31

329

360

130

01/03/2005

20

-

40

Chandler 1898

Grand Forks, ND

114

357

114

357

471

1

12/1/2022

40

Cherry Creek (FKA Village)

Grand Forks, ND

173

1,435

1

274

174

1,709

1,883

534

11/01/2008

40

Cityside Apartments

Fargo, ND

676

192

1,129

6

62

198

1,191

1,389

126

11/30/2018

40

Columbia Park Village I

Grand Forks, ND

295

102

546

102

546

648

41

01/31/2020

40

Columbia West

Grand Forks, ND

2,379

294

3,367

1

591

295

3,958

4,253

1,298

09/01/2008

20

-

40

Country Club

Fargo, ND

1,006

252

1,252

2

240

254

1,492

1,746

410

05/02/2011

20

-

40

Countryside

Fargo, ND

593

135

677

68

135

745

880

203

05/02/2011

40

Courtyard

St. Louis Park, MN

2,865

2,270

5,681

794

2,270

6,475

8,745

1,466

09/03/2013

5

-

40

Dakota Manor

Fargo, ND

1,391

249

2,236

20

182

269

2,418

2,687

486

08/07/2014

40

Danbury

Fargo, ND

4,572

381

5,869

211

653

592

6,522

7,114

2,317

12/31/2007

20

-

40

Dellwood Estates

Anoka, MN

6,177

844

9,924

861

844

10,785

11,629

2,468

05/31/2013

40

Deer Park

Hutchinson, MN

8,838

1,784

12,545

1,784

12,545

14,329

287

02/28/2022

40

Desoto Estates

Grand Forks, ND

4,155

955

4,869

955

4,869

5,824

81

05/31/2022

40

Desoto Townhomes

Grand Forks, ND

1,589

464

2,767

464

2,767

3,231

46

05/31/2022

40

Diamond Bend

Mandan, ND

6,825

722

9,789

722

9,789

10,511

143

06/10/2022

40

Eagle Run

West Fargo, ND

3,659

576

5,787

128

180

704

5,967

6,671

1,822

08/12/2010

40

Eagle Sky I

Bismarck, ND

801

115

1,292

104

115

1,396

1,511

248

03/01/2016

40

Eagle Sky II

Bismarck, ND

801

135

1,279

173

135

1,452

1,587

245

03/01/2016

40

East Bridge

Fargo, ND

3,143

792

5,396

1

301

793

5,697

6,490

770

07/03/2017

40

Eastbrook

Bismarck, ND

639

145

1,233

145

1,233

1,378

87

01/31/2020

40

Echo Manor

Hutchinson, MN

911

141

875

118

141

993

1,134

215

01/02/2014

20

-

40

Emerald Court

Fargo, ND

66

830

11

180

77

1,010

1,087

340

03/31/2008

20

-

40

Essex

Fargo, ND

525

212

642

68

212

710

922

98

06/01/2017

40

Evergreen Terrace

Omaha, NE

5,060

820

7,573

84

820

7,657

8,477

399

12/17/2020

40

Fairview

Bismarck, ND

2,502

267

3,978

39

918

306

4,896

5,202

1,527

12/31/2008

20

-

40

Flagstone

Fargo, ND

5,110

1,535

6,258

1,535

6,258

7,793

248

06/01/2021

40

Flickertail

Fargo, ND

4,799

426

5,590

76

1,674

502

7,264

7,766

2,132

12/31/2008

40

Forest Avenue

Fargo, ND

324

61

637

8

64

69

701

770

166

02/06/2013

40

Foxtail Creek Townhomes

Fargo, ND

267

1,221

267

1,221

1,488

71

09/15/2020

40

Galleria III

Fargo, ND

667

118

681

2

292

120

973

1,093

237

11/09/2010

40

Garden Grove

Bismarck, ND

4,089

606

6,073

168

606

6,241

6,847

1,050

05/04/2016

5

-

40

