UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 20172018 

Commission File Number 000-52566

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

(Exact name of registrant as specified in its charter)

800-978-8136

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the 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.x Yes  ¨ No

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

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

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

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

As of November 7, 2017,5, 2018, we had 23,027,978 shares of common stock of Summit Healthcare REIT, Inc. outstanding.

FORM 10-Q

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

For the Nine Months Ended September 30, 20172018

(Unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 20172018

(Unaudited)

1. Organization

Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns 100% of six properties, 95.3% of four properties, 95% of one property, a 10% equity interest in an unconsolidated equity-method investment that holds 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds two properties, a 20% equity interest in twoan unconsolidated equity-method investmentsinvestment that each holdholds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties and a 10% equity interest in an unconsolidated equity-method investment that holds ninesix properties. Summit is a Maryland corporation, formed in 2004 under the General Corporation Law of Maryland for the purpose of investing in and owning real estate. As used in these notes, the “Company”, “we”, “us” and “our” refer to Summit and its consolidated subsidiaries, except where the context otherwise requires.

We conduct substantially all of our operations through Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), which is a Delaware limited partnership. As of September 30, 2017, weWe own a 99.88% general partner interest in the Operating Partnership, and Cornerstone Realty Advisors, LLC (“CRA”), a former affiliate, owns a 0.12% limited partnership interest. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements.

Cornerstone Healthcare Partners LLC – Consolidated Joint Venture

We own 95% of Cornerstone Healthcare Partners LLC (“CHP LLC”), which was formed in 2012, and the remaining 5% non-controlling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated with our financial statements and owns five properties (the “JV Properties”).

As of September 30, 2017,2018, we own a 95.3% interest in four of the JV Properties, and CHREF owns a 4.7% interest. We continue to own a 95% interest in the fifth JV Property, and CHREF owns a 5% interest.interest in the fifth JV Property.

Summit Union Life Holdings, LLC – Equity-Method Investment

OnIn April 29, 2015, through our Operating Partnership, we entered into a limited liability company agreement (as amended, the “SUL LLC Agreement”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements (see Note 5).statements. As of September 30, 20172018 and December 31, 2016,2017, we have a 10% interest in the SUL JV. As of September 30, 2017 and December 31, 2016, the SUL JV ownedwhich owns 17 properties.

Summit Fantasia Holdings, LLC – Equity-Method Investment

OnIn September 27, 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia LLC Agreement”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia JV”). The Fantasia JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As

In April 2018, we made an additional capital contribution of September 30, 2017 and December 31, 2016, we have a 20% interest in$1.25 million to the Fantasia JV. As a result of September 30, 2017 and December 31, 2016,this capital contribution, the Fantasia JV owned two properties.Operating Partnership has a 35% equity investment (see Note 5) as of April 27, 2018.

As of September 30, 2018 and December 31, 2017, we have a 35% and 20% interest, respectively, in the Fantasia JV which owns two properties.

Summit Fantasia Holdings II, LLC – Equity-Method Investment

OnIn December 23, 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia II LLC Agreement”) with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of September 30, 20172018 and December 31, 2016,2017, we have a 20% interest in the Fantasia II JV. As of September 30, 2017, the Fantasia II JV ownedwhich owns two properties.

Summit Fantasia Holdings III, LLCLLC– Equity-Method Investment

OnIn July 27, 2017, through our Operating Partnership, we entered into a limited liability company agreement (“Fantasia III LLC Agreement”) with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in the Company’s condensed consolidated financial statements. As of September 30, 2018 and December 31, 2017, we have a 10% interest in the Fantasia III JV. As of September 30, 2017, the Fantasia III JV ownedwhich owns nine properties.

Summit Fantasy Pearl Holdings, LLCLLC– Equity-Method Investment

OnIn October 2, 2017, through our Operating Partnership, we entered into a limited liability company agreement (“FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and will beis accounted for under the equity-method in the Company’s condensed consolidated financial statements. See Note 13 – Subsequent Event for further information.As of September 30, 2018 and December 31, 2017, we have a 10% interest in the FPH JV which owns six properties.

Summit Healthcare Asset Management, LLC (TRS)

Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV and FPH JV (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All acquisition fees and asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information.

Friendswood TRS

Friendswood TRS (“Friendswood TRS”) iswas our wholly-owned TRS, and is the licensed operator and tenant of Friendship Haven Healthcare and Rehabilitation Center (“Friendship Haven”) (see. Effective as of January 1, 2018, we assigned our interest in Friendswood TRS to HMG Park Manor of Friendswood, LLC (“HMG”), the management company of Friendship Haven. See Note 3).12 for further information regarding the transaction and the classification of assets, liabilities and operations for Friendswood TRS as of December 31, 2017 and for the three and nine months ended September 30, 2017.

2. Summary of Significant Accounting Policies

For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 20162017 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2017.16, 2018. There have been no material changes to our policies since that filing.filing except as noted under Recently Adopted Accounting Pronouncements.

The accompanying condensed consolidated balance sheet at December 31, 20162017 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 20162017 consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 20162017 filed with the SEC on March 29, 201716, 2018 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 20162017 have been omitted in this report.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership (of which the Company owns 99.88%) and CHP LLC (of which the Company owns 95%). All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying financial information reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year. Operating results for the three and nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  2018.

Recently IssuedAdopted Accounting Pronouncements

TheRestricted Cash

On January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-13. This ASU adds, amends, and supersedes SEC paragraphs of the Accounting Standards Codification (ASC) related to the adoption and transition provisions of ASU No. 2014-09, Revenue From Contracts with Customers and ASU 2016-02, Leases, for public business entities. The ASU is titled ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.