Georgetown on the River

Fridley, MN

16,522

4,620

23,833

8

4,117

4,628

27,950

32,578

5,451

12/19/2014

5

-

40

Glen Pond

Eagan, MN

35,566

3,761

20,569

38

960

3,799

21,529

25,328

5,842

12/02/2011

20

-

40

Glen Pond Addition

Eagan, MN

6,056

876

15,408

876

15,408

16,284

899

09/30/2020

40

87

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Life on

which

Costs

depreciation

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Retail

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Applebees

Bloomington, MN

1,000

474

11

1,011

474

1,485

128

03/22/2010

40

Applebees

Coon Rapids, MN

750

875

8

758

875

1,633

237

03/09/2010

40

Applebees

Savage, MN

690

424

690

424

1,114

115

01/01/2010

40

Becker Furniture

Waite Park, MN

150

2,065

(637)

150

1,428

1,578

749

07/12/2006

40

Dairy Queen

Apple Valley, MN

1,128

1,345

1,128

1,345

2,473

90

9/17/18

40

Dairy Queen

Dickinson, ND

���

329

658

329

658

987

148

01/19/2012

40

Dairy Queen

Moorhead, MN

243

787

1

244

787

1,031

190

05/13/2011

20

Family Dollar

Mandan, ND

167

649

167

649

816

164

12/14/2010

40

OReilly

Mandan, ND

115

449

115

449

564

113

12/14/2010

40

Walgreens

Alexandria, LA

964

1,090

2,973

1,090

2,973

4,063

820

12/18/2009

28

-

40

Walgreens

Batesville, AR

5,134

473

6,405

473

6,405

6,878

1,842

07/09/2009

40

Walgreens

Denver, CO

3,142

2,349

2,358

2,349

2,358

4,707

565

06/14/2011

40

Walgreens

Fayetteville, AR

3,888

636

4,732

636

4,732

5,368

1,360

07/09/2009

40

Walgreens

Laurel, MS

937

1,280

2,984

1,280

2,984

4,264

783

07/30/2010

40

Total

$

14,065

$

10,400

$

27,178

$

20

$

(637)

$

10,420

$

26,541

$

36,961

$

7,304

Grand Totals

$

423,107

$

114,838

$

632,450

$

4,399

$

52,581

$

119,237

$

685,031

$

804,268

$

137,905

Investments in Unconsolidated Affiliates:

Life on

which

Costs

depreciation

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Banner

Fargo, ND

$

6,232

$

750

$

8,016

$

203

$

333

$

953

$

8,349

$

9,302

$

2,764

03/15/2007

40

GF Marketplace

Grand Forks, ND

10,036

4,259

15,801

208

1,194

4,467

16,995

21,462

6,927

07/01/2003

25

-

40

Granger Court I

Fargo, ND

1,908

279

1,926

25

301

304

2,227

2,531

479

06/04/2013

20

-

40

Hannifin

Bismarck, ND

403

81

607

5

52

86

659

745

147

11/01/2013

40

Harrison and Richfield

Grand Forks, ND

4,904

756

6,346

7

321

763

6,667

7,430

2,578

07/01/2007

5

-

40

Hartford Apartments

Fargo, ND

833

154

1,233

14

154

1,247

1,401

132

10/1/2018

40

Hawn

Fargo, ND

1,491

280

2,277

280

2,277

2,557

161

03/01/2020

40

Highland Meadows

Bismarck, ND

5,440

1,532

8,513

457

1,532

8,970

10,502

1,271

05/01/2017

5

-

40

Hunters Run I

Fargo, ND

473

50

419

5

(2)