ASU 2017-13 codifies portions of an SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting essentially delaying the effective date of the revenue recognition and leases standards for a subset of public entities. The SEC Observer made the following SEC Staff Announcement, “Transition Related to Accounting Standards Updates No. 2014-09 and 2016-02,” at the July 20, 2017 EITF meeting:

The SEC staff would not object to a public business entity that otherwise would not meet the definition of a public business entity, except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC, adopting: (1) ASC Topic 606, Revenue from Contracts with Customers for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, and (2) ASC Topic 842, Leases for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

A public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC may still elect to adopt ASC Topic 606 and ASC Topic 842 according to the public business entity effective dates.

This announcement is applicable only to public business entities that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC. This announcement is not applicable to other public business entities. As we include our significant tenant’s financials as an exhibit to our Form 10-K report, we will adopt this ASU as it relates to those financial statements.

In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows.

The amendmentsthis ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition ofOur restricted cash orconsists of escrows from our tenants for property taxes, insurance and capital improvements required by and held by our lenders.

The Company’s statements of cash flows for the nine months ended September 30, 2017 has been retroactively restated for the effect of adopting this ASU, adding approximately $3.8 million to the beginning of the period cash, cash equivalents and restricted cash equivalents.and approximately $3.6 million to the end of the period cash, cash equivalents and restricted cash. This reclassification resulted in an increase to cash, cash equivalents and restricted cash provided by operating activities by $108,000 (related to the change in restricted cash held for operating activities) and a decrease to cash, cash equivalents and restricted cash used in investing activities by $339,000 (related to the change in restricted cash held for capital improvements).

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.

Revenue Recognition

On January 1, 2018, the Company adoptedRevenue from Contracts with Customers (Topic 606). Our adoption of this new revenue recognition standard did not have a significant impact on our condensed consolidated financial statements as our rental revenue relates to triple net leases and related tenant reimbursements, which are excluded from this standard. Additionally, interest income from our notes receivable is excluded from this standard.

Acquisition fees arise from contractual agreements with our joint venture partners and are earned and paid at the time we close an acquisition, therefore, satisfying our performance obligations at that time. We earn our asset management fees based on a percentage of the purchase price or equity raised. As the manager, our duty is to manage the day-to-day operations of the special-purpose entities which own the properties. Asset management fees are recognized as a single performance obligation (managing the properties) comprised of a series of distinct services (handling issues with our tenants, etc.). We believe that the overall service of asset management is substantially the same each day and has the same pattern of performance over the term of the agreement. As a result, each day of service represents a performance obligation satisfied at that point in time. These fees are recognized at the end of each period for services performed during that period, billed monthly and paid quarterly.

Revenue recognition for acquisition and asset management fees did not change under the new standard. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied using aCompany elected the modified retrospective transition method, to each period presented. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements; however, once adopted, restricted cash will be presented with cash and cash equivalents in our condensed consolidated statements of cash flows and, at September 30, 2017, that amount was approximately $3.6 million.no adjustments were required.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02,Leases. The new standard (Topic 842) requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a salesales-type if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11,Leases - Targeted Improvements, which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, ASU No. 2018-11 provides lessors with the option to elect a practical expedient allowing them to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the nonlease component and the related lease component and (ii) the lease component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease or service based and recognize the entire contract under the relevant accounting guidance (i.e., predominantly lease-based would be accounted for under ASU 2016-02 and predominantly service-based would be accounted for under the Revenue ASUs). The Company plans to adopt the requirements of ASU 2016-02 effective January 1, 2019, the first day of fiscal year 2019, and will use the cumulative-effect transition method. The Company anticipates taking advantage of the practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases, and lease classifications for existing or expired leases, and initial direct costs for existing leases, and the Company is further evaluating other optional practical expedients. We continue to evaluate the impact of our adoption of this new standard in 2019 and we estimate the effect on our condensed consolidated financial statements could be approximately $0.3 million, as we have an operating lease that will be added to the assets and liabilities of our condensed consolidated balance sheet. As generally accepted accounting principles for lessors remains mostly unchanged, we do not expect it to have an impact on our leases from our tenants.

Reclassifications

Certain amounts related to the assets, liabilities and operations of Friendswood TRS have been reclassified in the Company’s condensed consolidated balance sheets and condensed consolidated statements of operations for prior year due to the classification of Friendswood TRS as held for sale (see Note 12). These reclassifications had no effect on total assets or liabilities or cash flows from operating activities. The FASB has issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted onlyreclassifications as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.and for the three months ended September 30, 2017 increased our loss from continuing operations by $571,000, but did not change our net loss of $(674,000) or our net loss applicable to common stockholders of $(689,000). The reclassifications for the nine months ended September 30, 2017 increased our loss from continuing operations by $1,383,000, but did not change our net loss of $(1,661,000) or our net loss applicable to common stockholders of $(1,701,000).

We have evaluatedSee above under Recently Adopted Accounting Pronouncements for reclassifications due to the impact that our adoption of this new revenue recognition standard in the first quarter of 2018 will have on our rental revenues and we do not expect this to have a significant impact on our condensed consolidated financial statements as our rental revenue relates to triple net leases and related tenant reimbursements, which are excluded from this standard.  Non-lease components will be evaluated under this standard upon adoption of ASU No. 2016-02.  Additionally, we continue to evaluate the impact this standard may have on our interest income revenue and acquisition and asset management fees, which have historically been less than five percent2016-18,Statement of our total revenue.

We continue to evaluate the impact the adoption of this ASU will have on our resident services and fee income. Approximately 80% of this revenue is related to Medicare and Medicaid, for which the recorded revenue is already reduced to the net expected amounts we will be entitled to receive from these parties. Additional estimations using a portfolio approach may be required for certain insurance payors and private payments.

The Company has elected the modified retrospective transition method. Upon adoption of this ASU in 2018, the Company anticipates that additional disclosures will be necessary to separately disclose the components of our total revenue. The Company expects to complete its evaluation of this ASU during the fourth quarter of 2017.

Cash Flows (Topic 230): Restricted Cash.

3. Investments in Real Estate Properties

As of September 30, 20172018 and December 31, 2016,2017, our investments in our 11 real estate properties which includeincluding those acquired through our subsidiaries and CHP, LLC, but excluding the 30 properties ownedheld by our unconsolidated Equity-Method Investments, were as follows:consolidated subsidiaries are set forth below:

For the three months ended September 30, 2018 and 2017, and 2016, depreciation and amortization expense (excluding leasing commission amortization) was approximately $0.8$0.7 million and $0.9$0.8 million, respectively. For the nine months ended September 30, 2018 and 2017, and 2016, depreciation and amortization expense (excluding leasing commission amortization) was approximately $2.2$2.3 million and $2.7$2.2 million, respectively.

As of September 30, 2017,2018, our portfolio consisted of 11 real estate properties which were 100% leased to the tenants of the related facilities. The following table provides summary information regarding our portfolio (excluding the 3036 properties owned by our unconsolidated Equity-Method Investments) as of September 30, 2017:2018:

AL is an abbreviation for assisted living facility.

MC is an abbreviation for memory care facility.

Future Minimum Lease Payments

The future minimum lease payments to be received under existing operating leases for our 11 real estate properties, which include those acquired through our subsidiaries and CHP, LLC, but excluding theowned as of September 30, properties owned by our unconsolidated Equity-Method Investments,2018, for the period from October 1, 20172018 to December 31, 20172018 and for each of the four following years and thereafter ending December 31 are as follows⁽¹⁾:follows:

2018 Acquisitions

Land Purchase – Redding, CA

On March 30, 2018, we purchased the land under the HP Redding facility, Sundial Assisted Living, for $685,000 plus approximately $30,000 in acquisition costs. Additionally, the existing lease agreement for the Sundial Assisted Living tenant was amended to increase the annual rental payment by $36,000.

2017 Acquisition - Chandler, AZ

On July 17, 2017, we acquired a 100% interest in Pennington Gardens, a 90-bed assisted living/memory care facility located in Chandler, Arizona (“Pennington Gardens”), for a purchase price of $13.4 million plus approximately $52,000 in acquisition costs (allocated values were approximately $1.8 million to land, $10.9 million to building and improvements and $750,000 to furniture and fixtures), which was funded through cash on hand plus a collateralized loan (see Note 4). Pennington Gardens is leased pursuant to a 15-year triple net lease with two five-year renewal options.options, and per the lease agreement, we received a letter of credit in lieu of a cash security deposit.

Leasing Commissions

As a self-managed REIT, we no longer pay leasing commissions. Leasing commissions are capitalized at cost and amortized on a straight-line basis over the related lease term. As of September 30, 20172018 and December 31, 2016,2017, total costs incurred were $1.9 million and $1.9 million, respectively, and the unamortized balance of capitalized leasing commissions was approximately $1.3$1.2 million and $1.4$1.3 million, respectively. Amortization expense for the three months ended September 30, 2018 and 2017 and 2016 was $35,000 and $40,000, respectively.approximately $35,000. Amortization expense for the nine months ended September 30, 2018 and 2017 and 2016 was $0.1 million and $0.1 million, respectively.approximately $105,000.

4. Loans Payable

As of September 30, 20172018 and December 31, 2016,2017, our loans payable consisted of the following:

As of September 30, 2017,2018, we have total debt obligations of approximately $62.9$66.4 million that will mature between 20182019 and 2051.2053. See Note 3 for loans payable balance for each property. All of the loans payable have certain financial and non-financial covenants, including ratios and financial statement considerations. As of September 30, 2017,2018, we were in compliance with all of thoseour debt covenants.

In connection with our loans payable, we incurred debt issuance costs. TheAs of September 30, 2018 and December 31, 2017, the unamortized balance of the debt issuance costs was approximately $1.9$2.1 million and $1.8 million, as of September 30, 2017 and December 31, 2016, respectively. These debt issuance costs are being amortized over the life of their respective financing agreements using the straight-line basis which approximates the effective interest rate method. For the three months ended September 30, 2018 and 2017, $63,000 and 2016, $69,000, and $34,000, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations. For the nine months ended September 30, 2018 and 2017, and 2016, $0.1$0.3 million and $0.1 million, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations. See below under Oxford Finance, LLC regarding the additional expense of approximately $79,000 due to the termination of that loan in March 2018 and under Capital One regarding the additional expense of approximately $15,000 due to the termination of that loan in September 2018.

During the three months ended September 30, 20172018 and 2016,2017, we incurred approximately $0.7$0.8 million and $0.7 million, respectively, of interest expense (excluding debt issuance costs amortization) related to our loans payable. During the nine months ended September 30, 20172018 and 2016,2017, we incurred approximately $2.0$2.5 million and $2.2$2.0 million, respectively, of interest expense (excluding debt issuance costs amortization) related to our loans payable.payable (see below under Oxford Finance, LLC regarding the additional expense of $167,000 due to the termination of that loan).

The principal payments due on the loans payable (excluding debt issuance costs) for the period from October 1, 20172018 to December 31, 20172018 and for each of the four following years and thereafter ending December 31 are as follows:

The following information describes our loan activity for the nine months ended September 30, 2017 and as of September 30, 2017 and December 31, 2016:

The following information describes our loan activity:

Capital One, National AssociationCIBC Bank USA

In July 2017, in conjunction with the acquisition of Pennington Gardens (see Note 3), weOn March 30, 2018, CHP Friendswood SNF, LLC entered into a $10.1 million first priority mortgage$10,725,000, three-year term loan and security agreement with CIBC Bank USA, which is collateralized by Pennington Gardens with Capital One, National Association.the Friendship Haven facility. We received approximately $9.0 million on March 30, 2018 and the remaining $1.7 million on April 16, 2018. The loan which bears interest at the One Month LIBOR (London Interbank Offered Rate) plus 2.95%3.75%, and matures on July 17,March 30, 2021. The monthly payments, commencing in May 2018, withconsist of interest plus approximately $18,000 of cash loan guarantee payments, (increasing to $19,000 for year 2 and $20,000 for year 3), which will be held in a cash loan guarantee fund until maturity date. If the option for two six-month extensions.loan is refinanced prior to the maturity date, the loan payments in the cash loan guarantee fund will be released to us; otherwise at the maturity date, the loan payments in the cash loan guarantee fund will be released to the lender and applied to the outstanding principal balance. The loan may be prepaid with no penalty if the property is refinanced through United States Department of Housing and Urban Development (“HUD”); otherwise we will be required to pay an exit fee, as defined ina prepayment premium of 2% of the loan agreement.balance prior to the first anniversary and 1% thereafter through maturity. We incurred approximately $0.2 million in deferred financingdebt issuance costs. See table above listing loans payable for further information.