55

417

472

163

03/23/2007

40

Hunters Run II

Fargo, ND

430

44

441

2

46

441

487

160

07/01/2008

40

Huntington

Fargo, ND

314

86

309

4

15

90

324

414

60

08/04/2015

40

Islander

Fargo, ND

732

98

884

49

115

147

999

1,146

270

07/01/2011

40

Jadestone

Fargo, ND

498

212

554

127

212

681

893

90

06/01/2017

40

Kennedy

Fargo, ND

354

84

588

7

91

91

679

770

161

02/06/2013

20

-

40

Library Lane

Grand Forks, ND

2,006

301

2,332

16

189

317

2,521

2,838

937

10/01/2007

20

-

40

Madison

Grand Forks, ND

272

95

497

100

95

597

692

102

09/01/2015

40

Maple Ridge

Omaha, NE

7,749

766

5,608

59

3,715

825

9,323

10,148

2,582

08/01/2008

20

-

40

Maplewood

Maplewood, MN

8,556

3,120

11,655

2,411

3,120

14,066

17,186

2,537

12/19/2014

5

-

40

Maplewood Bend I, II, III. IV, V, VI, VII, VIII & Royale

Fargo, ND

4,235

783

5,839

1

491

784

6,330

7,114

1,899

01/01/2009

20

-

40

Martha Alice

Fargo, ND

421

74

738

6

183

80

921

1,001

279

08/31/2009

20

-

40

Mayfair

Grand Forks, ND

80

1,043

4

123

84

1,166

1,250

394

07/01/2008

20

-

40

Monticello

Fargo, ND

544

60

752

14

111

74

863

937

184

11/08/2013

20

-

40

Montreal Courts

Little Canada, MN

16,802

5,809

19,565

15

3,605

5,824

23,170

28,994

4,961

10/02/2013

5

-

40

Morningside Apartments

Fargo, ND

458

85

673

42

85

715

800

71

11/30/2018

40

Newgate

Bismarck, ND

1,503

538

1,755

538

1,755

2,293

15

09/13/2022

40

Oak Court

Fargo, ND

2,502

270

2,210

29

436

299

2,646

2,945

899

04/30/2008

28

-

40

Oakview Townhomes

Grand Forks, ND

3,473

822

4,698

1

471

823

5,169

5,992

767

01/11/2017

40

Oxford

Fargo, ND

6,679

1,655

8,563

1,655

8,563

10,218

321

07/01/2021

40

Pacific Park I

Fargo, ND

526

95

777

3

130

98

907

1,005

205

02/06/2013

40

Pacific Park II

Fargo, ND

450

111

865

4

140

115

1,005

1,120

225

02/06/2013

40

Pacific South

Fargo, ND

278

58

459

2

16

60

475

535

114

02/06/2013

40

Park Circle

Fargo, ND

547

196

716

7

17

203

733

936

102

06/01/2017

40

Parkview Arms

Bismarck, ND

373

3,845

365

373

4,210

4,583

784

05/13/2015

5

-

40

Parkwest Gardens

West Fargo, ND

3,010

713

5,712

39

1,390

752

7,102

7,854

1,396

06/30/2014

20

-

40

Parkwood

Fargo, ND

126

1,143

14

23

140

1,166

1,306

407

08/01/2008

40

Pebble Creek

Bismarck, ND

3,588

260

2,818

31

(62)

291

2,756

3,047

958

03/19/2008

20

-

40

Pinehurst

Fargo, ND

9,716

2,368

12,614

2,368

12,614

14,982

473

07/01/2021

40

Plumtree

Fargo, ND

516

100

782

29

100

811

911

114

05/01/2017

40

Prairiewood Courts

Fargo, ND

308

1,730

28

143

336

1,873

2,209

725

09/01/2006

20

-

40

Prairiewood Meadows

Fargo, ND

3,781

736

852

11

367

747

1,219

1,966

232

09/30/2012

40

Prose Fossil Creek

Fort Worth, TX

5,451

46,811

5,451

46,811

52,262

98

12/29/2022

40

Quail Creek

Springfield, MO

5,317

1,529

7,396

1,656

1,529

9,052

10,581

1,537

02/03/2015

5

-

40

Robinwood

Coon Rapids, MN

4,129

1,380

6,133

711

1,380

6,844

8,224

1,333

12/19/2014

40

Rosedale Estates

Roseville, MN

13,916

4,680

20,591

836

4,680

21,427

26,107

4,289

12/19/2014

5

-

40

Rosegate

Fargo, ND

2,888

251

2,978

49

132

300

3,110

3,410

1,136

04/30/2008

20

-

40

Rosser

Bismarck, ND

688

156

1,216

86

156

1,302

1,458

88

03/01/2020

40

9888

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 20202022

(Dollar amounts in thousands)