Capital One

We had a secured term loan agreement with Capital One, National Association collateralized by the Pennington Gardens facility that was terminated on September 27, 2018 as the loan was refinanced with Capital One Multifamily Finance, LLC and insured by HUD (“HUD Pennington Loan”). We expensed the unamortized balance of approximately $15,000 of debt issuance costs related to the original Capital One loan, which is included in interest expense in our condensed consolidated statements of operations.

The HUD Pennington Loan is insured by HUD and collateralized by the Pennington Gardens facility. The loan bears interest at a fixed rate of 4.23%, plus 0.65% for mortgage insurance premiums, for the term of the loan. The loan matures in September 2053 and amortizes over 35 years. We incurred approximately $0.3 million in debt issuance costs. The note contains a prepayment penalty of 10% in year 1, which reduces each year by 100 basis points, until there is no longer a prepayment penalty beginning in year 11. As of September 30, 2018, the outstanding balance of the HUD Pennington Loan was approximately $10.6 million.

See table above listing loans payable for further information.

Healthcare Financial Solutions, LLC (a.k.a. Capital One)

We have an amended loan agreement for the Sundial Assisted Living property located in Redding, California, with Healthcare Financial Solutions, LLC (“HFS”). See table above listing loans payable for further information. The loan was interest-only through January 2017 and then the loan payments increased to approximately $15,000 a month, including interest. The principal payment portion of this loan payment commencing in February 2017, ispayments of approximately $5,000 per month are being held in a sinkingcash collateral fund until maturity date. As of September 30, 2018, the total monthly payment is approximately $18,000, including cash collateral and interest. If the loan is refinanced prior to the maturity date, the loan payments in the sinkingcash collateral fund will be released to us; otherwise at the maturity date, the loan payments in the sinkingcash collateral fund will be released to the lender and applied to the outstanding principal balance. Additionally, the loan is collateralized by the property and cross-guaranteed with several properties owned by the SUL JV, which will be released from the guarantee when the property is refinanced with a HUD-insured loan or upon repayment at the maturity date. We are currently in negotiations to refinance this loan with a HUD-insured loan through Lancaster Pollard and the maturity date has been extended to January 2019.

Oxford Finance, LLC

We have aOn March 30, 2018, we terminated our secured term loan agreement with Oxford Finance, LLC, which was collateralized by the Friendship Haven facility. See table above listing loans payable for further information. PriorAs we prepaid the loan prior to the maturity date of October 2019, we may prepay the loan, in whole, subject to certain terms and by payingpaid an exit fee as further describedof $87,500, a prepayment penalty of approximately $69,000 and $10,000 in other costs. Additionally, we expensed the loan agreement.unamortized balance of approximately $79,000 of debt issuance costs related to this loan. These payments were expensed to interest expense in our condensed consolidated statements of operations in March 2018.

Lancaster Pollard Mortgage Company, LLC

We have several properties with HUD-insured loans from the Lancaster Pollard Mortgage Company, LLC (“Lancaster Pollard”). See table above listing loans payable for further information.

All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our condensed consolidated balance sheets.

5. Equity-Method Investments

As of September 30, 20172018 and December 31, 2016,2017, the balances of our Equity-Method Investments were approximately $8.4$9.9 million and $5.1$9.2 million, respectively, and are as follows:

Summit Union Life Holdings, LLC

In April 2015, we formed the SUL JV, which is owned 10% by the Operating Partnership and 90% by Best Years. The SUL JV will continueexist until an event of dissolution occurs, as defined in the SUL LLC Agreement.

During 2015, we contributed our limited liability company interests in six properties (“JV 2 Properties”) toagreement of the SUL JV and retained a 10% interest in those six properties. Concurrent with this contribution, the Operating Partnership recorded a receivable for approximately $362,000 for distributions that could not be paid prior to the contribution of the JV 2 Properties due to cash restrictions related to the loans payable for the contributed JV 2 Properties. In April 2017, we received approximately $122,000 to pay down the distribution receivable from one of the JV 2 properties. As of September 30, 2017 and December 31, 2016, the receivable of $240,000 and $362,000, respectively, due from the JV 2 properties, is included in tenant and other receivables in our condensed consolidated balance sheets.(the “SUL LLC Agreement”).

Under the SUL LLC Agreement, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Yearspari passu up to a 9% to 10% annual return, as defined, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing or another capital event will be paid first to the Operating Partnership and Best Yearspari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.

In April 2017, one of the JV 2 properties that owed Summit approximately $110,000 in distributions payable was able to repay the funds; however, the cash was retained by the property to fund future capital calls. Through September 2017,30, 2018, we applied approximately $5,000 of this as additional capital. As of September 30, 2018 and December 31, 2017, the remaining balance of $105,000 is included in tenant and other receivables in our condensed consolidated balance sheets.

As of September 30, 2018 and December 31, 2017, the balance of our equity-method investment related to the SUL JV was approximately $3.5 million.million and $3.6 million, respectively.

Summit Fantasia Holdings, LLC

In September 2016, we formed the Fantasia JV, which is owned 20% by the Operating Partnership and 80% by Fantasia. The Fantasia JV will continueexist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia LLC Agreement.Agreement”).