Roughrider

Grand Forks, ND

373

100

448

117

100

565

665

93

08/01/2016

5

-

40

Saddlebrook

West Fargo, ND

1,306

148

1,262

203

105

351

1,367

1,718

462

12/31/2008

40

Sage Park

New Brighton, MN

9,307

2,520

13,985

1,061

2,520

15,046

17,566

3,031

12/19/2014

5

-

40

Sargent

Fargo, ND

940

164

1,529

4

17

168

1,546

1,714

233

01/10/2017

40

Schrock

Fargo, ND

425

71

626

3

66

74

692

766

152

06/04/2013

40

Sheridan Pointe

Fargo, ND

1,976

292

2,387

21

39

313

2,426

2,739

547

10/01/2013

40

Sierra Ridge

Bismarck, ND

6,575

754

8,795

151

863

905

9,658

10,563

2,987

09/01/2006

40

Somerset

Fargo, ND

300

3,400

43

57

343

3,457

3,800

1,235

07/01/2008

40

Southgate

Fargo, ND

4,744

803

5,267

20

64

823

5,331

6,154

2,015

07/01/2007

20

-

40

Southview III

Grand Forks, ND

99

522

1

116

100

638

738

170

08/01/2011

40

Southview Villages

Fargo, ND

2,376

268

2,483

16

645

284

3,128

3,412

1,012

10/01/2007

20

-

40

Spring

Fargo, ND

429

76

822

75

24

151

846

997

210

02/06/2013

20

-

40

Stanford Court

Grand Forks, ND

291

3,866

454

291

4,320

4,611

997

02/06/2013

20

-

40

Stonefield-Phase I

Bismarck, ND

7,500

2,804

11,060

227

802

3,031

11,862

14,893

2,273

08/01/2014

20

-

40

Stonefield-Phase II

Bismarck, ND

4,766

1,201

3,678

486

5,754

1,687

9,432

11,119

1,345

10/23/2014

40

Stonefield-Phase III

Bismarck, ND

1,079

238

1,317

1,317

10/23/2014

Stonybrook

Omaha, NE

6,124

1,439

8,003

1,574

1,439

9,577

11,016

3,088

01/20/2009

20

-

40

Summerfield

Fargo, ND

469

129

599

6

82

135

681

816

120

08/04/2015

40

Summit Point

Fargo, ND

3,284

681

5,434

22

449

703

5,883

6,586

1,020

10/01/2015

20

-

40

Sunchase

Fargo, ND

1,011

181

1,563

14

86

195

1,649

1,844

234

05/01/2017

40

Sunset Ridge

Bismarck, ND

10,813

1,759

9,560

36

145

1,795

9,705

11,500

3,234

06/06/2008

9

-

40

Sunview

Grand Forks, ND

144

1,578

2

241

146

1,819

1,965

587

12/31/2008

20

-

40

Sunwood

Fargo, ND

2,491

358

3,252

38

541

396

3,793

4,189

1,304

07/01/2007

20

-

40

Thunder Creek

Fargo, ND

2,645

633

4,063

1

551

634

4,614

5,248

525

03/1/2018

25

-

40

Twin Oaks

Hutchinson, MN

5,203

816

3,245

149

816

3,394

4,210

692

10/01/2014

40

Twin Parks

Fargo, ND

119

2,072

43

227

162

2,299

2,461

757

10/01/2008

20

-

40

Valley Homes Duplexes

Grand Forks, ND

998

356

1,668

1

418

357

2,086

2,443

390

01/22/2015

40

Valley View

Golden Valley, MN

4,107

1,190

6,076

458

1,190

6,534

7,724

1,274

12/19/2014

5

-

40

Village Park

Fargo, ND

609

219

1,932

51

80

270

2,012

2,282

725

04/30/2008

40

Village West

Fargo, ND

2,154

357

2,274

61

126

418

2,400

2,818

836

04/30/2008

40

Washington

Grand Forks, ND

350

74

592