In April 2018, we made an additional capital contribution of $1.25 million to the Fantasia JV. As a result of this capital contribution, as of April 27, 2018, the Operating Partnership has a 35% equity investment and each member will receive a distribution of net operating cash flow and capital proceeds of 50% (instead of 70% for Fantasia and 30% for the Operating Partnership) after the Operating Partnership and Fantasia receive their accrued, but unpaid, returns.

Under the Fantasia LLC Agreement, as amended in April 2018, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70%50% to Fantasia and 30%50% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70%50% to Fantasia and 30%50% to the Operating Partnership.

As of September 30, 2018 and December 31, 2017, the balance of our equity-method investment related to the Fantasia JV was approximately $2.2 million and $1.1 million.million, respectively.

Summit Fantasia Holdings II, LLC

In December 2016, we formed the Fantasia II JV, which is owned 20% by the Operating Partnership and 80% by Fantasia. The Fantasia II JV will continueexist until an event of dissolution occurs, as defined in the Fantasia II LLC Agreement.

On February 28, 2017, through the Fantasia II JV, we acquired a 20% interest in two skilled nursing facilities, located in Rhode Island, for a total aggregate purchase price of $27 million, which was funded through capital contributions from the memberslimited liability company agreement of the Fantasia II JV plus the proceeds from a collateralized loan. The facilities consist of a total of 318 licensed beds, and are operated by and leased to a third party operator. We contributed approximately $1.9 million for the acquisition, which includes approximately $0.2 million of acquisition costs paid in 2016.(the “Fantasia II LLC Agreement”).

Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70% to Fantasia and 30% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia II JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership.

As of September 30, 2018 and December 31, 2017, the balance of our equity-method investment related to the Fantasia II JV was approximately $1.6 million and $1.8 million.million, respectively.

Summit Fantasia Holdings III, LLC

On July 27, 2017, through our Operating Partnership, we entered into aThe Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement (“Fantasia III LLC Agreement”) with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in the Company’s condensed consolidated financial statements.

On August 10, 2017, through the Fantasia III JV, we acquired a 10% interest in nine skilled nursing facilities, located in Connecticut, for a total aggregate purchase price of $60 million for the properties, which was funded through capital contributions from the members of the Fantasia III JV plus the proceeds from a collateralized loan. The facilities consist of a total of 1,285 licensed beds, and will be operated by and leased to a third party operator. We contributed approximately $2.0 million to the Fantasia(the “Fantasia III JV in connection with the acquisition.LLC Agreement”).

Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 75% to Fantasia and 25% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia III JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 75% to Fantasia and 25% to the Operating Partnership.

As of September 30, 2018 and December 31, 2017, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.9 million.$1.7 million and $1.8 million, respectively.

Summit Fantasy Pearl Holdings, LLC

On October 2, 2017, through our Operating Partnership, we entered intoThe FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”).

Under the FPH LLC Agreement, with Fantasia, Atlantis and Fantasy, and formednet operating cash flow of the FPH JV. TheJV will be distributed quarterly, first to the memberspari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, is not consolidated in our consolidated financial statements anda refinancing or another capital event, will be accounted for underpaid to the memberspari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.

As of September 30, 2018 and December 31, 2017, the balance of our equity-method ininvestment related to the Company’s condensed consolidated financial statements. See Note 13 for further information.FPH JV was approximately $0.9 million.

Distributions from Equity-Method Investments

As of September 30, 20172018 and December 31, 2016,2017, we have distributions receivable, which is included in tenant and other receivables in our condensed consolidated balance sheets, as follows:

For the nine months ended September 30, 20172018 and 2016,2017, we have received cash distributions, which are included in our cash flows from operating activities in tenant and other receivables, and cash flows from investing activities, as follows:

Acquisition and Asset Management Fees

We serve as the manager of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an acquisition fee, as defined in the agreements. Additionally, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in the agreements. For the three months ended September 30, 20172018 and 2016,2017, we recorded approximately $0.3$0.2 million and $0.2$0.3 million, respectively, in acquisition and asset management fees from our Equity-Method Investments. For the nine months ended September 30, 20172018 and 2016,2017, we recorded approximately $0.6$0.5 million and $0.3$0.6 million, respectively, in acquisition and asset management fees from our Equity-Method Investments.

6. Receivables

Notes Receivable

Friendswood TRS Note

The Operating Partnership entered into an amended and restated promissory note dated January 1, 2018, with Friendswood TRS for approximately $1.1 million. The note does not bear interest and is due in 48 equal payments of approximately $22,000. We recorded a discount of approximately $95,000 on the note using an imputed interest rate of 4.25%. As of September 30, 2018, the balance on the note was approximately $0.8 million.

Fernhill Note

In September 2014, we loaned approximately $140,000 to the operator of the Fernhill facility for certain property improvements at a fixed rate of interest of 6% payable in monthly installments through January 2019. As of September 30, 20172018 and December 31, 2016,2017, the balance on the note was approximately $47,000$12,000 and $71,000,$38,000, respectively.

Nantucket Note

On January 7,In 2015, through our Operating Partnership, we sold Sherburne Commons to The Residences at Sherburne Commons, Inc. (“Sherburne Buyer”), an unaffiliated Massachusetts non-profit corporation, in exchange for $5.0 million, as evidenced by a purchase money note from Sherburne Buyer to us as the lender.

The $5.0 million purchase money note is collateralized by the Sherburne Commons property, bears an annual interest rate of 3.5% and matures onIn December 31, 2017. Interest payments on the note are due monthly and are recorded as payments are received. Outstanding and unpaid principal due shall be paid from the net proceeds payable to Sherburne Buyer from the sale of the residential cottages in Sherburne Commons. We may also participate in additional interest of up to $1 million from 50% of the net proceeds of cottage sales through December 31, 2018.

As of September 30, 2017, we have not collected any fundsapproximately $0.9 million related to the principal on the note and the net carrying amountin January 2018, we received approximately $4.0 million in full payoff of the note receivable wasand recorded a gain of approximately $4.7$0.2 million.