75

74

667

741

108

05/04/2016

40

Westcourt

Fargo, ND

2,294

287

2,914

28

195

315

3,109

3,424

702

01/02/2014

5

-

40

West Oak

Fargo, ND

608

85

692

47

36

132

728

860

116

01/17/2017

40

Westside

Hawley, MN

456

59

360

99

59

459

518

127

02/01/2010

40

Westwind

Fargo, ND

561

49

455

1

95

50

550

600

206

04/30/2008

20

-

40

Westwood

Fargo, ND

3,108

597

6,341

91

764

688

7,105

7,793

2,378

06/05/2008

20

-

40

Willow Park

Fargo, ND

3,228

288

5,286

39

799

327

6,085

6,412

1,943

12/31/2008

40

Wolf Creek

Fargo, ND

2,979

1,082

4,210

28

1,082

4,238

5,320

319

01/12/2020

40

Woodland Pines

Omaha, NE

6,047

842

10,596

1,372

842

11,968

12,810

1,199

11/30/2018

40

Total

$

400,085

$

93,455

$

588,087

$

3,013

$

57,599

$

96,468

$

645,686

$

742,154

$

122,246

89

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Life on

which

Costs

depreciation

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Office

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

32nd Avenue

Fargo, ND

$

4,763

$

635

$

3,298

$

87

$

1,226

$

722

$

4,524

$

5,246

$

1,651

03/16/2004

3

-

40

Bell Plaza

Bloomington, MN

30,662

6,912

34,672

4,635

6,912

39,307

46,219

11,707

08/13/2015

3

-

40

Trustmark

Fargo, ND

6,915

2,089

4,718

14

6,298

2,103

11,016

13,119

712

08/28/2020

40

First International Bank & Trust

Moorhead, MN

210

712

5

88

215

800

1,015

295

05/13/2011

10

-

40

Four Points

Fargo, ND

70

1,238

175

70

1,413

1,483

520

10/18/2007

5

-

40

Gate City

Grand Forks, ND

382

893

1

810

383

1,703

2,086

405

03/31/2008

40

Goldmark Office Park

Fargo, ND

12,362

1,160

11,788

65

8,832

1,225

20,620

21,845

5,289

07/01/2007

1

-

40

Great American Bldg

Fargo, ND

1,064

511

1,290

22

447

533

1,737

2,270

760

02/01/2005

28

-

40

Midtown Plaza

Minot, ND

1,103

30

1,213

97

30

1,310

1,340

565

01/01/2004

5

-

40

Parkway office building (FKA Echelon)

Fargo, ND

1,619

278

1,491

42

82

320

1,573

1,893

611

05/15/2007

9

-

40

Redpath

White Bear Lake, MN

2,849

1,195

1,787

1,195

1,787

2,982

309

02/01/2016

40

Wells Fargo Center

Duluth, MN

600

7,195

(115)

2,740

485

9,935

10,420

3,537

07/11/2007

4

-

40

Total

$

61,337

$

14,072

$

70,295

$

121

$

25,430

$

14,193

$

95,725

$

109,918

$

26,361

90

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Life on

which

Costs

depreciation

capitalized

Date of

on latest

Initial cost

subsequent

Gross Amount at which

Construction

income

Retail

to company

to acquisition (a)

carried at close of period

or

statement is

Property

   

Physical Location

   

Encumbrances

   

Land

   

Buildings

   

Land

   

Buildings

   

Land

   

Buildings

   

Total

   

Depreciation

   

Acquisition

   

computed

Applebees

Coon Rapids, MN

750

875

8

758

875

1,633

281

03/09/2010

40

Dairy Queen

Apple Valley, MN

1,898

845

828

845

828

1,673

90

09/17/2018

40

Dairy Queen

Dickinson, ND

329

658

1

330

658

988

181

01/19/2012

40

Dairy Queen

Moorhead, MN

243

787

2

245

787

1,032

230

05/13/2011

20

Family Dollar

Mandan, ND

166

649

54

166

703

869

198

12/14/2010

40

OReilly

Mandan, ND

115

449

27

115

476

591

138

12/14/2010

40

Walgreens

Alexandria, LA

548

1,090

2,973

1,090

2,973

4,063

969

12/18/2009

28

-

40

Walgreens

Batesville, AR

4,623

472

6,405

472

6,405

6,877

2,162

07/09/2009

40

Walgreens

Denver, CO

2,984

2,349

2,358

2,349

2,358

4,707

683

06/14/2011

40

Walgreens

Fayetteville, AR

3,474

636

4,732

636

4,732

5,368

1,597

07/09/2009

40

Walgreens

Laurel, MS

1,280

2,984

1,280

2,984

4,264

933

07/30/2010

40

Total

$

13,527

$

8,275

$

23,698

$

11

$

81

$

8,286

$

23,779

$

32,065

$

7,462

Grand Totals

$

508,305

$

125,157

$

716,714

$

4,525

$

85,537

$

129,682

$

802,251

$

931,933

$

168,635

91

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Notes:

(a)The costs capitalized subsequent to acquisition is net of dispositions.
(b)The changes in total real estate investments for the years ended December 31, 2020, 20192022, 2021 and 20182020 are as follows (in thousands):

2020

2019

2018

2022

2021

2020

Balance at January 1,

$

802,028

$

790,696

$

759,703

$

896,702

$

845,288

$

802,028

Purchase of real estate investments

57,799

5,981

41,230

103,252

63,299

57,799

Sale and disposal of real estate investment

(15,467)

(4,422)

(10,222)

(26,960)

(8,184)

(15,467)

Property held for sale

(1,578)

1,578

(1,578)

Provision for asset impairment

(561)

Construction in progress not yet placed in service

2,506

9,773

(15)

(1,285)

(5,279)

2,506

Reallocation to intangible assets

Balance at December 31,

$

845,288

$

802,028

$

790,696

$

971,148

$

896,702

$

845,288

(c)The changes in accumulated depreciation for the years ended December 31, 2020, 20192022, 2021 and 20182020 are as follows (in thousands):

2020

2019

2018

2022

2021

2020

Balance at January 1,

$

146,316

$

128,112

$

111,026

$

179,155

$

160,575

$

146,316

Depreciation expense

19,770

19,644

19,165

22,161

20,917

19,770

Property held for sale

(749)

749

(749)

Sale and disposal of real estate investment

(4,762)

(1,440)

(2,079)

(6,467)

(3,086)

(4,762)

Balance at December 31,

$

160,575

$

146,316

$

128,112

$

194,849

$

179,155

$

160,575

(d)The aggregate cost of our real estate for federal income tax purposes is $680,591.$763,298.

9992

Table of Contents

Exhibit Index

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

  

Exhibit Description

  

with

  

Form

  

ending

  

Exhibit

  

Date

3.1

Articles of Organization of Sterling Real Estate Trust filed December 3, 2002

10-12G

3.1

03/10/11

3.2

Amendment to Articles of Organization of Sterling Real Estate Trust dated August 1, 2014

8-K

5.02

06/24/14

3.3

Amended and Restated Bylaws dated June 2, 2020

8-K

3.1

06/03/20

4.1

Declaration of Trust Sterling Real Estate Trust dated July 21, 2004

10-12G

4.1

03/10/11

4.2

Addendum to Declaration of Trust dated July 25, 2007

10-12G

4.2

03/10/11

4.3

Sterling Third Amended and Restated Declaration of Trust dated March 27, 2014

8-K

4.1

04/02/14

4.4

Sterling Third Amended and Restated Declaration of Trust dated June 23, 2016

8-K

4.1

06/29/16

4.5

First Amended and Restated Declaration of Trust dated February 9, 2011

10-12G

4.3

03/10/11

4.6

Amendment No. 1 to First Amended and Restated Declaration of Trust dated August 1, 2014

8-K

5.01

06/24/14

4.7

Amended and Restated Share Repurchase Plan effective January 1, 2021

8-K

99.1

12/21/20

4.8

Amended and Restated Unit Repurchase Plan effective January 1, 2021

8-K

99.2

12/21/20

4.9

Description of Registrant’s Securities

10-K

4.11

3/13/20

10.1

First Amendment and Complete Restatement of Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated April 25, 2003

10-12G

10.2

03/10/11

10.2

Second Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated December 19, 2008