For the three months ended September 30, 20172018 and 2016,2017, we received interest payments from the note of approximately $43,000$0 and $43,000, respectively, which is recorded as interest income from notes receivable in our condensed consolidated statements of operations. For the nine months ended September 30, 20172018 and 2016,2017, we received interest payments from the note of approximately $129,000$18,000 and $115,000,$129,000, which is recorded as interest income from notes receivable in our condensed consolidated statements of operations.

Tenant and Other Receivables, Net

Tenant and other receivables, net consists of:

7. Related Party Transactions

CRA

Prior to the termination of our advisory agreement on April 1, 2014 with CRA (our former advisor, a related party), we incurred costs related to fees paid and costs reimbursed for services rendered to us by CRA through March 31,September 30, 2014. Some of the fees we had paid to CRA were considered to be in excess of allowed amounts and, therefore, CRA was required to reimburse us for the amount of the excess costs we paid to them. As of September 30, 20172018 and December 31, 2016,2017, the receivables from CRA are fully reserved due to the uncertainty of collectability and are included in tenant and other receivables in our condensed consolidated balance sheets.sheets (see Note 10).

As of September 30, 20172018 and December 31, 2016,2017, we had the following receivables and reserves:

Equity-Method Investments

See Note 5 for further discussion of distributions and acquisition and asset management fees related to our Equity-Method Investments.  

8. Concentration of Risk

Our cash is generally invested in short-term money market instruments. As of September 30, 2017,2018, we had cash and cash equivalent accounts in excess of FDIC-insured limits. However, we do not believe the risk associated with this excess is significant.

As of September 30, 2017,2018, we owned one property in California, three properties in Oregon, four properties in North Carolina, one property in Texas, one property in Illinois, and one property in Arizona (excluding the 3036 properties held by our Equity-Method Investments). Accordingly, there is a geographic concentration of risk subject to economic conditions in certain states.

Additionally, for the three months ended September 30, 2017,2018, we leased our 11 real estate properties to fourfive different tenants under long-term triple net leases, three of which comprise 50%41%, 30%24% and 19%14% of our tenant rental revenue. For the three months ended September 30, 2016, we leased our 11 healthcare properties to five different tenants under long-term triple net leases, two of which comprised 51% and 30% of our tenant rental revenue. For the nine months ended September 30, 2017, we leased our 11 healthcare properties to four different tenants under long-term triple net leases, three of which comprise 55%comprised 50%, 33%30% and 11%19% of our tenant rental revenue.

For the nine months ended September 30, 2016,2018, we leased our 11 healthcare properties to five different tenants under long-term triple net leases, twothree of which comprise 48%41%, 23% and 28%13% of our tenant rental revenue. For the nine months ended September 30, 2017, we leased our 11 healthcare properties to five different tenants under long-term triple net leases, three of which comprise 55%, 33%, and 11% of our tenant rental revenue.

As of September 30, 20172018 and December 31, 2016,2017, we have one tenant that constitutes a significant asset concentration, as the net assets of the tenant are 36%approximately 32% and 38%33%, respectively, of our total assets as of December 31, 2016.assets.

9. Fair Value Measurements of Financial Instruments

Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, notes receivable, deposits, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, accrued salaries and benefits, security deposits and loans payable. With the exception of the Nantucket note receivable (see Note 6) and loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment.

As of September 30, 20172018 and December 31, 2016, the fair value of the Nantucket note receivable (see Note 6) was approximately $4.9 million compared to the carrying value of approximately $4.7 million. The fair value of the note receivable was estimated based on cash flow analysis at an assumed market rate of interest. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our notes receivable are classified as Level 3 assets within the fair value hierarchy.

As of September 30, 2017, and December 31, 2016, the fair value of our loans payable was approximately $63.4$66.8 million and $54.3$63.3 million, respectively, compared to the carrying value of approximately $62.9$66.4 million and $53.5$62.6 million, respectively. The fair value of our loans payable is estimated using lending rates available to us for financial instruments with similar terms and maturities. To estimate fair value as of September 30, 2017,2018, we utilized a discount rate ranging from 4.4% to 7.8%6.3% and a weighted-average discount rate of 4.9%4.7%. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 assets within the fair value hierarchy.

As of September 30, 2018, the fair value of the Friendswood TRS note receivable (see Note 6) was $0.8 million compared to the carrying value of $0.8 million. The fair value of the note receivable was estimated based on cash flow analysis at a weighted-average discount rate of 4.7%. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our notes receivable are classified as Level 3 assets within the fair value hierarchy.

As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances. No impairments were recorded during the nine months ended September 30, 20172018 and 2016.2017. 

At September 30, 20172018 and December 31, 2016,2017, we do not have any financial assets or financial liabilities that are measured at fair value on a recurring basis in our condensed consolidated financial statements.

10. Commitments and Contingencies

We conduct a Phase I assessment for each of our properties at acquisition to evaluate whether hazardous or toxic substances are present on the properties. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company.

Legal Proceedings

On April 1, 2014, CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center, Case No. 30-2014-00714004-CU-BT-CJC, naming the Company, its former directors and two of its officers (one current and one former) as defendants, seeking declaratory and injunctive relief and compensatory and punitive damages. On AprilSeptember 17, 2014, Judge Nakamura denied in its entirety plaintiffs’ ex parte application for a temporary restraining order to show cause why a preliminary injunction against the defendants should not issue.  On May 19, 2014, the Companywe filed a counter claim against plaintiffsFirst Amended Cross-Complaint seeking compensatory damages and certain individuals affiliated with CRAan accounting pursuant to Sections 10(c)(i) and affiliated entities. The Company continues17(c)(ii) of the Advisory Agreement and including any monies Plaintiffs and Terry Roussel directly or indirectly received from or paid to the Company. At this time, no trial date has been scheduled. A status conference is currently scheduled for November 30, 2018. We continue to believe that all of plaintiffs’ claims are without merit and will continue to vigorously defend itself. .. We filed motions for summary adjudication on plaintiffs’ claims and on our cross claims. The court heard oral argument on the motions for summary adjudication and granted the motions in part and denied the motions part. A trial is scheduled to commence on March 26, 2018.ourselves.