10-12G

10.3

03/10/11

10.3

Third Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated August 5, 2009

10-12G

10.4

03/10/11

10.4

Fourth Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated February 9, 2011

10-12G

10.5

03/10/11

10.5

Fifth Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated June 23, 2011

10-K

12/31/2011

10.6

03/30/12

10.6

Second Amended and Restated Agreement of Limited Liability Limited Partnership of Sterling Properties LLLP dated August 1, 2013

8-K

10.1

12/27/12

10.7

Third Amended and Restated Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated January 1, 2014

8-K

5.04

06/24/14

10.8

Ninth Amended and Restated Advisory Agreement dated April 1, 2020

8-K

10.1

03/31/20

10.9

Amended and Restated Dividend Reinvestment Plan effective June 25, 2020

8-K

10.3

06/30/20

10.10

Amendment to Certificate of Limited Liability Partnership of Sterling Properties, LLLP dated August 1, 2014

8-K

5.03

06/24/14

10.11

Form of Secured Promissory Note (15-Year Note) dated as of December 19, 2014

8-K

10.3

12/23/14

10.12

Form of Secured Promissory Note (10-Year Note) dated as of December 19, 2014

8-K

10.4

12/23/14

10.13

Form of Mortgage, Security Agreement and Fixture Filing dated as of December 19, 2014

8-K

10.5

12/23/14

10.14

Form of Promissory Note dated as of December 19, 2014

8-K

10.6

12/23/14

10.15

Form of Mortgage dated as of December 19, 2014

8-K

10.7

12/23/14

10.16

Form of Commercial Security Agreement dated as of December 19, 2014

8-K

10.8

12/23/14

10.17

Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan approved June 18, 2015

8-K

10.1

06/23/15

10.18

Form of Promissory Note dated as of August 13, 2015

8-K

10.2

08/18/15

10.19

Form of Mortgage, Security Agreement and Fixture Filing dated as of August 13, 2015

8-K

10.3

08/18/15

10.20

Amendment No. 1 to Amended and Restated Independent Trustee Stock Plan

8-K

99.3

04/04/18

21.1

Subsidiaries of Registrant

X

23.1

Consent of Independent Registered Public Accounting Firm - Baker Tilly US, LLP

X

31.1

Section 302 Certification of Chief Executive Officer

X

31.2

Section 302 Certification of Chief Financial Officer

X

32.1

Section 906 Certification of Chief Executive Officer and Chief Financial Officer

X

101

The following materials from Sterling Real Estate Trust’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2020 and 2019; (ii) Consolidated Statements of Operations and Comprehensive Income for years ended December 31, 2020, 2019 and 2018; (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018, and; (v) Notes to Consolidated Financial Statements

X

104

Cover Page Interactive Data File, formatted in IXBRL and contained in Exhibit 101

X

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

  

Exhibit Description

  

with

  

Form

  

ending

  

Exhibit

  

Date

3.1

Articles of Organization of Sterling Real Estate Trust filed December 3, 2002

10-12G

3.1

03/10/11

3.2

Amendment to Articles of Organization of Sterling Real Estate Trust dated August 1, 2014

8-K

5.02

06/24/14

3.3

Amended and Restated Bylaws dated June 2, 2020

8-K

3.1

06/03/20

4.1

Sterling Third Amended and Restated Declaration of Trust dated June 23, 2016

8-K

4.1

06/29/16

4.2

Amended and Restated Share Redemption Plan effective January 1, 2021

8-K

99.1

09/29/21

4.3

Amended and Restated Unit Repurchase Plan effective January 1, 2021

8-K

99.2

09/29/21

4.4

Description of Registrant’s Securities

10-K

12/31/2019

4.11

03/13/20

10.1

Third Amended and Restated Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated January 1, 2014

8-K

5.04

06/24/14

10.2

Amended and Restated Dividend Reinvestment Plan effective June 25, 2020

8-K

10.3

06/30/20

10.3

Amendment to Certificate of Limited Liability Partnership of Sterling Properties, LLLP dated August 1, 2014

8-K

5.03

06/24/14

10.4

Form of Secured Promissory Note (15-Year Note) dated as of December 19, 2014

8-K

10.3

12/23/14

10.5

Form of Secured Promissory Note (10-Year Note) dated as of December 19, 2014

8-K

10.4

12/23/14

10.6

Form of Mortgage, Security Agreement and Fixture Filing dated as of December 19, 2014

8-K

10.5

12/23/14

10.7

Form of Promissory Note dated as of December 19, 2014

8-K

10.6

12/23/14

10.8

Form of Mortgage dated as of December 19, 2014

8-K

10.7

12/23/14

10.9

Form of Commercial Security Agreement dated as of December 19, 2014

8-K

10.8

12/23/14

10.10

Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan approved June 18, 2015

8-K

10.1

06/23/15

10.11

Form of Promissory Note dated as of August 13, 2015

8-K

10.2

08/18/15

10.12

Form of Mortgage, Security Agreement and Fixture Filing dated as of August 13, 2015

8-K

10.3

08/18/15

10.13

Amendment No. 1 to Amended and Restated Independent Trustee Stock Plan

8-K

99.3

04/04/18

10.14

Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan dated March 25, 2021

8-K

10.1

03/31/21

10.15

Eleventh Amended and Restated Advisory Agreement, dated April 1, 2022

8-K

10.1

03/29/22

10.16

Bell Bank Promissory Note, dated December 29, 2022 between Bell Bank and Sterling Properties, LLLP, together with commercial Guaranty of Sterling Real Estate Trust, dated December 29, 2022

8-K

10.1

01/04/23

16.1

Letter of Baker Tilly US, LLP dated March 31, 2021 to the SEC regarding statements in Item 4.01(a)

8-K

16.1

03/31/21

21.1

Subsidiaries of Registrant

X

23.1

Consent of Independent Registered Public Accounting Firm - RSM, LLP

X

23.2

Consent of Independent Registered Public Accounting Firm - Baker Tilly US, LLP

X

31.1

Section 302 Certification of Chief Executive Officer

X

31.2

Section 302 Certification of Chief Financial Officer

X

32.1

Section 906 Certification of Chief Executive Officer and Chief Financial Officer

X

101

The following materials from Sterling Real Estate Trust’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2022 and 2020; (ii) Consolidated Statements of Operations and Comprehensive Income for years ended December 31, 2022, 2021 and 2020; (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020, and; (v) Notes to Consolidated Financial Statements

X

104

Cover Page Interactive Data File, formatted in IXBRL and contained in Exhibit 101

X

10093

Table of Contents

SIGNATURES

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

Dated: March 31, 202115, 2023

STERLING REAL ESTATE TRUST

By:

/s/ KENNETHKenneth P. REGANegan

Kenneth P. Regan

Chief Executive Officer

(Principal Executive Officer)

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

Signature

    

Title

    

Date

/s/ KENNETHKenneth P. REGANRegan

(Kenneth P. Regan)

Chief Executive Officer and Trustee
(principal executive officer)Principal Executive Officer)

March 31, 202115, 2023

/s/ Erica J. ChaffeeDamon K. Gleave

(Erica J. Chaffee)Damon K. Gleave)

Chief Financial Officer and Treasurer
(principal financial officer)Principal Financial Officer)

March 31, 202115, 2023

/s/ LANCELance R. WOLFWolf

(Lance R. Wolf)

Chairman of the Board of Trustees

March 31, 202115, 2023

/s/ Ann L. Christenson

(Ann L. Christenson)

Trustee

March 31, 202115, 2023

/s/ TIMOTHY HAUGENTimothy L. Haugen

(Timothy L. Haugen)

Trustee

March 31, 202115, 2023

/s/ TimTimothy A. Hunt

(TimTimothy A. Hunt)

Trustee

March 31, 202115, 2023

/s/ Michelle L. Korsmo

(Michelle L. Korsmo)

Trustee

March 31, 202115, 2023

/s/ Mark T. Polovitz

(Mark T. Polovitz)

Trustee

March 31, 202115, 2023

/s/ James S. Wieland

(James S. Wieland)

Trustee

March 31, 202115, 2023

10194