AAn involuntary bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC orand Healthcare Real Estate Qualified Purchasers Fund, LLC.LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. At a status hearing, the Bankruptcy Court expressed concern about HCRE commencing this litigation and urged the parties to mediate the issues. A mediation was held but the parties did not reach a settlement. The Bankruptcy Court recently granted a motion to dismiss the complaint for violation of the automatic stay (the “Complaint”) filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware. The District Court affirmed the Bankruptcy Court’s decision dismissing the Complaint. HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s order dismissing the Complaint to the United States Court of Appeals for the Third Circuit, where the matter awaits a briefing schedule and ruling. The Bankruptcy Court has stayed all litigation on HCRE’s motion for damages pending resolution of all appeals relative to the dismissal of the Complaint. We believe that all of HCRE’s remaining alleged claims are without merit and will vigorously defend ourselves.

UnderDelbert Freeman and his company, Freescan Ventures, Inc. (collectively, “Freeman”), filed an action against us and Mr. Eikanas, our three-year managementPresident, on December 21, 2017 for breach of contract arising out of the sale of the Athens project in Georgia. We originally guaranteed a lease for the development of the Athens project, which was ultimately sold to a third party in June of 2016, thereby releasing us from our obligation. Freeman sued for breach of contract based on an allegation that he was not paid profits he was promised from the proceeds of the project. Freeman is also alleging that he was promised consulting fees of $270,000 from us arising out of an alleged agreement with HMG (see Note 3), dated January 1, 2017, either party may terminate the agreement by written notice to the other party. However, if we terminate the agreement within one year, we are obligated to pay a termination fee up to three times the highest monthly management fee paid to HMG prior to the termination. For 2017, if we terminated the agreement, we expect the termination fee could be approximately $130,000.consulting fees of $10,000 per month. A trial date has been set for June 30, 2019. We believe that his claims are without merit and are vigorously defending them. 

Indemnification and Employment Agreements

We have entered into indemnification agreements with certain of our executive officers and directors which indemnify them against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding. Additionally, in September 2015,effective October 1, 2018, we entered into three-yearamended our employment agreements with our executive officers whichto extend the term of each agreement for an additional three years. These employment agreements include customary terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a cash payment following a change in control of the Company, as defined in such agreements.

Management of our Equity-Method Investments

As the manager of our Equity-Method Investments, we are responsible for managing the day-to-day operations and are, thus, subject to contingencies that may arise in the normal course of their operations. Additionally, we could be subject to a capital call from our Equity-Method Investments.

11. Equity

Upon the grant of stock options, we determine the exercise price by using our estimated per-share value, which is calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the estimated fair value of our liabilities, which approximate book value, utilizing a discount for the fact that the shares are not currently traded on a national securities exchange and a control premium, and divided by the total by the number of our common shares outstanding at the time the options were granted.

The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions required by the model include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The expected life of the options was based on evaluations of expected future exercise behavior. The risk-free interest rate was based on the U.S. Treasury yield curve at the date of grant with maturity dates approximating the expected term of the options at the date of grant. Volatility was based on historical volatility of the stock prices for a sample of publicly traded companies with risk profiles similar to ours. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option.

On January 1, 2017,2018, the Compensation Committee of the Board of Directors approved the issuance of 99,00041,500 stock options under our Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”) to our directors andnon-executive employees. The stock options vest monthly beginning on February 1, 20172018 and continuing over a three-year period through January 1, 2020.2021. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.35.$0.40.

In March 2017, 182,796 stock options were issued under our Incentive Plan to executive management as part of their 2016 performance bonus arrangement. The options vested 33% on the grant date and the remaining 67% will vest in equal monthly installments beginning January 1, 2017 and continuing over a two-year period through December 31, 2018. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.29.

On April 3, 2017,1, 2018, the Compensation Committee of the Board of Directors approved the issuance of 170,000200,000 stock options under our Incentive Plan to executive management related to their performance goals for 2016.2017. The stock options were granted under the Incentive Plan, with 33% vesting on the grant date and the remaining 67% vesting in equal monthly installments beginning May 1, 20172018 and continuing over a two-year period through April 2019.May 1, 2020. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.30.$0.32.

On April 1, 2018, the Compensation Committee of the Board of Directors approved the issuance of 100,000 stock options under our Incentive Plan to our directors. The stock options vest monthly beginning on May 1, 2018 and continuing over a three-year period through May 1, 2021. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.42.

The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:

The following table summarizes our stock options as of September 30, 2017:2018:

For our outstanding non-vested options as of September 30, 2017,2018, the weighted average grant date fair value per share was $0.29.$0.35. As of September 30, 2017,2018, we have unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures, which is expected to be recognized as follows:

The stock-based compensation expense reported for the three months ended September 30, 20172018 and 20162017 was approximately $18,000$23,000 and $7,000,$18,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations. The stock-based compensation expense reported for the nine months ended September 30, 20172018 and 20162017 was approximately $83,000$78,000 and $22,000,$83,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations.

12. Dispositions

In accordance with ASC 360, Property, Plant & Equipment, we report results of operations from real estate assets that meet the definition of a component of an entity that have been sold, or meet the criteria to be classified as held for sale, as discontinued operations.

Disposal of Real EstateFriendswood TRS

On April 29, 2016,Effective January 1, 2018, we contributed Riverglenassigned our interest in Friendswood TRS, the licensed operator and tenant of Friendship Haven, to HMG, the SUL JV (see Note 5) and, therefore, Riverglen is no longer consolidated in our condensed consolidated financial statements. The aggregate net valuemanagement company of Riverglen at the date of the contribution was approximately $3.9 million, which approximated the Operating Partnership’s carrying value on the date of contribution (total assets were approximately $9.2 million less liabilities of approximately $5.3 million, which included approximately $4.7 million in a HUD insured loan payable).Friendship Haven.

Medford Purchase Option and Sale

In September 2016, the option holder for our Medford property provided notice to us to exercise its option to purchase the property. On October 31, 2016, we sold the Medford property. The total sale price was $10.8 million, of which we received approximately $3.8 million in cash. The aggregate carrying value of Medford at the date of the sale was approximately $1.3 million, (total assets were approximately $8.0 million less liabilities of approximately $6.7 million, which included approximately $6.7 million in a HUD-insured loan payable). As a result of the sale,Therefore, as of NovemberJanuary 1, 2016, Medford2018, Friendswood TRS is no longer consolidated in our consolidated financial statements. Additionally, in October 2016, we recordedThe consolidated statement of operations for the three months ended September 30, 2017 has been restated to present the operations of Friendswood TRS as a net gain of approximately $2.8 million related to the sale.discontinued operation.

13. Subsequent Event

Summit Fantasy Pearl Holdings, LLC

On October 2, 2017, through our Operating Partnership,We made the decision to dispose of Friendswood TRS primarily because we entered intoare not in the FPH LLC Agreement with Fantasia, Atlantis,business of operating facilities; we are in the business of acquiring senior housing facilities and Fantasyleasing them to independent third party operators under triple-net leases. Friendswood TRS recorded the operations of Friendship Haven as resident services and formed the FPH JV. The FPH JV is notfee income and resident services costs in their financial statements, which were then consolidated in our consolidated balance sheets and consolidated statements of operations and cash flows. The disposition represented a strategic shift to divest ourselves of being a tenant and licensed operator of our facilities, and had a material effect on the Company’s operations and financial statementsresults as we will no longer record resident services and will be accounted forfee income and resident services costs.

Prior to January 1, 2018, HMG provided management services to Friendship Haven pursuant to a management agreement with Friendswood TRS. We do not have any continuing obligations under the equity-methodmanagement agreement as of January 1, 2018.

Effective January 1, 2018, the new owners of Friendswood TRS entered into an Amended and Restated 10-year triple-net lease with two five-year renewal options, with CHP Friendswood SNF, LLC, our majority-owned consolidated subsidiary. Additionally, the Operating Partnership entered into an amended and restated promissory note with Friendswood TRS for approximately $1.1 million. The note does not bear interest and is due in 48 equal payments of approximately $22,000. We recorded a discount of approximately $95,000 on the note using an imputed interest rate of 4.25%.

The income from discontinued operations presented in the Company’s condensed consolidated financial statements.statements of operations related to Friendswood TRS consisted of the following for the three and nine months ended September 30, 2017:

In November 2017, through the FPH JV, we acquired a 10% interest in six skilled nursing facilities, located in Iowa, for a total aggregate purchase price of $29.5 million for the properties, which was funded through capital contributions from the members of the FPH JV plus the proceeds from a collateralized loan. The facilities consist of a total of 551 licensed beds, and will be operated by and leased to a third party operator.

Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed quarterly, first to the memberspari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, a refinancing or another capital event, will be paid to the memberspari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.

We serve as the manager of the FPH JV and provide management services in exchange for fees and reimbursements. Under the FPH LLC Agreement, as the manager, we are paid an acquisition fee upon closing of an acquisition, as defined in the agreement, based on the purchase price paid for the properties. Additionally, we are paid on a quarterly basis an annual asset management fee equal to 0.75% of the initial capital contribution of the members.

We contributed approximately $1.0 million for the acquisition.

The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of Friendswood TRS held for sale” and “Liabilities of Friendswood TRS held for sale,” respectively, in the accompanying condensed consolidated balance sheets at December 31, 2017 and consist of the following:

For the nine months ended September 30, 2017, total cash flows of the discontinued operations provided by operating activities was $758,000 and cash flows used in investing activities was $163,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to numerous risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162017 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2017.16, 2018.

Overview

As of September 30, 2017,2018, our ownership interests in our 11 real estate properties of senior housing facilities was as follows: 100% ownership of six properties, five properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC, of which we have a 95.3% interest in four properties and a 95% interest in the fifth property. Additionally, we have a 10% interest in an unconsolidated equity-method investment that owns 17 properties, a 35% interest in an unconsolidated equity-method investments that owns two properties, a 20% interest in an unconsolidated equity-method investments that owns two properties, and a 10% interest in two unconsolidated equity-method investments that each own twohold nine properties and a 10% interest in an unconsolidated equity-method investment that holds ninesix properties, respectively, (collectively, our “Equity-Method Investments”). As used in this report, the “Company,” “we,” “us” and “our” refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.

Our revenues are comprised largely of tenant rental income from our 11 real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, and acquisition and asset management fees resulting from our Equity-Method Investments, and fees earned for resident care from Friendship Haven (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements).Investments. We also receive cash distributions from our Equity-Method Investments, which are included in net cash provided by operating activities and net cash provided by investing activities in our condensed consolidated statements of cash flows. Our growth depends, in part, on our ability to continue to raise joint venture equity, acquire new healthcare properties at attractive prices, negotiate long-term tenant leases with favorablesustainable rental rate escalation terms and control our expenses. Our operations are impacted by property-specific, market-specific, general economic, regulatory and other conditions.

We believe that continued investing in senior housing facilities is accretive to earnings and stockholder value. Senior housing facilities include independent living facilities (“IL”), skilled-nursingskilled nursing facilities (“SNF”), assisted living facilities (“AL”), memory care facilities (“MC”) and continuing care retirement communities (“CCRC”). Each of these types of facilities caters tofocuses on different segments of the senior population.

Summit Portfolio Properties

At September 30, 2017,2018, our portfolio consisted of 11 real estate properties as noted above. All of the properties are 100% leased on a triple net basis. The following table provides summary information (excluding the 3036 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of September 30, 2017:2018: