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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20202021
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: 000-55776001-40814
RW HOLDINGS NNN REIT,MODIV INC.
(Exact name of registrant as specified in its charter)
Maryland47-4156046
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer Identification No.)
120 Newport Center Drive, Newport Beach, CA92660
(Address of principal executive offices)(Zip Code)
(855) 742-4862(888) 686-6348
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act.Act:
Title of each classEach ClassTrading symbols(s)Symbol(s)Name of each exchangeEach Exchange on which registeredWhich Registered
None7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value per shareNoneMDVANoneNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 ☐

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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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2020,2021, there were 23,890,7197,394,256 shares of Class C common stock outstanding and 188,06363,618 shares of Class S common stock outstanding.

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RW HOLDINGS NNN REIT, INC.Modiv Inc.
FORM 10-Q
INDEX
54
54
54
65
76
87
98
109
4942
6862
6862
6963
6963
6963
7063
7365
7567
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains 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”), and we intend that such forward-looking statements be subject to the safe harbor provisions created thereby. For this purpose, any statements made in this Quarterly Report on Form 10-Q that are not historical or current facts may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “anticipates,” “believes,” “seeks,” “estimates,” “expects,” “intends,” “continue,” “can,” “may,” “plans,” “potential,” “projects,” “should,” “could,” “will,” “would” or similar expressions and the negatives of those expressions are intended to identify forward-looking statements. Such statements include, but are not limited to, any statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods.
The forward-looking statements included herein represent our management’s current expectations and assumptions based on information available as of the date of this report. These statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time-to-time with the Securities and Exchange Commission (the “SEC”). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information, which speak only as of the date of this report.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time-to-time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from our forward-looking statements:
•We are subject to risks associated with deteriorating economic conditions resulting fromThe magnitude and duration of the novel coronavirus (“COVID-19”) pandemic and related disruptions inincluding the financial markets.
•The magnitude and durationrecent spread of the COVID-19 pandemicDelta variant and its impact on our tenants, operations and liquidity is uncertain as of the filing date of this Quarterly Report on Form 10-Q and may continue to have an adverse impact on our business and results of operations.
•We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
•We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
•Our properties, intangible assets and other assets may be subject to further impairment charges.
•We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties, and we may be unable to acquire or dispose of, or lease, our properties on advantageous terms.
•We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
•We have substantial indebtedness, and may incur additional secured or unsecured debt, which may affect our ability to pay distributions, expose us to interest rate fluctuation risk, impose limitations on how we operate and expose us to the risk of default under our debt obligations.
•We may not be able to extend or refinance existing indebtedness before it becomes due.
•We may not be able to attain or maintain profitability.
•The only sources of cash for distributions to investors will be cash flow from our operations (including sales of properties) or any net proceeds that result from financing or refinancing our properties or, in limited circumstances, proceeds from our offering.properties.
•We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
•We may be affected by risks resulting from losses in excess of insured limits.
•We may fail to qualify as a REITreal estate investment trust (“REIT”) for U.S. federal income tax purposes.
•Risks of security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology networks and related systems, could adversely affect our business and results of operations.
•The trading price of our 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value per share (“Series A Preferred Stock”), may fluctuate significantly.
•Adverse macroeconomic conditions, including inflation, may affect (i) existing or prospective lessees' businesses and their demand for space, and (ii) conditions in the real estate and mortgage markets, and could result in declines in our income and asset values.
Our forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in light of the risk factors identified above and the additional risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.
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PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
RW HOLDINGS NNN REIT, INC.Modiv Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30,
2020		December 31, 2019September 30,
2021		December 31, 2020
AssetsAssetsAssets
Real estate investments:Real estate investments:Real estate investments:
LandLand$74,082,722 $86,775,988 Land$67,340,810 $65,358,321 
Buildings and improvementsBuildings and improvements276,926,627 309,904,890 Buildings and improvements280,284,086 272,397,472 
Tenant origination and absorption costsTenant origination and absorption costs24,274,555 27,266,610 Tenant origination and absorption costs23,784,332 23,792,057 
Total investments in real estate propertyTotal investments in real estate property375,283,904 423,947,488 Total investments in real estate property371,409,228 361,547,850 
Accumulated depreciation and amortizationAccumulated depreciation and amortization(28,856,496)(20,411,794)Accumulated depreciation and amortization(41,720,011)(32,091,211)
Total investments in real estate property, net (Note 4)346,427,408 403,535,694 
Investment in unconsolidated entity (Note 5)10,085,476 10,388,588 
Total investments in real estate property, netTotal investments in real estate property, net329,689,217 329,456,639 
Investment in unconsolidated entityInvestment in unconsolidated entity9,977,144 10,002,368 
Total real estate investments, netTotal real estate investments, net356,512,884 413,924,282 Total real estate investments, net339,666,361 339,459,007 
Real estate investments held for sale, net (Note 4)23,033,118 0 
Real estate investments held for sale, netReal estate investments held for sale, net— 24,585,739 
Total real estate investmentsTotal real estate investments379,546,002 413,924,282 Total real estate investments339,666,361 364,044,746 
Cash and cash equivalentsCash and cash equivalents8,745,052 6,823,568 Cash and cash equivalents52,299,936 8,248,412 
Restricted cashRestricted cash265,654 113,362 Restricted cash2,410,951 129,118 
Tenant receivables, net (Note 6)6,958,611 6,224,764 
Receivable from early termination of lease and sale of real estate property, respectivelyReceivable from early termination of lease and sale of real estate property, respectively1,966,767 1,824,383 
Tenant receivablesTenant receivables7,346,948 6,665,790 
Above-market lease intangibles, netAbove-market lease intangibles, net910,501 1,251,734 Above-market lease intangibles, net723,475 820,842 
Due from affiliates (Note 9)0 2,332 
Prepaid expenses and other assetsPrepaid expenses and other assets2,317,708 1,867,777 Prepaid expenses and other assets4,779,024 2,171,717 
Interest rate swap derivatives0 34,567 
Assets related to real estate investments held for sale864,008 0 
Operating lease right-of-use asset0 2,386,877 
Other assets related to real estate investments held for saleOther assets related to real estate investments held for sale— 1,079,361 
Goodwill, netGoodwill, net17,320,857 50,588,000 Goodwill, net17,320,857 17,320,857 
Intangible assets, netIntangible assets, net5,587,932 7,700,000 Intangible assets, net3,926,009 5,127,788 
Total assetsTotal assets$422,516,325 $490,917,263 Total assets$430,440,328 $407,433,014 
Liabilities and EquityLiabilities and EquityLiabilities and Equity
Mortgage notes payable, net (Note 7)$179,001,117 $194,039,207 
Mortgage notes payable, netMortgage notes payable, net$180,914,339 $175,925,918 
Mortgage notes payable related to real estate investments held for sale, netMortgage notes payable related to real estate investments held for sale, net14,671,370 0 Mortgage notes payable related to real estate investments held for sale, net— 9,088,438 
Total mortgage notes payable, netTotal mortgage notes payable, net193,672,487 194,039,207 Total mortgage notes payable, net180,914,339 185,014,356 
Unsecured credit facility, net5,967,729 7,649,861 
Short-term notes payable0 4,800,000 
Economic relief notes payable527,000 0 
Accounts payable, accrued and other liabilities (Note 6)7,944,998 11,555,161 
Credit facility, netCredit facility, net— 5,978,276 
Economic relief note payableEconomic relief note payable— 517,000 
Accounts payable, accrued and other liabilitiesAccounts payable, accrued and other liabilities9,913,473 7,579,624 
Share repurchases payableShare repurchases payable1,393,275 0 Share repurchases payable1,348,911 2,980,559 
Below-market lease intangibles, netBelow-market lease intangibles, net13,274,833 14,591,359 Below-market lease intangibles, net11,466,014 12,565,737 
Due to affiliates (Note 9)0 630,820 
Interest rate swap derivatives (Note 8)2,006,997 1,021,724 
Liabilities related to real estate investments held for sale3,934,795 0 
Operating lease liability0 2,386,877 
Interest rate swap derivativesInterest rate swap derivatives1,073,998 1,743,889 
Other liabilities related to real estate investments held for saleOther liabilities related to real estate investments held for sale— 801,337 
Total liabilitiesTotal liabilities228,722,114 236,675,009 Total liabilities204,716,735 217,180,778 
Commitments and contingencies (Note 10)
Commitments and contingencies (Note 11)Commitments and contingencies (Note 11)00
Redeemable common stockRedeemable common stock8,282,554 14,069,692 Redeemable common stock750,000 7,365,568 
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding0 0 
Class C common stock $0.001 par value, 300,000,000 shares authorized, 24,008,115 and 23,647,466 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively24,008 23,647 
Class S common stock $0.001 par value, 100,000,000 shares authorized, 188,425 and 186,606 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively188 187 
7.375% Series A cumulative redeemable perpetual preferred stock, $0.001 par value, 2,000,000 and no shares authorized, 2,000,000 and no shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively (Note 9)7.375% Series A cumulative redeemable perpetual preferred stock, $0.001 par value, 2,000,000 and no shares authorized, 2,000,000 and no shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively (Note 9)2,000 — 
Class C common stock $0.001 par value, 300,000,000 shares authorized, 7,409,929 and 7,874,541 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectivelyClass C common stock $0.001 par value, 300,000,000 shares authorized, 7,409,929 and 7,874,541 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively7,410 7,874 
Class S common stock $0.001 par value, 100,000,000 shares authorized, 63,548 and 62,860 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectivelyClass S common stock $0.001 par value, 100,000,000 shares authorized, 63,548 and 62,860 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively64 63 
Additional paid-in-capitalAdditional paid-in-capital227,745,917 220,714,676 Additional paid-in-capital270,724,156 224,288,417 
Cumulative distributions and net lossesCumulative distributions and net losses(92,861,456)(31,168,948)Cumulative distributions and net losses(96,363,037)(92,012,686)
Total shareholders' equity134,908,657 189,569,562 
Total Modiv Inc. equityTotal Modiv Inc. equity174,370,593 132,283,668 
Noncontrolling interests in the Operating PartnershipNoncontrolling interests in the Operating Partnership50,603,000 50,603,000 Noncontrolling interests in the Operating Partnership50,603,000 50,603,000 
Total equityTotal equity185,511,657 240,172,562 Total equity224,973,593 182,886,668 
Total liabilities and equityTotal liabilities and equity$422,516,325 $490,917,263 Total liabilities and equity$430,440,328 $407,433,014 
See accompanying notes to condensed consolidated financial statements.
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RW HOLDINGS NNN REIT, INC.Modiv Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Rental income:$9,557,191 $6,125,957 $29,888,620 $17,907,668 
Expenses:
Fees to affiliates (Note 9)0 812,349 0 2,436,386 
General and administrative2,522,719 918,636 7,447,082 2,312,081 
Depreciation and amortization4,304,470 2,393,725 13,420,256 7,176,716 
Interest expense2,732,528 1,738,791 9,196,061 5,975,866 
Property expenses1,677,055 1,362,661 5,480,411 3,537,249 
Impairment of real estate investment properties (Note 4)0 0 9,506,525 0 
Impairment of goodwill and intangible assets (Note 3)0 0 34,572,403 0 
Reserve for (reversal of) loan guarantee (Note 6)(4,359)0 3,120,678 0 
Total expenses11,232,413 7,226,162 82,743,416 21,438,298 
Less: Expenses reimbursed by Former Sponsor (Note 9)0 (96,104)0 (332,336)
Expenses, net11,232,413 7,130,058 82,743,416 21,105,962 
Other operating income:
Gain on sale of real estate investments (Note 4)1,693,642 0 1,693,642 0 
Real estate operating income (loss)18,420 (1,004,101)(51,161,154)(3,198,294)
Other (expense) income:
Lease termination expense (Note 10)(1,175,192)0 (1,175,192)0 
Interest income51 45,940 4,873 56,971 
Income from investments in unconsolidated entities, net92,617 37,570 239,028 167,558 
Other0 0 (4,855)0 
Total other (expense) income, net(1,082,524)83,510 (936,146)224,529 
Net loss$(1,064,104)$(920,591)$(52,097,300)$(2,973,765)
Net loss per share, basic and diluted (Note 2)$(0.04)$(0.06)$(2.17)$(0.20)
Weighted-average number of common shares outstanding, basic and diluted24,225,210 15,809,624 24,059,227 14,754,347 
Distributions declared per common share$0.136 $0.176 $0.311 $0.528 
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Rental income$10,307,683 $9,557,191 $28,521,546 $29,888,620 
Expenses:
General and administrative3,674,187 2,522,719 9,832,940 7,447,082 
Depreciation and amortization3,814,503 4,304,470 11,817,529 13,420,256 
Interest expense1,831,545 2,732,528 5,711,330 9,196,061 
Property expenses1,658,437 1,677,055 5,111,270 5,480,411 
Impairment of real estate investment properties— — (400,999)9,506,525 
Impairment of goodwill and intangible assets— — — 34,572,403 
Reserve for loan guarantee— (4,359)— 3,120,678 
Total expenses10,978,672 11,232,413 32,072,070 82,743,416 
Other operating income:
Gain on sale of real estate investments4,242,771 1,693,642 4,532,413 1,693,642 
Real estate operating income (loss)3,571,782 18,420 981,889 (51,161,154)
Other income (loss):
Lease termination expense— (1,175,192)— (1,175,192)
Interest income1,270 51 1,370 4,873 
Income from investment in unconsolidated entity75,403 92,617 222,705 239,028 
Gain on forgiveness of economic relief note payable— — 517,000 — 
Other— — 20,000 (4,855)
Total other income (loss)76,673 (1,082,524)761,075 (936,146)
Net income (loss)3,648,455 (1,064,104)1,742,964 (52,097,300)
Preferred stock dividends(143,403)— (143,403)— 
Net income (loss) attributable to common stockholders$3,505,052 $(1,064,104)$1,599,561 $(52,097,300)
Net income (loss) per share attributable to common stockholders (Note 2)
Basic$0.47 $(0.13)$0.21 $(6.50)
Diluted$0.40 $(0.13)$0.18 $(6.50)
Weighted-average number of common shares outstanding
Basic7,531,559 8,075,070 7,575,013 8,019,742 
Diluted8,750,875 8,075,070 8,763,112 8,019,742 
Distributions declared per common share$0.2625 $0.4080 $0.7875 $0.9330 
See accompanying notes to condensed consolidated financial statements.
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RW HOLDINGS NNN REIT, INC.Modiv Inc.
Condensed Consolidated Statements of Equity
Three Months Ended September 30, 20202021 and 20192020
(Unaudited)
Common StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass S
SharesAmountsSharesAmounts
Balance, June 30, 202024,137,134 $24,137 187,649 $188 $228,696,741 $(89,661,537)$139,059,529 $50,603,000 $189,662,529 
Issuance of common stock299,431 300 776 — 2,101,388 — 2,101,688 — 2,101,688 
Stock compensation expense26,250 26 — — 183,724 — 183,750 — 183,750 
Class P OP Units compensation expense— — — — 88,784 — 88,784 — 88,784 
Offering costs— — — — (158,826)— (158,826)— (158,826)
Repurchase of common stock(454,700)(455)— — (3,165,894)— (3,166,349)— (3,166,349)
Distributions declared— — — — — (2,135,815)(2,135,815)— (2,135,815)
Net loss— — — — — (1,064,104)(1,064,104)— (1,064,104)
Balance, September 30, 202024,008,115 $24,008 188,425 $188 $227,745,917 $(92,861,456)$134,908,657 $50,603,000 $185,511,657 
Preferred StockCommon StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass S
SharesAmountsSharesAmountsSharesAmounts
Balance, June 30, 2021— $— 7,490,414 $7,490 63,331 $63 $215,317,098 $(97,886,364)$117,438,287 $50,603,000 $168,041,287 
Issuance of common stock— — 67,904 68 217 1 1,749,795 — 1,749,864 — 1,749,864 
Issuance of preferred stock, net2,000,000 2,000 — — — — 47,568,374 — 47,570,374 — 47,570,374 
Stock compensation expense— — 3,647 4 — — 94,996 — 95,000 — 95,000 
Class OP Units compensation expense— — — — — — 648,609 — 648,609 — 648,609 
Offering costs— — — — — — (136,282)— (136,282)— (136,282)
Reclassification to redeemable common stock— — — — — — 9,316,023 — 9,316,023 — 9,316,023 
Repurchase of common stock— — (152,036)(152)— — (3,834,457)— (3,834,609)— (3,834,609)
Distributions declared, common stock— — — — — — — (1,981,725)(1,981,725)— (1,981,725)
Net income attributable to common stockholders— — — — — — — 3,505,052 3,505,052 — 3,505,052 
Balance, September 30, 20212,000,000 $2,000 7,409,929 $7,410 63,548 $64 $270,724,156 $(96,363,037)$174,370,593 $50,603,000 $224,973,593 
Common StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass S
SharesAmountsSharesAmounts
Balance, June 30, 201915,313,171 $15,313 166,448 $166 $144,011,702 $(23,214,573)$120,812,608 $0 $120,812,608 
Issuance of common stock988,121 988 19,812 20 10,238,741 — 10,239,749 — 10,239,749 
Stock compensation expense10,334 10 — — 104,990 — 105,000 — 105,000 
Offering costs— — — — (307,068)— (307,068)— (307,068)
Reclassification to redeemable common stock— — — — 2,823,079 — 2,823,079 — 2,823,079 
Repurchase of common stock(394,954)(395)— — (3,935,287)— (3,935,682)— (3,935,682)
Distributions declared— — — — — (2,784,235)(2,784,235)— (2,784,235)
Net loss— — — — — (920,591)(920,591)— (920,591)
Balance, September 30, 201915,916,672 $15,916 186,260 $186 $152,936,157 $(26,919,399)$126,032,860 $0 $126,032,860 
Preferred StockCommon StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass S
SharesAmountsSharesAmountsSharesAmounts
Balance, June 30, 2020— $— 8,045,711 $8,046 62,550 $63 $228,712,957 $(89,661,537)$139,059,529 $50,603,000 $189,662,529 
Issuance of common stock— — 99,810 100 259 — 2,101,588 — 2,101,688 — 2,101,688 
Stock compensation expense— — 8,750 9 — — 183,741 — 183,750 — 183,750 
Class OP Units compensation expense— — — — — — 88,784 — 88,784 — 88,784 
Offering costs— — — — — — (158,826)— (158,826)— (158,826)
Repurchase of common stock— — (151,567)(152)— — (3,166,197)— (3,166,349)— (3,166,349)
Distributions declared, common stock— — — — — — — (2,135,815)(2,135,815)— (2,135,815)
Net loss attributable to common stockholders— — — — — — — (1,064,104)(1,064,104)— (1,064,104)
Balance, September 30, 2020— $— 8,002,705 $8,003 62,808 $63 $227,762,047 $(92,861,456)$134,908,657 $50,603,000 $185,511,657 
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
RW HOLDINGS NNN REIT, INC.Modiv Inc.
Condensed Consolidated Statements of Equity
Nine Months Ended September 30, 20202021 and 20192020
(Unaudited)
Common StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity		Preferred StockCommon StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass SClass CClass S
SharesAmountsSharesAmountsSharesAmountsSharesAmountsSharesAmounts
Balance, December 31, 201923,647,466 $23,647 186,606 $187 $220,714,676 $(31,168,948)$189,569,562 $50,603,000 $240,172,562 
Balance, December 31, 2020Balance, December 31, 2020— $— 7,874,541 $7,874 62,860 $63 $224,288,417 $(92,012,686)$132,283,668 $50,603,000 $182,886,668 
Issuance of common stockIssuance of common stock1,757,559 1,758 3,755 3 16,192,166 — 16,193,927 — 16,193,927 Issuance of common stock— — 271,061 271 688 1 6,311,203 — 6,311,475 — 6,311,475 
Issuance of preferred stock, netIssuance of preferred stock, net2,000,000 2,000 — — — — 47,568,374 — 47,570,374 — 47,570,374 
Stock compensation expenseStock compensation expense38,931 39 — — 313,295 — 313,334 — 313,334 Stock compensation expense— — 12,168 13 — — 296,237 — 296,250 — 296,250 
Class P OP Units compensation expense— — — — 266,350 — 266,350 — 266,350 
Class OP Units compensation expenseClass OP Units compensation expense— — — — — — 1,840,341 — 1,840,341 — 1,840,341 
Offering costsOffering costs— — — — (981,748)— (981,748)— (981,748)Offering costs— — — — — — (946,914)— (946,914)— (946,914)
Reclassification to redeemable common stockReclassification to redeemable common stock— — — — 4,393,863 — 4,393,863 — 4,393,863 Reclassification to redeemable common stock— — — — — — 8,247,216 — 8,247,216 — 8,247,216 
Repurchase of common stockRepurchase of common stock(1,435,841)(1,436)(1,936)(2)(13,152,685)— (13,154,123)— (13,154,123)Repurchase of common stock— — (747,841)(748)— — (16,880,718)— (16,881,466)— (16,881,466)
Distributions declared— — — — — (9,595,208)(9,595,208)— (9,595,208)
Net loss— — — — — (52,097,300)(52,097,300)— (52,097,300)
Balance, September 30, 202024,008,115 $24,008 188,425 $188 $227,745,917 $(92,861,456)$134,908,657 $50,603,000 $185,511,657 
Distributions declared, common stockDistributions declared, common stock— — — — — — — (5,949,912)(5,949,912)— (5,949,912)
Net income attributable to common stockholdersNet income attributable to common stockholders— — — — — — — 1,599,561 1,599,561 — 1,599,561 
Balance, September 30, 2021Balance, September 30, 20212,000,000 $2,000 7,409,929 $7,410 63,548 $64 $270,724,156 $(96,363,037)$174,370,593 $50,603,000 $224,973,593 
Common StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity		Preferred StockCommon StockAdditional
Paid-in
Capital		Cumulative
Distributions
and Net
Losses		Total
Stockholders'
Equity		Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass SClass CClass S
SharesAmountsSharesAmountsSharesAmountsSharesAmountsSharesAmounts
Balance, December 31, 201812,943,294 $12,943 17,594 $18 $119,247,245 $(16,167,437)$103,092,769 $0 $103,092,769 
Balance, December 31, 2019Balance, December 31, 2019— $— 7,882,489 $7,882 62,202 $62 $220,730,566 $(31,168,948)$189,569,562 $50,603,000 $240,172,562 
Issuance of common stockIssuance of common stock3,795,112 3,795 168,666 168 40,241,277 — 40,245,240 — 40,245,240 Issuance of common stock— — 585,853 586 1,252 1 16,193,340 — 16,193,927 — 16,193,927 
Stock compensation expenseStock compensation expense20,669 21 — — 209,979 — 210,000 — 210,000 Stock compensation expense— — 12,977 13 — — 313,321 — 313,334 — 313,334 
Class OP Units compensation expenseClass OP Units compensation expense— — — — — — 266,350 — 266,350 — 266,350 
Offering costsOffering costs— — — — (1,206,930)— (1,206,930)— (1,206,930)Offering costs— — — — — — (981,748)— (981,748)— (981,748)
Reclassification to redeemable common stockReclassification to redeemable common stock— — — — 2,823,079 — 2,823,079 — 2,823,079 Reclassification to redeemable common stock— — — — — — 4,393,863 — 4,393,863 — 4,393,863 
Repurchase of common stockRepurchase of common stock(842,403)(843)— — (8,378,493)— (8,379,336)— (8,379,336)Repurchase of common stock— — (478,614)(478)(645)— (13,153,645)— (13,154,123)— (13,154,123)
Distributions declared— — — — — (7,778,197)(7,778,197)— (7,778,197)
Net loss— — — — — (2,973,765)(2,973,765)— (2,973,765)
Balance, September 30, 201915,916,672 $15,916 186,260 $186 $152,936,157 $(26,919,399)$126,032,860 $0 $126,032,860 
Distributions declared, common stockDistributions declared, common stock— — — — — — — (9,595,208)(9,595,208)— (9,595,208)
Net loss attributable to common stockholdersNet loss attributable to common stockholders— — — — — — — (52,097,300)(52,097,300)— (52,097,300)
Balance, September 30, 2020Balance, September 30, 2020— $— 8,002,705 $8,003 62,808 $63 $227,762,047 $(92,861,456)$134,908,657 $50,603,000 $185,511,657 
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
RW HOLDINGS NNN REIT, INC.Modiv Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months EndedNine Months Ended
September 30,
September 30, 2020September 30, 201920212020
Cash Flows from Operating Activities:Cash Flows from Operating Activities:Cash Flows from Operating Activities:
Net loss$(52,097,300)$(2,973,765)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)Net income (loss)$1,742,964 $(52,097,300)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortizationDepreciation and amortization13,420,256 7,176,716 Depreciation and amortization11,817,529 13,420,256 
Stock compensation expenseStock compensation expense522,183 281,667 Stock compensation expense2,115,341 522,183 
Deferred rents(1,027,863)(991,009)
Amortization of deferred rentsAmortization of deferred rents(950,694)(1,027,863)
Amortization of deferred lease incentivesAmortization of deferred lease incentives45,903 45,903 Amortization of deferred lease incentives192,235 45,903 
Amortization of deferred financing costs and premium796,810 511,336 
Amortization of deferred financing costs and premium/discountAmortization of deferred financing costs and premium/discount207,086 796,810 
Amortization of above-market lease intangiblesAmortization of above-market lease intangibles134,412 72,784 Amortization of above-market lease intangibles97,367 134,412 
Amortization of below-market lease intangiblesAmortization of below-market lease intangibles(1,157,951)(355,793)Amortization of below-market lease intangibles(1,099,723)(1,157,951)
Impairment of real estate investment propertiesImpairment of real estate investment properties9,506,525 0 Impairment of real estate investment properties(400,999)9,506,525 
Impairment of goodwill and intangible assetsImpairment of goodwill and intangible assets34,572,403 0 Impairment of goodwill and intangible assets— 34,572,403 
Gain on forgiveness of economic relief note payableGain on forgiveness of economic relief note payable(517,000)— 
Gain on sale of real estate investmentsGain on sale of real estate investments(1,693,642)0 Gain on sale of real estate investments(4,532,413)(1,693,642)
Unrealized loss on interest rate swap valuation1,019,840 1,095,547 
Income from investments in unconsolidated entities(239,028)(167,558)
Distributions from investments in unconsolidated entities542,140 716,215 
Unrealized (gain) loss on interest rate swap valuationUnrealized (gain) loss on interest rate swap valuation(684,057)1,019,840 
Income from investment in unconsolidated entityIncome from investment in unconsolidated entity(222,705)(239,028)
Distributions from investment in unconsolidated entityDistributions from investment in unconsolidated entity247,929 542,140 
Change in operating assets and liabilities:Change in operating assets and liabilities:Change in operating assets and liabilities:
Increase in tenant receivables(563,259)(319,773)
Decrease (increase) in tenant receivablesDecrease (increase) in tenant receivables613,626 (563,259)
Increase in note receivableIncrease in note receivable(1,283,162)— 
Increase in prepaid and other assetsIncrease in prepaid and other assets(513,161)(102,872)Increase in prepaid and other assets(667,634)(513,161)
Increase in accounts payable, accrued and other liabilities1,171,868 541,315 
Decrease in due to affiliates(628,488)(967,518)
(Decrease) increase in accounts payable, accrued and other liabilities(Decrease) increase in accounts payable, accrued and other liabilities(363,007)1,173,784 
Decrease in due to affiliateDecrease in due to affiliate— (628,488)
Net cash provided by operating activitiesNet cash provided by operating activities3,811,648 4,563,195 Net cash provided by operating activities6,312,683 3,813,564 
Cash Flows from Investing Activities:Cash Flows from Investing Activities:Cash Flows from Investing Activities:
Acquisition of real estate investmentAcquisition of real estate investment(3,644,221)— 
Additions to existing real estate investmentsAdditions to existing real estate investments(600,291)(181,972)Additions to existing real estate investments(531,382)(600,291)
Additions to intangible assetsAdditions to intangible assets(566,102)0 Additions to intangible assets(195,750)(566,102)
Collection of receivable from sale of real estate propertyCollection of receivable from sale of real estate property1,824,383 — 
Net proceeds from sale of real estate investmentsNet proceeds from sale of real estate investments15,364,073 0 Net proceeds from sale of real estate investments22,840,026 15,364,073 
Payment of tenant improvements0 (3,387,699)
Payment of acquisition fees to affiliate0 (5,459)
Costs related to pending merger with an affiliate0 (1,005,523)
Additions to lease incentives(990,000)0 
Refund of refundable purchase deposit0 100,000 
Refundable purchase deposit0 (2,000,000)
Net cash provided by (used in) investing activities13,207,680 (6,480,653)
Lease incentivesLease incentives— (990,000)
Net cash provided by investing activitiesNet cash provided by investing activities20,293,056 13,207,680 
Cash Flows from Financing Activities:Cash Flows from Financing Activities:Cash Flows from Financing Activities:
Borrowings from unsecured credit facility4,260,000 4,869,000 
Repayments of unsecured credit facility(6,000,000)(13,869,000)
Borrowings from credit facilitiesBorrowings from credit facilities6,000,000 4,260,000 
Repayments of credit facilitiesRepayments of credit facilities(12,000,000)(6,000,000)
Proceeds from mortgage notes payableProceeds from mortgage notes payable35,705,500 6,350,000 Proceeds from mortgage notes payable25,436,000 35,705,500 
Principal payments on mortgage notes payablePrincipal payments on mortgage notes payable(36,421,500)(14,557,433)Principal payments on mortgage notes payable(29,434,396)(36,421,500)
Proceeds from economic relief notes payableProceeds from economic relief notes payable527,000 0 Proceeds from economic relief notes payable— 527,000 
Principal payments on short-term notes payablePrincipal payments on short-term notes payable(4,800,000)0 Principal payments on short-term notes payable— (4,800,000)
Refundable loan depositsRefundable loan deposits0 (171,000)Refundable loan deposits18,804 — 
Payments of deferred financing costs to third partiesPayments of deferred financing costs to third parties(389,662)(175,311)Payments of deferred financing costs to third parties(381,076)(389,662)
Payments of financing fees to affiliates0 (63,500)
Proceeds from issuance of common stock and investor deposits10,378,762 34,559,949 
Proceeds from issuance of preferred stock, netProceeds from issuance of preferred stock, net47,570,374 — 
Proceeds from issuance of common stockProceeds from issuance of common stock2,911,744 10,378,762 
Payments of offering costsPayments of offering costs(981,748)(1,206,930)Payments of offering costs(946,914)(981,748)
Liabilities for (payments of) selling commissions on Class S common stock1,916 (632)
Repurchases of common stockRepurchases of common stock(13,154,123)(8,379,336)Repurchases of common stock(16,881,466)(13,154,123)
Distributions paid to common stockholdersDistributions paid to common stockholders(4,071,697)(1,901,575)Distributions paid to common stockholders(2,565,452)(4,071,697)
Net cash (used in) provided by financing activities(14,945,552)5,454,232 
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities19,727,618 (14,947,468)
Net increase in cash, cash equivalents and restricted cashNet increase in cash, cash equivalents and restricted cash2,073,776 3,536,774 Net increase in cash, cash equivalents and restricted cash46,333,357 2,073,776 
Cash, cash equivalents and restricted cash, beginning of periodCash, cash equivalents and restricted cash, beginning of period6,936,930 8,755,928 Cash, cash equivalents and restricted cash, beginning of period8,377,530 6,936,930 
Cash, cash equivalents and restricted cash, end of periodCash, cash equivalents and restricted cash, end of period$9,010,706 $12,292,702 Cash, cash equivalents and restricted cash, end of period$54,710,887 $9,010,706 
Modiv Inc.Modiv Inc.
Condensed Consolidated Statements of Cash Flows (continued)Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)(Unaudited)
Nine Months Ended
September 30,
20212020
Supplemental Disclosure of Cash Flow Information:Supplemental Disclosure of Cash Flow Information:Supplemental Disclosure of Cash Flow Information:
Cash paid for interest$5,062,906 $4,372,246 
Cash paid for interest for the nine months ended September 30, 2021 and 2020 (as revised) Cash paid for interest for the nine months ended September 30, 2021 and 2020 (as revised)$6,116,202 $6,930,329 
Supplemental Schedule of Noncash Investing and Financing Activities:Supplemental Schedule of Noncash Investing and Financing Activities:Supplemental Schedule of Noncash Investing and Financing Activities:
Reclassification to redeemable common stock$4,393,863 $2,823,079 
Reclassification from redeemable common stockReclassification from redeemable common stock$8,247,216 $4,393,863 
Reinvested distributions from common stockholdersReinvested distributions from common stockholders$5,815,165 $5,685,291 Reinvested distributions from common stockholders$3,399,731 $5,815,165 
Decrease in share repurchases payableDecrease in share repurchases payable$(1,631,648)$(1,393,275)
Deferred rentsDeferred rents$683,605 $— 
Deferred lease incentiveDeferred lease incentive$(2,128,538)$— 
Accrued distributionsAccrued distributions$123,521 $291,654 
Supplemental disclosure related to real estate investment held for sale, net:Supplemental disclosure related to real estate investment held for sale, net:
Real estate investments held for sale, netReal estate investments held for sale, net$23,033,118 $0 Real estate investments held for sale, net$24,585,739 $23,033,118 
Assets related to real estate investments held for sale$864,008 $0 
Other assets related to real estate investments held for saleOther assets related to real estate investments held for sale$1,079,361 $864,008 
(Increase) decrease in above-market lease intangibles, net(Increase) decrease in above-market lease intangibles, net$(50,549)$198,517 
Mortgage notes payable related to real estate investments held for sale, netMortgage notes payable related to real estate investments held for sale, net$14,671,370 $0 Mortgage notes payable related to real estate investments held for sale, net$(9,088,438)$(14,671,370)
Liabilities related to real estate investments held for sale$3,934,795 $0 
Increase in share repurchases payable$1,393,275 $619,159 
Accrued distributions$291,654 $937,863 
Unpaid capitalized costs related to pending merger with an affiliate$0 $620,647 
Other liabilities related to real estate investments held for saleOther liabilities related to real estate investments held for sale$(801,337)$(3,934,795)
Increase in below-market lease intangibles, netIncrease in below-market lease intangibles, net$325,734 $73,505 
Increase in interest swap derivativesIncrease in interest swap derivatives$14,166 $— 
See accompanying notes to condensed consolidated financial statements.
8
Table of Contents
RW HOLDINGS NNN REIT, INC.Modiv Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
RW Holdings NNN REIT,Modiv Inc. (the “Company”) was incorporated on May 14,15, 2015 as a Maryland corporation. The Company has the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001 par value per share, 300,000,000 shares of Class C common stock, $0.001 par value per share, and 100,000,000 shares of Class S common stock, $0.001 par value per share. The Company's five-year emerging growth company registration with the SEC will end on December 30, 2021 but the Company was formedwill continue to primarily invest in single-tenant income-producing properties locatedreport with the SEC as a smaller reporting company under Rule 12b-2 of the Exchange Act. Effective February 1, 2021, with the authorization of the board of directors, the Company filed Articles of Amendment to the Company’s charter in the United States, which are leasedState of Maryland in order to creditworthy tenants under long-term net leases. The Company’s goal is to generate current income for investors and long-term capital appreciation in the value of its properties.
The Company holds its investments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of RW Holdings NNN REIT Operating Partnership, LP,effect a Delaware limited partnership (the “Operating Partnership”), or Katana Merger Sub, LP (“Merger Sub”), which is described below. The Operating Partnership was formed on January 28, 2016. The Company is the sole general partner of and owned a 99% partnership interest in the Operating Partnership prior to the completion of the Self-Management Transaction (defined below) on December 31, 2019. The Company's wholly-owned subsidiary, Rich Uncles NNN LP, LLC, a Delaware limited liability company formed on May 13, 2016 (“NNN LP”), owned the remaining 1% partnership interest in the Operating Partnership and was the sole limited partner of the Operating Partnership prior to the completion of the Self-Management Transaction on December 31, 2019.
Following completion of the Self-Management Transaction, the Company, including NNN LP, owns an approximately 87% partnership interest in the Operating Partnership. Daisho OP Holdings, LLC, a formerly wholly-owned subsidiary of BrixInvest (defined below) (“Daisho”) which was spun off from BrixInvest on December 31, 2019, was issued and held 657,949.5 units of Class M limited partnership interest (the “Class M OP Units”), or an approximate 12% limited partnership interest, in the Operating Partnership as of December 31, 2019. The Class M OP Units were distributed to the members of Daisho during 2020. In connection with the Self-Management Transaction, the Company's Chief Executive Officer and Chief Financial Officer were issued an aggregate of 56,029 units of Class P limited partnership interest (the “Class P OP Units”) in the Operating Partnership and thereby own the remaining approximate 1% limited partnership interest in the Operating Partnership.
The Company was externally managed by its former advisor, Rich Uncles NNN REIT Operator, LLC (the “Former Advisor”), a Delaware limited liability company, pursuant to the Second Amended and Restated Advisory Agreement dated August 11, 2017, as amended (the “Advisory Agreement”), through December 31, 2019. The Former Advisor was wholly-owned by the Company’s former sponsor, BrixInvest, LLC (f/k/a Rich Uncles, LLC) (“BrixInvest” or the “Former Sponsor”), a Delaware limited liability company, whose members include Aaron S. Halfacre and Raymond Wirta, the Company’s Chief Executive Officer and Chairman of the Board, respectively. On each of June 24, 2015 and December 31, 2015, the Company issued 10,000 shares of its Class C common1:3 reverse stock to the Former Sponsor, for a total of 20,000 shares of Class C common stock, at a purchase price of $10.00 per share. Upon completing the Self-Management Transaction, the Former Sponsor's previously held 10,740 sharessplit of the Company’s Class C common stock were canceled.and Class S common stock and, following the implementation of the reverse stock split, to decrease the par value of each post-split share of the Company’s Class C common stock and Class S common stock from $0.003 per share to $0.001 per share.
OnThe Company has been internally managed since its December 31, 2019 acquisition of the business of BrixInvest, LLC, a Delaware limited liability company and the Company’s former sponsor (“BrixInvest”), and the Company’s merger with Rich Uncles Real Estate Investment Trust I (“REIT I”) on December 31, 2019 pursuant to an Agreement and Plan of Merger dated September 19, 2019 (the “Merger Agreement”), Rich Uncles Real Estate Investment Trustwhereby REIT I (“REIT I”) merged with and into Katana Merger Sub, LP (“Merger Sub”), a Delaware limited partnership and wholly-owned subsidiary of the Company, with Merger Sub surviving as a direct, wholly-owned subsidiary of the Company (the “Merger”). At such time,Through the separate existence of REIT I ceased. As a result,Merger and acquisitions, the Company issued 8,042,221.6 sharescreated one of the largest non-listed real estate investment funds to be raised via crowdfunding technology and the first real estate crowdfunding platform to be completely investor-owned.
The Company holds its Class C common stock to former shareholdersinvestments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of REIT I. In addition,Modiv Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership was formed on January 28, 2016. The Company is the sole general partner of and owned an 86% partnership interest in the Operating Partnership on September 30, 2021. The Operating Partnership limited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 12.
As of September 30, 2021, the Company's portfolio of approximately 2.2 million square feet of aggregate leasable space consisted of investments in 38 real estate properties, comprised of: 13 retail properties, 14 office properties and 11 industrial properties, including an approximate 72.7% tenant-in-common interest in a Santa Clara, California industrial property (the “TIC Interest”).
Self-Management Transaction and Merger on December 31, 2019
The Company was externally managed through December 31, 2019 by its former external advisor, Rich Uncles NNN REIT Operator, LLC, a Delaware limited liability company. On December 31, 2019, the Company merged with REIT I and a self-management transaction was completed, whereby the Company the Operating Partnership, BrixInvest and Daisho effectuated a Contribution Agreementcontribution agreement, dated September 19, 2019 (the “Contribution Agreement”), pursuant to which the Company acquired substantially all of the assets and assumed certain liabilities of BrixInvestits former external advisor and former sponsor in exchange for 657,949.5 Class M OP Unitsunits of limited partnership interest in the Operating Partnership (the “Self-Management Transaction”). As a result of the completion of the Merger and the Self-Management Transaction, the Company became self-managed (see Note 3).and eliminated all fees for acquisitions, dispositions and management of its properties, which were previously paid to its former external advisor. Following completion of the Self-Management Transaction and the issuance of various other tranches of general and limited partnership interests, the Company owned an approximately 86% partnership interest in the Operating Partnership as of September 30, 2021.
9
Table of Contents
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Offerings
On July 15, 2015, the Company filed a registration statement on Form S-11 (File No. 333-205684) with the SEC to register an initial public offering of a maximum of 90,000,00030,000,000 (adjusted for the 1:3 reverse stock split) of its shares of common stock for sale to the public (the “Primary“Initial Primary Offering”). The Company also registered a maximum of 10,000,0003,333,333 (adjusted for the 1:3 reverse stock split) of its shares of common stock pursuant to the Company’sCompany's distribution reinvestment plan (the “Registered“DRP”) (the “Initial DRP Offering” and together with the Initial Primary Offering, the “Registered“Initial Registered Offering”). TheDuring 2016, the SEC declared the Company’sCompany's registration statement effective on June 1, 2016, and on July 20, 2016, the Company began offering shares of common stock to the public. Pursuant to the Initial Registered Offering, the Company sold shares of Class C common stock directly to investors, with a
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
minimum investment in shares of $500. Commencing in August 2017, the Company began selling shares of its Class C common stock only to U.S. persons as defined under Rule 903 promulgated under the Securities Act, and began selling shares of its Class S common stock as a result of the commencement of the Class S Offering (as defined below) to non-U.S. Persons.
OnIn August 11, 2017, the Company began offering up to 100,000,00033,333,333 shares (adjusted for the 1:3 reverse stock split) of Class S common stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act, pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act (the “Class S Offering” and, together with the Registered Offering and the Follow-on Offering (as defined below), the “Offerings”). The Class S common stock has similar features and rights as the Class C common stock, including with respect to voting and liquidation, except that the Class S common stock offered in the Class S Offering may be sold only to non-U.S. Persons and may be sold through brokers or other persons who may be paid upfront and deferred selling commissions and fees.
On December 23, 2019, the Company commenced a follow-on offering pursuant to a new registration statement on Form S-11 (File No. 333-231724) (the “Follow-on Offering” and, together with the Registered Offering, the “Registered Offerings”), which registered the offer and sale of up to $800,000,000 in share value of Class C common stock, including $725,000,000 in share value of Class C common stock pursuant to the primary portion of the Follow-on Offering and $75,000,000 in share value of Class C common stock pursuant to the Company's distribution reinvestment plan.DRP. The Company ceased offering shares pursuant to the Initial Registered Offering concurrently with the commencement of the Follow-on Offering.
On January 31, 2020,22, 2021, with the Company’sauthorization of the board of directors, approvedthe Company amended and established anrestated its DRP with respect to the Company's shares of Class C common stock in order to reflect its corporate name change and to remove the ability of the Company's stockholders to elect to reinvest only a portion of their cash distributions in shares through the DRP so that investors who elect to participate in the DRP must reinvest all cash distributions in shares. In addition, the amended and restated DRP provides for determinations of the estimated net asset value (“NAV”) per share by the board of directors more frequently than annually. The amended and restated DRP was effective with respect to distributions that were paid in February 2021.
On January 22, 2021, the Company filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 in share value of Class C common stock to be issued pursuant to the amended and restated DRP (the “2021 DRP Offering” and, collectively with the Initial DRP Offering, the “Registered DRP Offering”). The Company commenced offering shares of Class C common stock pursuant to the 2021 DRP Offering upon termination of the Follow-on Offering.
Effective January 27, 2021, the board of directors terminated the Company’s Follow-on Offering. In connection with the termination of the Follow-on Offering, the Company stopped accepting investor subscriptions on January 22, 2021. As of January 27, 2021, the Company had $600,547,672 in share value of unsold shares in the Follow-on Offering, which were deregistered with the SEC. On February 1, 2021, the Company commenced a private offering of Class C common stock of $10.27 (unaudited). Effective February 1, 2020,under Regulation D promulgated under the purchase price per share ofSecurities Act (the “Private Offering” and, collectively with the Company’s common stock inRegistered Offerings (as defined below), the primary portion of“Offerings”) and accepted investor subscriptions from only accredited investors until the Company terminated the Private Offering on August 12, 2021.
On June 29, 2021, the Company filed with the SEC a Regulation A Offering Statement on Form 1-A (the “Reg A Offering” and, collectively with the Follow-on Offering and the distribution reinvestment plans was increasedRegistered DRP Offering, the “Registered Offerings”), including its preliminary offering circular, for a $75,000,000 offering of its Class C common stock and filed an amended Form 1-A on August 13, 2021. The SEC qualified the amended Regulation A Offering Statement on Form 1-A on August 16, 2021. The Reg A Offering allowed the Company to once again accept subscriptions from $10.16 (unaudited)investors who are not accredited.
Preferred Stock
On September 14, 2021, the Company and the Operating Partnership entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (collectively, the “Underwriters”), pursuant to $10.27 (unaudited). Also, commencing February 1, 2020,which the purchaseCompany agreed to issue and sell 1,800,000 shares of the Company’s 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”) in an underwritten public offering (the “Preferred Offering”) at a price per share inof $25.00. In addition, the primary portionCompany granted the Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Class S Offering was increased to $10.27 (unaudited) plusSeries A Preferred Stock, which the amount of any applicable upfront commissionsUnderwriters exercised in full on September 16, 2021. The issuance and fees, and the NAV per share used for purposessale of the share repurchase programs was increasedshares of Series A Preferred Stock, including the Underwriters’ full exercise of their option to $10.27 (unaudited)purchase additional shares, closed on September 17, 2021 (see Note 9 for additional information).
In response
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Notes to the significant economic impacts of the COVID-19 pandemic, effective as of the close of business on May 7,Condensed Consolidated Financial Statements (continued)
(Unaudited)
Estimated NAV Per Share (Unaudited)
Since December 31, 2020, the Company’s board of directors temporarily suspended the primary portion of the Company’s Follow-on Offering and Class S Offering until such time as the board of directorshas approved and established an updated quarterly estimated NAV per share of the Company’s Class C common stock and determined to resume such primary offerings. On May 20, 2020, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’sClass S common stock of $7.00 (unaudited) to reflect the Company's valuation of its real estate assets, debt and other assets and liabilities as of April 30, 2020. follows:
Valuation DateEffective DateNAV Per Share
December 31, 2020January 27, 2021$23.03 (unaudited and adjusted for the 1:3 reverse stock split on February 1, 2021)
March 31, 2021May 5, 2021$24.61 (unaudited)
June 30, 2021August 4, 2021$26.05 (unaudited)
September 30, 2021November 5, 2021$27.29 (unaudited)
Additional information on the determination of the Company's most recent estimated NAV per share, including the process used to determine its estimated NAV per share, can be found in the Company's Current Report on Form 8-K filed with the SEC on May 22, 2020. With respect to distributions paid to stockholders on May 26, 2020,November 5, 2021. Effective November 5, 2021, the purchase price per share of the Company’s Class C common stock in the distribution reinvestment plans was decreased from $10.27 to $7.00. Commencing on June 1, 2020, the Company’s board of directors resumed the primary portions of the Follow-on Offering and the Class S Offering. The purchase price per share in the primary portion of the Follow-onReg A Offering was decreasedincreased from $10.27$26.05 (unaudited) to $7.00, and$27.29 (unaudited). Also, commencing November 5, 2021, the purchase price per share in the primary portion of the Class S Offering was decreasedincreased to $7.00$27.29 (unaudited) plus the amount of any applicable upfront commissions and fees. Thefees, and the NAV per share used for purposes of future repurchases pursuant to the share repurchase programs was also decreased from $10.27increased to $27.29 (unaudited) for repurchase requests made starting on November 1, 2021. Beginning with distributions scheduled to $7.00 (unaudited).
Through September 30, 2020,be paid to stockholders on November 25, 2021, the Company had sold 19,645,508 sharespurchase price per share of Class C common stock in the Registered Offerings, including 2,208,870 shares of Class C common stock sold under its registered distribution reinvestment plan, for aggregate gross offering proceeds of $195,859,756, and 190,361 shares of Class SCompany’s common stock in the Class S Offering, including 5,397 shares ofC and the Class S common stock sold under its distribution reinvestment plan, for aggregate gross offering proceeds of $1,926,663.
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NotesDRPs was increased from $26.05 (unaudited) to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As of September 30, 2020, the Company had investments in (i) 39 operating properties, comprised of: 14 retail properties, 14 office properties and 11 industrial properties (including 17 operating properties of the original 20 operating properties which were acquired through the Merger on December 31, 2019, and are comprised of: (a) 8 retail properties, (b) 4 office properties and (c) 5 industrial properties); (ii) 1 parcel of land, which currently serves as an easement to one of the Company’s office properties; and (iii) an approximate 72.7% tenant-in-common interest in a Santa Clara office property (the “TIC Interest”)$27.29 (unaudited). During the three months ended June 30, 2020, the Company determined to sell 4 of its operating properties, including 3 retail properties and 1 industrial property, and classified them as real estate investments held for sale as of June 30, 2020 in the Company's unaudited condensed consolidated balance sheet. The 3 retail properties were subsequently sold during the three months ended September 30, 2020 and the industrial property was sold in October 2020. During the three months ended September 30, 2020, the Company also determined to sell an additional 2 retail properties, bringing the total real estate investments held for sale to 3 properties consisting of 2 retail properties and 1 industrial property as of September 30, 2020 (see Notes 4 and 11 for additional discussion).
The Company continues to offer shares of common stock under its Offerings. In some states, the Company is required to renew the registration statement for the Follow-on Offering annually or file a new registration statement to continue the Follow-on Offering. The Company may terminate the Offerings at any time.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and the rules and regulations of the SEC. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Such unaudited condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 20192020 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 6, 2020.March 31, 2021.
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which are normal and recurring, necessary to fairly state the Company's financial position, results of operations and cash flows. All significant intercompany balances and transactions are eliminated in consolidation. The unaudited condensed consolidated balance sheet as of December 31, 20192020 included herein was derived from the audited financial statements.
Reverse Stock Split
On February 1, 2021, the Company effected a 1:3 reverse stock split of its Class C common stock and Class S common stock and, following the implementation of the reverse stock split, decreased the par value of each share of the Company’s Class C common stock and Class S common stock from $0.003 per share to $0.001 per share. The Company has reflected the effect of the reverse stock split in the accompanying unaudited condensed consolidated financial statements do not include all disclosures orand related notes required by GAAP for complete financial statements.as if it had occurred at the beginning of the earliest period presented.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements and the accompanying notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations related to the COVID-19 pandemic (see Notes 3 and 45 for impairment charges related primarily to COVID-19). Actual results may differ from those estimates.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Noncontrolling Interests in Consolidated Entitiesthe Operating Partnership
The Company accounts for the noncontrolling interests in its Operating Partnership in accordance with the related accounting guidance. Due to the Company's control of the Operating Partnership through its general partnership interest therein and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company, and the limited partner interests not held by the Company are reflected as noncontrolling interests in the accompanying unaudited condensed consolidated balance sheets.sheets and statements of equity. The noncontrolling interests were issued on December 31, 2019 and represent non-voting, non-dividend accruing interests with no allocation of profits or losses. As described in Note 312, the interests arewere not able to be converted or exchanged prior to (i) December 31, 2020, the one-year anniversary of the closing of the Self-Management Transaction (in the case of the units of Class M limited partnership interest (“Class M OP Units)Units”) in the Operating Partnership), or (ii) the expiration of the Lockup Period (as defined below)in Note 12) (in the case of the units of Class P limited partnership interest (“Class P OP Units)Units”) in the Operating Partnership). As of September 30, 2021, no interests have been converted or exchanged.
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Notesdirectors approved the grant of units of Class R limited partnership interest (“Class R OP Units”) to Condensed Consolidated Financial Statements (continued)
(Unaudited)
all employees of the Company. As described in detail in Note 12, all units granted vest on January 25, 2024 and are then mandatorily convertible into units of Class C limited partnership interest in the Operating Partnership (“Class C OP Units”) no later than March 31, 2024.
Business Combinations
The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) and applicable Accounting StandardStandards Updates (each, an “ASU”), whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to any non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
ASC 805 defines a business as an integrated set of activities and assets (collectively, a “set”) that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. To be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. ASC 805 provides a practical screen to determine when a set would not be considered a business. If the screen is not met and further assessment determines that the set is not a business, then the set is an asset acquisition. The primary difference between a business combination and an asset acquisition is that an asset acquisition requires cost accumulation and allocation at relative fair value. Acquisition costs are capitalized for an asset acquisition and expensed for a business combination (see Note 3 for a description of the Merger and Self-Management Transaction).combination.
Revenue Recognition
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)accounts for revenue in accordance with FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), effective January 1, 2018. The Company’s revenue impacted by ASU No. 2014-09 includedwhich includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842, as discussed below, in the period the recoverable costs are incurred. Tenant reimbursements, for which the Company pays the associated costs directly to third-party vendors and is reimbursed by the tenants, are recognized and recorded on a gross basis.
The Company adoptedaccounts for leases in accordance with FASB ASU No. 2016-02, Leases (Topic 842), and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, effective January 1, 2019, which provide practical expedients, technical corrections and improvements for certain aspects of ASU No. 2016-02, on a modified retrospective basis (collectively, “Topic 842”). Topic 842 establishes a single comprehensive model for entities to use in accounting for leases and supersedes the existing leasing guidance.leases. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements were made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 impacts the Company's accounting for leases primarily as a lessor. However, Topic 842 also impacts the Company's accounting as a lessee for an operating lease assumed as a resultbut is considered not material.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As a lessor, the Company's leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. Under Topic 842, the lease of space is considered a lease component while the common area maintenance, property taxes and other recoverable costs billings are considered nonlease components, which fall under revenue recognition guidance in ASU No. 2014-09. However, upon adopting the guidance in Topic 842, the Company determined that its tenant leases met the criteria to apply the practical expedient provided by ASU No. 2018-11 to recognize the lease and non-lease components together as one single component. This conclusion was based on the consideration that (1) the timing and pattern of transfer of the nonlease components and associated lease components are the same, and (2) the lease component, if accounted for separately, would be classified as an operating lease. As the lease of properties is the predominant component of the Company's leasing arrangements, the Company accounted for all lease and nonlease components as one, single component under Topic 842. As a result, the adoption of Topic 842 did not have any impact on the Company's timing or pattern of recognition of rental revenues as compared to previous guidance. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU No. 2018-11 have been combined under rental income subsequent to the adoption of Topic 842 in the Company's unaudited condensed consolidated statements of operations. For the three months ended September 30, 20202021 and 2019,2020, tenant reimbursements included in rental income amounted to $1,622,218$1,640,835 and $1,328,373,$1,622,218, respectively, and for the nine months ended September 30, 20202021 and 2019,2020, tenant reimbursements included in rental income amounted to $5,036,196 and $5,521,723, and $3,514,836, respectively.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company recognizes rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, management of the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company.
When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
•whether the tenant improvements are expected to have any residual value at the end of the lease.
Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if the Company is the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions.
The Company evaluates the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If the Company’s evaluation of these factors indicates it may not recover the full value of the receivable, it provides an allowance against the portion of the receivable that it estimates may not be recovered. This analysis requires the Company to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected.
Gain or Loss on Sale of Real Estate Property
The Company recognizes gain or loss on sale of real estate property when the Company has executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that the Company will collect substantially all of the consideration for the property. The Company's real estate property sale transactions forduring the three and nine months ended September 30, 2021 and 2020 met these criteria at closing. When properties are sold, operating results of the properties remain in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in the Company’s accompanying unaudited condensed consolidated statements of operations.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Bad Debts and Allowances for Tenant and Deferred Rent Receivables
Since the adoption of Topic 842 on January 1, 2019, theThe Company's determination of the adequacy of its allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, the Company also may record an allowance under other authoritative GAAP depending upon the Company's evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in the Company's unaudited condensed consolidated statements of operations.
With respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental income until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Leasing Costs
Upon adoption of Topic 842, the Company elected to apply the package of practical expedients provided and did not reassess the following as of January 1, 2019: (1) whether any expired or existing contracts are leases or contain leases; (2) the lease classification for any expired or existing leases; and (3) initialInitial direct costs for any existing leases. Under Topic 842, initial direct costs for both lesseessuch as legal fees and lessors would include only those costs thatcommissions are incremental tocapitalized and amortized over the arrangement and would not have been incurred ifterm of the lease had not been obtained. As a result, since January 1, 2019, the Company no longer capitalizes internallease. Internal leasing costs and third-party legal leasing costs and instead charges these costsare charged to expense as incurred. These expenses are included in legal leasing costs under property expenses in the Company's unaudited condensed consolidated statements of operations. The election of the package of practical expedients described above permits the Company to continue to account for its leases that commenced before January 1, 2019 under the previously existing lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases entered into or acquired commencing or modified after January 1, 2019.
Impairment of Investment in Real Estate Properties
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company records an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset. As more fully discussed in Note 43, the Company recorded impairment charges of $9,506,525 related to 4 of its real estate properties during the nine months ended September 30, 2020. The Company did 0tnot incur any impairment charges for its real estate properties during the three months September 30, 2021 and 2020 and the nine months ended September 30, 2020.2021. However, the Company recognized a reversal of a prior year impairment charge of $400,999 in June 2021 related to a real estate property that is no longer classified as held for sale (see Note 3 for more details).
Other Comprehensive Loss
For all periods presented, other comprehensive loss is the same as net loss.
Per Share Data
The Company reports a dual presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute for the potential dilution that would occur if dilutive securities or commitments to issue common stock were exercised. Diluted EPS is the same as Basic EPS for the three and nine months ended September 30, 2020 and 2019 as the Company had a net loss attributable to common stockholders for allboth reported periods.
As of September 30, 2020,2021, there were 657,949.5 Class M OP Units, and 56,029 Class P OP Units and 353,003 Class R OP Units, net of forfeiture of 6,997 units (adjusted for the 1:3 reverse stock split) that are convertible tointo Class C OP Units (defined below) at a conversion ratio of five Class C OP Units for each one Class M OP Unit or Class P OP Unit, as applicable, after a specified period of time (see Note 312 )for more details). The holders of Class C OP Units may exchange such Class C OP Units for shares of the Company's Class C common stock on a 1-for-1 basis or, at the Company’s sole and absolute discretion, for cash.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Class M OP Units, Class P OP Units and Class PR OP Units, and the shares of Class C common stock into which they may ultimately be converted, were excluded from the computation of Diluted EPS for the three and nine months ended September 30, 2020 because their effect would not be dilutive. The weighted average dilutive effect of such units for the three and nine months ended September 30, 2021 was an increase of 1,219,316 and 1,188,099 shares, respectively, included in the computation of Diluted EPS. There were 0no other outstanding securities or commitments to issue common stock that would have a dilutive effect for the periods then ended.
The Company has presented the basic and diluted net loss per share amounts on the accompanying unaudited condensed consolidated statements of operations for Class C and Class S share classes as a combined common share class. Application of the two-class method for allocating net loss attributable to common stockholders in accordance with the provisions of ASC 260, Earnings per Share, would have resulted in abasic net lossincome (loss) attributable to common stockholders of $(0.04)$0.47 and $(0.06)$(0.12) per share forof Class C sharescommon stock for the three months ended September 30, 2021 and 2020, respectively, net income (loss) attributable to common stockholders of $0.47 and 2019, respectively, and a net loss of $(0.04) and $(0.03)$(0.12) per share forof Class S sharescommon stock for the three months ended September 30, 2021 and 2020, respectively, net income (loss) attributable to common stockholders of $0.21 and 2019,$(6.51) per share of Class C common stock for the nine months ended September 30, 2021 and 2020, respectively, and net income (loss) attributable to common stockholders of $0.20 and $(6.51) per share of Class S common stock for the nine months ended September 30, 2021 and 2020, respectively.
The two-class method would have resulted in adiluted net lossincome (loss) attributable to common stockholders of $0.40 and $(0.12) per share of $(2.17) and $(0.20) for Class C sharescommon stock for the three months ended September 30, 2021 and 2020, respectively, diluted net income (loss) attributable to common stockholders of $0.47 and $(0.12) per share of Class S common stock for the three months ended September 30, 2021 and 2020, respectively, diluted net income (loss) attributable to common stockholders of $0.18 and $(6.51) per share of Class C common stock for the nine months ended September 30, 20202021 and 2019,2020, respectively, and adiluted net lossincome (loss) attributable to common stockholders of $0.20 and $(6.51) per share of $(2.17) and $(0.20) for Class S sharescommon stock for the nine months ended September 30, 2021 and 2020, and 2019, respectively. The differences
Any difference in net loss per share if allocated under this method primarily reflects the lower effective distributions per share for Class S shareholdersstockholders as a result of the payment of the deferred commission to the Class S distributor of these shares, and also reflects the impact of the timing of the declaration of the distributions relative to the time the shares were outstanding.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Fair Value Disclosures
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an existing price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Cash and cash equivalents, restricted cash, receivable from sale of real estate property, tenant receivables, due from affiliates, prepaid expenses and other assets and accounts payable, accrued and other liabilities and due to affiliates:liabilities: These balances approximate their fair values due to thetheir short maturities of these items.maturities.
Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying unaudited condensed consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.
Goodwill and Intangible Assets: The fair value measurements of goodwill and intangible assets are considered Level 3 nonrecurring fair value measurements. For goodwill, fair value measurement involves the determination of fair value of a reporting unit. The Company useshas used a Monte Carlo simulation model to estimate future performance, generating the fair value of the reporting unit's business. For intangible assets, fair value measurements include assumptions with inherent uncertainty, including projected Offeringsofferings volumes and related projected revenues and long-term growth rates, among others. The carrying value of the Company's intangible assets is at risk of impairment if future projected Offerings proceeds, revenuesthe Company experiences an adverse change in its business climate or long-term growth rates are lowerhas a current expectation that, more likely than those currently projected.not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Unsecured credit facilityCredit facilities and short-term noteseconomic relief note payable: The fair values of the Company’s unsecured credit facilityfacilities and short-term noteseconomic relief note payable approximate the carrying values of the unsecured credit facility and short-term noteseconomic relief note payable as their interest rates and other terms are comparable to those available in the market place for a similar credit facility and short-term note, respectively.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Mortgage notes payable: The fair value of the Company’s mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.
Restricted Cash
Restricted cash is comprised of funds which are restricted for use as required by certain lenders in conjunction with an acquisition or debt financing or modification and for on-site and tenant improvements or property taxes. Restricted cash as of September 30, 20202021 and December 31, 20192020 amounted to $265,654$2,410,951 and $113,362, respectively.$129,118, respectively, for the properties discussed below and other lender reserves.
Under the terms of the Company’s June 2021 refinancing of mortgages on its properties leased to Northrop Grumman and L3Harris Technologies, Inc. (“L3Harris”) with Banc of California as described in Note 7, the Company established restricted cash accounts at Banc of California with $1,271,462 and $1,000,000 held for the Northrop Grumman and L3Harris properties, respectively, to fund building improvements, tenant improvements and leasing commissions. During the three months ended September 30, 2021, the amount of $128,538 was released to fund a leasing commission.
Pursuant to amended lease agreements, the Company has obligationshad an obligation to pay for tenant improvements as of September 30, 2021 and December 31, 2020 of $189,136 and $60,598, and $98,329 in site andrespectively, for tenant improvements to be incurred by tenants asfor which funds restricted by the lender were available. As of September 30, 20202021 and December 31, 2019, respectively, including a 72.7% share of tenant improvements for the Santa Clara property at both balance sheet dates. At both September 30, 2020, and December 31, 2019, the Company's restricted cash held to fund other improvements and leasing commissions totaled $92,684. As$2,271,462 and $32,086, respectively.
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Table of September 30, 2020 and December 31, 2019, the Company also held restricted cash of $172,970 and $20,678, respectively, for lender reserves.Contents
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Investments Held for Sale
The Company generally considers a real estate investment to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investment held for sale, net” and “assets related to real estate investment held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in the Company’s accompanying unaudited condensed consolidated statements of operations.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. The Company evaluates goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit has declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized. Due
In assessing goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the impactsexistence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the COVID-19 pandemic,recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company performed an impairment testdetermines it is unlikely that the fair value of goodwill for the three months ended March 31, 2020. Since the Company is a singlesuch reporting unit the Company performedis less than its carrying amount, then a quantitative analysis is unnecessary.
However, if the Company concludes otherwise, or if it elects to comparebypass the estimatedqualitative analysis, then it is required to perform a quantitative analysis that compares the fair value of the Company’s net tangible and intangible assets toreporting unit with its carrying amount, including goodwill. If the preliminary carryingfair value of the reporting unit exceeds its net tangible and intangible assets as of March 31, 2020. The recordedcarrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment chargeloss is recognized for the lesser of: (a) the amount that the carrying amount of $33,267,143 representsa reporting unit exceeds its fair value; or (b) the excessamount of the Company’s net book value over its estimated fair value as of March 31, 2020. NaN additional goodwill impairment charges were recorded for the period from April 1, 2020allocated to September 30, 2020.that reporting unit.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Intangible assets consist of purchased customer-relatedinvestor-related intangible assets, marketing-related intangible assets, developed or acquired technology and other intangible assets. Intangible assets are amortized over their estimated useful lives using the straight-line method ranging from three years to five years. No significant residual value is estimated for intangible assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate.generate or if the Company has a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Due to the impacts of the COVID-19 pandemic, the Company evaluated its intangible assets for impairment and recorded an impairment charge of $1,305,260 for the three months ended March 31, 2020. NaN additional impairment charges on intangible assets were recorded for the period from April 1, 2020 to September 30, 2020.
See Note 3 for additional information related to goodwill and other intangible assets acquired in connection with the Self-Management Transaction and impairments recorded.
Reclassifications
Certain prior period cash flows from operations account grouping in the condensed consolidated statement of cash flows has been reclassified to conform with the current year presentation. The reclassifications had no impact on net loss.
Restricted Stock Units and Restricted Stock Unit Awards
The fair values of the Operating Partnership's units or restricted stock unit awards issued or granted by the Company are based on the most recent NAVan estimated value per share of the Company’s common stock on the date of issuance or grant.grant, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction discussed in Note 312 are recorded in equity under noncontrolling interests in the Operating Partnership in the Company's unaudited condensed consolidated balance sheets as of September 30, 20202021 and December 31, 20192020 and unaudited condensed consolidated statements of equity for the three and nine months ended September 30, 2021 and 2020. For units granted to employees of the Company that are not included in the purchase consideration, the fair value of the award is amortized using the straight-line method over the requisite service period of the award, which is generally the vesting period (seeperiod. We have elected to record forfeitures as they occur.
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Note 3Table of Contents).
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company determines the accounting classification of equity instruments (e.g. restricted stock units) that are issued as purchase consideration or part of the purchase consideration in a business combination, as either liability or equity, by first assessing whether the equity instruments meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480-10, equity instruments are classified as liabilities if the equity instruments are mandatorily redeemable, obligate the issuer to settle the equity instruments or the underlying shares by paying cash or other assets, or must or may require an unconditional obligation that must be settled by issuing a variable number of shares.
If equity instruments do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the equity instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the equity instruments are indexed to its common stock and whether the equity instruments are classified as equity under ASC 815-40 or other applicable GAAP guidance. After all relevant assessments are made, the Company concludes whether the equity instruments are classified as liability or equity. Liability classified equity instruments are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified equity instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.
Reclassifications
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TableCertain prior year balance sheet accounts have been reclassified to conform with the current year presentation. The reclassification did not affect net income in the prior year unaudited condensed consolidated statement of Contents
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
operations.
Recent Accounting Pronouncements
New Accounting Standards Recently Issued and Adopted
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”). ASU No. 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and to disclose the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurement. In addition, public entities are required to provide information about the measurement uncertainty of recurring Level 3 fair value measurements from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. ASU No. 2018-13 is effective for the Company beginning January 1, 2020. Entities were permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The adoption of ASU No. 2018-13 on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.
In April 2020, the FASB issued a FASB Staff Q&A related to Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic (the “Topic 842 Q&A”). The Company adopted the lease accounting standards of Topic 842 beginning January 1, 2019. Under Topic 842, subsequent changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications. Some contracts may contain explicit or implicit enforceable rights and obligations that require lease concessions if certain circumstances arise that are beyond the control of the parties to the contract. If a lease contract provides enforceable rights and obligations for concessions in the contract and no changes are made to that contract, the concessions are not accounted for under the lease modification guidance in Topic 842. If concessions granted by lessors are beyond the enforceable rights and obligations in the contract, entities would generally account for those concessions in accordance with the lease modification guidance in Topic 842.
Because of the unprecedented and global nature of the COVID-19 pandemic, the FASB staff is aware that it may be exceedingly challenging for entities to determine whether existing contracts provide enforceable rights and obligations for lease concessions and whether those concessions are consistent with the terms of the contract or are modifications to the contract. As such, the FASB staff believes that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842, as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in Topic 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. For example, this election is available for concessions that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The FASB staff expects that reasonable judgment will be exercised in making those determinations. Some concessions will provide a deferral of payments with no substantive changes to the consideration in the original contract. A deferral affects the timing, but the amount of the consideration is substantially the same as that required by the original contract.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The FASB staff expects that there will be multiple ways to account for those deferrals, none of which the FASB staff believes are more preferable than the others. Two of those methods are: (1) account for the concessions as if no changes to the lease contract were made; under that accounting, a lessor would increase its lease receivable, and a lessee would increase its accounts payable as receivables/payments accrue; in its income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period; and (2) account for the deferred payments as variable lease payments.
The Company has elected to utilize the method wherein the concessions result in additional lease receivable during the deferral period as available under the Topic 842 Q&A for lease concessions related to the effects of the COVID-19 pandemic. The Company's lease concessions related to the effects of the COVID-19 pandemic resulted in a receivable of $79,463 on the Company’s condensed consolidated balance sheet as of September 30, 2020, approximately 29% of which was collected subsequent to September 30, 2020. Due to the continuing nature of the COVID-19 pandemic, there may be subsequent impacts from future tenant requests for lease concessions or deferrals for future periods. The Company maintains an inventory of tenants which have or are expected to request lease concessions. Future lease concessions may have an impact on the Company’s business, financial condition and results of operations, but the ultimate impact will largely depend on future developments with respect to the continued spread and treatment of COVID-19, which the Company cannot accurately predict at this time.
New Accounting Standards Recently Issued and Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 eases the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discounted because of reference rate reform.
Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modification would be considered “minor” so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that ASU 2020-04 will have on the Company’s consolidated financial statements.
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NOTE 3. MERGER AND SELF-MANAGEMENT TRANSACTION
REIT I Merger Transaction
On December 31, 2019, pursuant to the Merger Agreement, the Company completed the acquisition of REIT I. The Company's stockholders approved the Merger contemplated by the Merger Agreement at the Annual Meeting of Stockholders held on December 17, 2019 (the “Annual Meeting”). The shareholders of REIT I approved the Merger contemplated by the Merger Agreement at REIT I’s Special Meeting of Shareholders, also held on December 17, 2019. On December 31, 2019, REIT I merged with and into Merger Sub, which survived the Merger as the Company's direct, wholly-owned subsidiary. At such time, the separate existence of REIT I ceased. The acquisition primarily included 20 single-tenant commercial properties and related tenant receivables, mortgage notes payable and accounts payable, in exchange for Merger consideration for each of REIT I's common shares (the “REIT I Common Shares”) issued and outstanding immediately prior to the Merger, other than the REIT I Common Shares owned by the Company, which were automatically canceled and retired, and converted into the right to receive one share of the Company's Class C common stock, with any fractional REIT I Common Shares converted into a corresponding number of fractional shares of the Company’s Class C common stock. As a result, the Company issued 8,042,221.6 shares of its Class C common stock to former shareholders of REIT I. As further discussed in Note 5, prior to the merger of REIT I with and into Merger Sub on December 31, 2019, the Company had an approximate 4.8% ownership interest in REIT I.
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RW HOLDINGS NNN REIT,MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Accounting Treatment
While the Merger transaction was treated legally as a merger of the two entities, for accounting purposes, the transaction was treated as an asset acquisition under GAAP because REIT I did not possess the capability to operate its properties to generate revenue since it had no workforce. It was dependent on its advisor and did not possess the processes to perform asset management, property purchase and sale transactions or the resulting revenue generation on a stand-alone basis. The real estate assets acquired are similar in nature to each other and represent substantially all of the fair value of the assets acquired. While there are some dissimilarities including the nature of the use (retail, industrial and office), each of the properties was subject to a multi-year lease with a single creditworthy tenant and the properties had similar risk profiles, generally including a mortgage secured only by the property. In addition, 17 of the 20 properties (approximately 93% by value as of the transaction date) were located in California and therefore subject to California law and all properties were managed without on-site offices. Merger Sub, not REIT I, was the surviving entity, there was no entity level debt and there was 0 contingent consideration paid, as would be typical in the purchase of an operating business.
The assets and liabilities acquired in the Merger were recorded at fair value as determined as of December 31, 2019, including normal adjustments for the values of lease-in-place and above/below market leases and premium/discount on outstanding mortgage notes payable. The Company incurred approximately $3,044,000 of acquisition-related transaction costs during 2019. These acquisition-related transaction costs were capitalized to the acquired real estate assets. As the transaction closed on the final day of the year, the Merger did not have an impact on the Company's consolidated statement of operations for the year ended December 31, 2019.
Purchase Price Allocation
The Company accounted for the Merger in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets based on their estimated fair values as of the closing date. As of December 31, 2019, the Company had substantially completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the closing date.
The following table summarizes the allocation of the purchase price to the fair values assigned to the REIT I assets acquired and liabilities assumed as of December 31, 2019, the Merger closing date. These fair values were based on internal Company and independent external third-party valuations:
Fair Values AssignedDecember 31,
2019
Assets:
Real estate property, including above/below lease intangibles$151,099,097 
Cash and cash equivalents1,612,331 
Tenant receivable310,169 
Prepaid expenses and other assets51,924 
Liabilities:
Mortgage notes payable, net(62,985,425)
Accounts payable and other liabilities(2,243,156)
Net87,844,940 
Less: Cancellation of investment in REIT I (Note 5)(3,091,489)
         Capitalized transaction-related costs(3,044,480)
Net Assets Acquired$81,708,971 
Self-Management Transaction
On September 19, 2019, the Company, the Operating Partnership, BrixInvest and Daisho entered into the Contribution Agreement pursuant to which the Company agreed to acquire substantially all of the net assets of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership and assumed certain liabilities. On December 31, 2019, the Self-Management Transaction was completed.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Prior to the closing of the Self-Management Transaction: (i) substantially all of BrixInvest’s assets and liabilities were contributed to Daisho’s wholly-owned subsidiary, modiv, LLC, a Delaware limited liability company (“modiv, LLC”); and (ii) BrixInvest spun off Daisho to the BrixInvest members (the “Spin Off”). Pursuant to the Self-Management Transaction, Daisho contributed to the Operating Partnership all of the membership interests in modiv, LLC in exchange for the Class M OP Units.
As a result of the Self-Management Transaction, BrixInvest, through its subsidiary, Daisho, transferred all of its operating assets, including but not limited to: (i) all personal property used in or necessary for the conduct of BrixInvest’s business; (ii) intellectual property, goodwill, licenses and sublicenses granted and obtained with respect thereto and certain domain names; (iii) all continuing employees and (iv) certain other assets and liabilities, to modiv, LLC and distributed 100% of the ownership interests in Daisho to the members of BrixInvest in the Spin Off.
BrixInvest had been engaged in the business of serving as the sponsor platform supporting the operations of the Company, REIT I and, prior to October 28, 2019, BRIX REIT, Inc. (“BRIX REIT”), including serving, directly or indirectly, as advisor and asset manager to the Company, REIT I and, until October 28, 2019, BRIX REIT.
As a result of the Merger and the Self-Management Transaction, effective December 31, 2019, the Company, its Former Advisor and BrixInvest, which wholly owned the Company's Former Advisor, mutually agreed to terminate the Advisory Agreement, and the Company became self-managed. Accordingly, disclosures with regard to the Advisory Agreement elsewhere in this Quarterly Report on Form 10-Q pertain only to transactions with the Company's Former Advisor through December 31, 2019.
Amendments to Operating Partnership Agreement
On December 31, 2019, the Company, the Operating Partnership and NNN LP entered into the Second Amended and Restated Agreement of Limited Partnership (the “Amended OP Agreement”), which amended the Amended and Restated Agreement of Limited Partnership of the Operating Partnership dated August 11, 2017. The amendments included amending the name of the Operating Partnership from “Rich Uncles NNN Operating Partnership, LP” to “RW Holdings NNN REIT Operating Partnership, LP” and provided the terms of the Class M OP Units and Class P OP Units issued in connection with the Self-Management Transaction and further described below.
The Class M OP Units were issued to Daisho on December 31, 2019 in connection with the Self-Management Transaction and are non-voting, non-dividend accruing, and are not able to be converted or exchanged prior to the one-year anniversary of the completion of the Self-Management Transaction. Investors holding units in BrixInvest received Daisho units in a ratio of 1:1 for an aggregate of 657,949.5 Daisho units. During 2020, Daisho distributed the Class M OP Units to its members and the Class M OP Units will become convertible into units of Class C limited partnership interest in the Operating Partnership (“Class C OP Units”) at a conversion ratio of five Class C OP Units for each one Class M OP Unit, subject to a reduction in the conversion ratio (which reduction will vary depending upon the amount of time held) if the exchange occurs prior to the four-year anniversary of the completion of the Self-Management Transaction. In the event that the Class M OP Units are converted into Class C OP Units prior to December 31, 2023, such Class M OP Units shall be exchanged at the rate indicated below:
Date of ExchangeEarly Conversion Rate
From December 31, 2020 to December 30, 202150% of the Class M conversion ratio
From December 31, 2021 to December 30, 202260% of the Class M conversion ratio
From December 31, 2022 to December 30, 202370% of the Class M conversion ratio
The Class M OP Units are eligible for an increase in the conversion ratio (conversion ratio enhancement) if the Company achieves both of the targets for assets under management (“AUM”) and adjusted funds from operations (“AFFO”) in a given year as set forth below:
Hurdles
AUMAFFO Per ShareClass M
($ in billions)($)Conversion Ratio
Initial Conversion Ratio1:5.00
Fiscal Year 2021$0.860 $0.59 1:5.75
Fiscal Year 2022$1.175 $0.65 1:7.50
Fiscal Year 2023$1.551 $0.70 1:9.00
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Based on the current conversion ratio of five Class C OP Units for each one Class M OP Unit, if a Class M OP Unit is converted on or after December 31, 2023, and based on the current NAV per share of $7.00, a Class M OP Unit would be valued at $35.00. The current NAV does not impact the early conversion rate or the future conversion enhancement ratio of the Class M OP Units and Class P OP Units.
The Company also issued a portion of the Class P OP Units described below in connection with the Self-Management Transaction. The Class P OP Units are intended to be treated as “profits interests” in the Operating Partnership, which are non-voting, non-dividend accruing, and are not able to be transferred or exchanged prior to the earlier of (1) March 31, 2024, (2) a change of control (as defined in the Amended OP Agreement), or (3) the date of the recipient's involuntary termination (as defined in the relevant award agreement for the Class P OP Units) (collectively, the “Lockup Period”). Following the expiration of the Lockup Period, the Class P OP Units are convertible into Class C OP Units at a conversion ratio of five Class C OP Units for each one Class P OP Unit; provided, however, that the foregoing conversion ratio shall be subject to increase on generally the same terms and conditions as the Class M OP Units, as set forth above.
The Company issued a total of 56,029 Class P OP Units to Messrs. Halfacre and Raymond J. Pacini, the Company’s Chief Financial Officer, including 26,318 Class P OP Units issued in exchange for Messrs. Halfacre's and Pacini's agreements to forfeit a similar number of restricted units in BrixInvest in connection with the Self-Management Transaction. The remaining 29,711 Class P OP Units were issued to these executives as a portion of their incentive compensation for 2020 in connection with their entry into restrictive covenant agreements. The 29,711 Class P OP Units were valued based on the estimated NAV per share of $10.16 when issued on December 31, 2019 and the expected minimum conversion ratio of five Class C OP Units for each one Class P OP Unit, which resulted in a valuation of $1,509,319. This amount is amortized on a straight-line basis over 51 months through March 31, 2024, the expected vesting date of the units, as a periodic charge to stock compensation expense. During the three and nine months ended September 30, 2020, the Company amortized and charged $88,784 and $266,350, respectively, to stock compensation expense. The unamortized value of these units was $1,242,969 as of September 30, 2020.
Under the Amended OP Agreement, once the Class M OP Units or Class P OP Units are converted into Class C OP Units, they will be exchangeable for the Company’s shares of Class C common stock on a 1-for-1 basis, or for cash at the sole and absolute discretion of the Company. The Company recorded the ownership interests of the Class M OP Units and Class P OP Units as noncontrolling interests in the Operating Partnership, representing a combined total of approximately 13% of equity in the Operating Partnership as of December 31, 2019.
Registration Rights Agreement
On December 31, 2019, the Company, the Operating Partnership and Daisho entered into a Registration Rights Agreement pursuant to which Daisho (or any successor holder) has the right, after one year from the date of the Self-Management Transaction, to request that the Company register for resale, under the Securities Act, shares of the Company's Class C common stock issued or issuable to such holder in exchange for the Class C OP Units as described above.
Accounting Treatment
In accordance with GAAP, the Company accounted for the Self-Management Transaction as an acquisition of a business in accordance with the accounting standards codification guidance for business combinations because the parties to the transaction were not under common control and the acquisition was for an integrated set of activities and assets, consisting of inputs (executives and staff with knowledge and experience) and processes (operating a real estate investment trust and online investor website platform) that contribute to the creation of outputs (real estate transactions, asset management and generation of investors). Therefore, the total consideration transferred was allocated to the acquired net tangible and intangible assets based on their estimated fair values at December 31, 2019.
The fair value measurement of the consideration transferred was based on significant inputs not observable in the market and thus represent a Level 3 measurement as discussed in Note 2. The key assumptions used in estimating the fair value of the Class M OP Units and the Class P OP Units included projections for (i) property acquisitions and changes in property values, (ii) new investors, and (iii) follow on investments by existing stockholders. The consideration transferred in the Self-Management Transaction was determined to have a fair value of $50,603,000 as of December 31, 2019 based on a probability weighted analysis of achieving the requisite AUM and AFFO hurdles. The Class M OP Units and the 26,318 Class P OP Units issued in connection with the Self-Management Transaction were treated as permanent equity of the Company for accounting purposes because the Class M OP Units and the Class P OP Units are not mandatorily redeemable by the Company. In addition, there is no unconditional obligation to issue a variable number of shares; the Class M OP Units and the Class P OP Units are issued in the form of shares and as such would not represent a financial instrument other than an outstanding share that embodies a conditional
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
obligation, and they do not possess the characteristics of freestanding derivatives. Moreover, they are not redeemable for cash or other assets at the option of the holder or upon the occurrence of an event that is not solely within the control of the Company. The Class M OP Units and the Class P OP Units are a single financial instrument, including the conversion ratio enhancement, which cannot be detached and is not separately exercisable.
As of December 31, 2019, the Company had substantially completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the closing date. The Company incurred $1,468,913 in costs in connection with the Self-Management Transaction, which were included in the consolidated statement of operations for the year ended December 31, 2019 and an additional $201,920 in post-closing costs during the nine months ended September 30, 2020, including $193,460 in post-closing costs that were incurred during the three months ended March 31, 2020 and $8,460 in post-closing costs that were incurred during the three months ended June 30, 2020.
Purchase Price Allocation
The following table summarizes the allocation of the purchase price to the fair values assigned to the BrixInvest assets acquired and liabilities assumed as of December 31, 2019, the closing date of the Self-Management Transaction. These fair values were based on internal Company and independent external third-party valuations:
Fair Values AssignedDecember 31, 2019
Assets:
Cash and cash equivalents$(204,176)
Prepaid expenses and other assets(305,212)
Operating lease right-of-use asset(2,386,877)
Intangible assets(7,700,000)
Liabilities:
Short-term notes payable4,800,000 
Due to affiliates630,820 
Bank line of credit800,000 
Accounts payable and other liabilities2,070,968 
Operating lease liability2,386,877 
Net liabilities assumed92,400 
Less: Cancellation of investment in the Company(107,400)
Add: Contribution of Class M OP Units and Class P OP Units50,603,000 
Goodwill$50,588,000 
Prior to the closing of the Self-Management Transaction, BrixInvest held 10,740 shares of Class C common stock in the Company, purchased at $10.00 per share. These shares were canceled in connection with the Self-Management Transaction.
Goodwill
The goodwill recognized was primarily attributable to the Company's ability to be self-managed, the value of the workforce which includes growth opportunities, from both existing and new investments, income streams and the ability to offer new products, the investor platform acquired from BrixInvest and its expected synergies resulting from the Self-Management Transaction and the Merger. Key areas of expected cost synergies include increased purchasing power for acquiring properties, lower financing costs and administrative efficiencies. Goodwill is expected to be mostly non-deductible for tax purposes. As permitted under ASC 805 for business combinations, the Company recorded goodwill because the purchase price of the Self-Management Transaction exceeded the estimated fair value of net identified tangible and intangible assets acquired.
The current COVID-19 pandemic in the United States and globally, and the magnitude and uncertain duration of the economic impacts have resulted in challenges in attracting investor equity during this period of economic weakness and volatility. The disruption in the Company's Offerings is expected to have a protracted impact on capital raising, and the recessionary pressures on the economy have resulted in real estate market uncertainty and an approximate 14% decrease in the estimated fair value of the Company’s real estate properties as of April 30, 2020 as compared with the estimated fair value of the Company’s real estate properties as of December 31, 2019 (see discussion of the Company's updated estimated NAV per share approved on May 20, 2020 above in Note 1). Given these circumstances, the Company revised its capital raise projections, its projections of new investment and other factors contributing to the Company's analysis of estimated fair value of its consolidated business operations. Since the Company is a single reporting unit, the Company performed a quantitative analysis to compare the estimated
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
fair value of the Company’s net tangible and intangible assets, including the estimated fair value of the business acquired from its Former Sponsor, to the carrying value of its net tangible and intangible assets as of March 31, 2020. Since the estimated fair value of the Company’s net tangible and intangible assets was less than the carrying amount of its net tangible and intangible assets, the Company recorded a goodwill impairment charge of $33,267,143 for the three months ended March 31, 2020 which is reflected in the Company’s net loss for the nine months ended September 30, 2020.
The net carrying amount of goodwill as of September 30, 2020 and December 31, 2019 is as follows:
September 30,
2020		December 31,
2019
Goodwill$17,320,857 $50,588,000 
Intangible Assets Acquired
The allocation of the purchase price to the net assets acquired in the Self-Management Transaction resulted in the recognition of $7,700,000 of intangible assets as of the December 31, 2019 closing date. The fair values of the acquired investor lists and developed technology assets, primarily the investor online platform, were determined using the adjusted cost approach, which approximates fair value. The useful lives of the intangible assets were determined based on the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors that may limit the useful life of the respective intangible asset.
Intangible assets, net as of September 30, 2020 and December 31, 2019 and related useful lives were as follows:
Intangible AssetsWeighted-Average Useful LifeSeptember 30,
2020		December 31,
2019
Investor list, net5.0 years$3,494,740 $4,800,000 
Web services technology, domains and licenses3.0 years3,466,102 2,900,000 
6,960,842 7,700,000 
Accumulated amortization(1,372,910)0 
Net$5,587,932 $7,700,000 
During the three and nine months ended September 30, 2020, the Company acquired additional web services technology, domains and licenses intangible assets of $33,061 and $566,102, respectively. Amortization expense for the three and nine months ended September 30, 2020 amounted to $458,371 and $1,372,910, respectively.
As discussed previously, the COVID-19 pandemic has caused significant disruptions in the economy and uncertainties in the investment markets. Based on the impacts on the Company's investors and the economy, the Company evaluated the fair value of intangibles to determine if they exceeded the respective carrying values and determined that a portion of the investor list would no longer be viable and, therefore, an impairment charge of $1,305,260 was recorded for the three months ended March 31, 2020 which is reflected in the Company’s net loss for the nine months ended September 30, 2020.
The estimated amortization expense for the succeeding fiscal years is as follows: October to December 2020, $460,144; 2021, $1,840,576; 2022, $1,840,576; 2023, $749,978; and 2024, $696,658.
NOTE 4.3. REAL ESTATE INVESTMENTS, NET
As of September 30, 2020,2021, the Company’s real estate investment portfolio consisted of (i) 3938 operating properties located in 14 states (including the 17 operating properties of the original 20 operating properties acquired in connection with the Merger on December 31, 2019) including: 14comprised of: 13 retail properties, 14 office properties and 11 industrial properties, (ii) 1 parcel of land, which currently serves as an easement to one ofincluding the Company’s office properties and (iii) a 72.7% undivided TIC Interest not reflected in an office property in Santa Clara, CA, asthe table below but discussed in Note 54.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table provides summary information regarding the Company’s operating properties as of September 30, 2020:2021:
PropertyPropertyLocationAcquisition DateProperty TypeLand, Buildings and ImprovementsTenant Origination and Absorption CostsAccumulated Depreciation and AmortizationTotal Investment in Real Estate Property, NetPropertyLocationAcquisition DateProperty TypeLand, Buildings and ImprovementsTenant Origination and Absorption CostsAccumulated Depreciation and AmortizationTotal Investment in Real Estate Property, Net
Accredo HealthAccredo HealthOrlando, FL6/15/2016Office$9,855,847 $1,269,349 $(2,104,747)$9,020,449 Accredo HealthOrlando, FL6/15/2016Office$9,855,847 $1,269,350 $(2,506,329)$8,618,868 
Dollar GeneralDollar GeneralLitchfield, ME11/4/2016Retail1,281,812 116,302 (155,945)1,242,169 Dollar GeneralLitchfield, ME11/4/2016Retail1,281,812 116,302 (196,188)1,201,926 
Dollar GeneralDollar GeneralWilton, ME11/4/2016Retail1,543,776 140,653 (199,575)1,484,854 Dollar GeneralWilton, ME11/4/2016Retail1,543,776 140,653 (251,079)1,433,350 
Dollar GeneralDollar GeneralThompsontown, PA11/4/2016Retail1,199,860 106,730 (149,835)1,156,755 Dollar GeneralThompsontown, PA11/4/2016Retail1,199,860 106,730 (188,502)1,118,088 
Dollar GeneralDollar GeneralMt. Gilead, OH11/4/2016Retail1,174,188 111,847 (143,657)1,142,378 Dollar GeneralMt. Gilead, OH11/4/2016Retail1,174,188 111,847 (180,730)1,105,305 
Dollar GeneralDollar GeneralLakeside, OH11/4/2016Retail1,112,872 100,857 (147,437)1,066,292 Dollar GeneralLakeside, OH11/4/2016Retail1,112,872 100,857 (185,485)1,028,244 
Dollar GeneralDollar GeneralCastalia, OH11/4/2016Retail1,102,086 86,408 (143,250)1,045,244 Dollar GeneralCastalia, OH11/4/2016Retail1,102,086 86,408 (180,218)1,008,276 
Dana (1)Cedar Park, TX12/27/2016Industrial6,802,876 531,439 (1,762,138)5,572,177 
Northrop GrummanNorthrop GrummanMelbourne, FL3/7/2017Office12,382,991 1,341,199 (2,773,228)10,950,962 Northrop GrummanMelbourne, FL3/7/2017Office12,382,991 1,469,737 (3,466,555)10,386,173 
exp US Servicesexp US ServicesMaitland, FL3/27/2017Office6,056,668 388,248 (777,286)5,667,630 exp US ServicesMaitland, FL3/27/2017Office6,056,668 388,248 (1,001,253)5,443,663 
Harley (1)Harley (1)Bedford, TX4/13/2017Retail12,947,054 — (1,281,445)11,665,609 
WyndhamWyndhamSummerlin, NV6/22/2017Office10,406,483 669,232 (1,081,599)9,994,116 WyndhamSummerlin, NV6/22/2017Office10,406,483 669,232 (1,436,091)9,639,624 
Williams SonomaWilliams SonomaSummerlin, NV6/22/2017Office8,079,612 550,486 (980,566)7,649,532 Williams SonomaSummerlin, NV6/22/2017Office8,079,612 550,486 (1,292,121)7,337,977 
OmnicareOmnicareRichmond, VA7/20/2017Industrial7,262,747 281,442 (771,324)6,772,865 OmnicareRichmond, VA7/20/2017Industrial7,275,115 281,442 (1,016,164)6,540,393 
EMCOREMCORCincinnati, OH8/29/2017Office5,960,610 463,488 (559,314)5,864,784 EMCORCincinnati, OH8/29/2017Office5,960,610 463,488 (738,712)5,685,386 
HusqvarnaHusqvarnaCharlotte, NC11/30/2017Industrial11,840,200 1,013,948 (1,024,378)11,829,770 HusqvarnaCharlotte, NC11/30/2017Industrial11,840,200 1,013,948 (1,381,471)11,472,677 
AvAirAvAirChandler, AZ12/28/2017Industrial27,357,900 0 (1,937,616)25,420,284 AvAirChandler, AZ12/28/2017Industrial27,357,899 — (2,631,689)24,726,210 
3M3MDeKalb, IL3/29/2018Industrial14,762,819 2,356,361 (3,165,253)13,953,927 3MDeKalb, IL3/29/2018Industrial14,762,819 2,356,361 (4,410,594)12,708,586 
CumminsCumminsNashville, TN4/4/2018Office14,465,491 1,536,998 (1,953,297)14,049,192 CumminsNashville, TN4/4/2018Office14,538,528 1,536,998 (2,759,017)13,316,509 
Northrop Grumman ParcelNorthrop Grumman ParcelMelbourne, FL6/21/2018Land329,410 0 0 329,410 Northrop Grumman ParcelMelbourne, FL6/21/2018Land329,410 — — 329,410 
Texas HealthTexas HealthDallas, TX9/13/2018Office6,976,703 713,221 (607,013)7,082,911 Texas HealthDallas, TX9/13/2018Office6,976,703 713,221 (904,326)6,785,598 
Bon SecoursBon SecoursRichmond, VA10/31/2018Office10,388,751 800,356 (865,130)10,323,977 Bon SecoursRichmond, VA10/31/2018Office10,399,820 800,356 (1,318,163)9,882,013 
CostcoCostcoIssaquah, WA12/20/2018Office27,330,797 2,765,136 (2,328,660)27,767,273 CostcoIssaquah, WA12/20/2018Office27,330,797 2,765,136 (3,631,336)26,464,597 
Taylor Fresh FoodsTaylor Fresh FoodsYuma, AZ10/24/2019Industrial34,194,369 2,894,017 (1,266,604)35,821,782 Taylor Fresh FoodsYuma, AZ10/24/2019Industrial34,194,369 2,894,017 (2,588,277)34,500,109 
Chevron Gas StationSan Jose, CA12/31/2019Retail4,054,759 145,577 (45,475)4,154,861 
Raising Cane'sRaising Cane'sSan Antonio, TX7/26/2021Retail3,430,224 213,997 (24,221)3,620,000 
LevinsLevinsSacramento, CA12/31/2019Industrial4,429,390 221,927 (165,456)4,485,861 LevinsSacramento, CA12/31/2019Industrial4,429,390 221,927 (386,065)4,265,252 
Chevron Gas StationRoseville, CA12/31/2019Retail3,648,571 136,415 (89,270)3,695,716 
Dollar GeneralDollar GeneralBakersfield, CA12/31/2019Retail4,899,714 261,630 (110,349)5,050,995 Dollar GeneralBakersfield, CA12/31/2019Retail4,899,714 261,630 (257,482)4,903,862 
PMI PreclinicalSan Carlos, CA12/31/2019Industrial9,672,174 408,225 (153,241)9,927,158 
EcoThriftSacramento, CA12/31/2019Retail5,550,226 273,846 (223,109)5,600,963 
LabcorpLabcorpSan Carlos, CA12/31/2019Industrial9,672,174 408,225 (357,562)9,722,837 
GSA (MSHA)GSA (MSHA)Vacaville, CA12/31/2019Office3,112,076 243,307 (103,886)3,251,497 GSA (MSHA)Vacaville, CA12/31/2019Office3,112,076 243,307 (242,401)3,112,982 
PreK EducationPreK EducationSan Antonio, TX12/31/2019Retail12,447,287 447,927 (449,571)12,445,643 PreK EducationSan Antonio, TX12/31/2019Retail12,447,287 555,767 (1,006,332)11,996,722 
Dollar TreeDollar TreeMorrow, GA12/31/2019Retail1,320,367 73,298 (53,183)1,340,482 Dollar TreeMorrow, GA12/31/2019Retail1,320,367 73,298 (124,094)1,269,571 
Solar TurbinesSolar TurbinesSan Diego, CA12/31/2019Office7,133,241 284,026 (253,605)7,163,662 Solar TurbinesSan Diego, CA12/31/2019Office7,133,241 284,026 (561,523)6,855,744 
Wood GroupWood GroupSan Diego, CA12/31/2019Industrial9,731,220 392,955 (423,870)9,700,305 Wood GroupSan Diego, CA12/31/2019Industrial9,869,520 539,633 (806,309)9,602,844 
ITW RippeyITW RippeyEl Dorado, CA12/31/2019Industrial7,071,143 304,387 (226,824)7,148,706 ITW RippeyEl Dorado, CA12/31/2019Industrial7,071,143 304,387 (532,405)6,843,125 
Dollar GeneralDollar GeneralBig Spring, TX12/31/2019Retail1,281,683 76,351 (38,227)1,319,807 Dollar GeneralBig Spring, TX12/31/2019Retail1,281,683 76,351 (89,195)1,268,839 
GapGapRocklin, CA12/31/2019Office8,378,276 360,377 (359,480)8,379,173 GapRocklin, CA12/31/2019Office8,407,236 360,377 (839,188)7,928,425 
L-3 CommunicationsSan Diego, CA12/31/2019Industrial11,631,857 454,035 (353,117)11,732,775 
L3HarrisL3HarrisSan Diego, CA12/31/2019Industrial11,631,857 454,035 (823,940)11,261,952 
Sutter HealthSutter HealthRancho Cordova, CA12/31/2019Office29,555,055 1,616,610 (810,261)30,361,404 Sutter HealthRancho Cordova, CA12/31/2019Office29,586,023 1,616,610 (1,890,868)29,311,765 
WalgreensWalgreensSanta Maria, CA12/31/2019Retail5,223,442 335,945 (99,720)5,459,667 WalgreensSanta Maria, CA12/31/2019Retail5,223,442 335,945 (232,681)5,326,706 
$351,009,349 $24,274,555 $(28,856,496)$346,427,408 $347,624,896 $23,784,332 $(41,720,011)$329,689,217 
(1)    See impairment chargesReclassified to real estate investment held for investment and use during the second quarter of 2021 from real estate held for sale beginning September 30, 2020 (see detailed discussion below.below).
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Impairment Charges
During late March 2020, the Company learned that there would be a substantial impact on the commercial real estate market and specifically on fitness centers such as the Company's property leased at that time to 24 Hour Fitness USA, Inc. (“24 Hour Fitness”) due to the COVID-19 pandemic and the requirement of an indefinite and potentially extended period of store closures.
On March 31, 2020, the Company received written notice from 24 Hour Fitness USA, Inc. (“24 Hour Fitness”) that due to circumstances beyond its control, including the response to the COVID-19 pandemic and directives and mandates of various governmental authorities affecting the Las Vegas, NVNevada 24 Hour Fitness store leased from the Company, had been closed on or about March 17, 2020 and remained closed as of the date of the tenant's notice. The tenant's notice stated that it would not make the April 2020 rent payment. The Company's special purpose subsidiary, which owns the property, immediately initiatedDespite negotiations with the tenant; however,tenant, no further rent payments were received and on June 15, 2020, the Company received written notice that the lease was formally rejected in connection with 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the premises were surrendered to the Company's subsidiary.
On April 1, 2020, the Company’s special purpose subsidiary initiated negotiations with the The lender on the property regarding the special purpose subsidiary's request for a deferral of mortgage payments until the tenant resumed paying rent. The lender on this property did not agree to provide any substantial mortgage relief to the Company's special purpose subsidiary, but rather agreed to temporarily reduce its $32,000 monthly mortgage payment by $8,000 from May through August 2020. The2020 and the Company's special purpose subsidiary determined that if it was unable to secure a replacement tenant, then it would consider allowing the lender to foreclose on, and take possession of, the property. As such, the Company concluded that it was necessary to record an impairment charge to reduce the net book value of the property to its estimated fair value.
In addition, during the first quarter of 2020, the Company determined that the effects of the COVID-19 pandemic on the overall economy and commercial real estate market would also have negative impacts on the Company's ability to re-lease 2 vacant properties, the property formerly leased to Dinan Cars located in Morgan Hill, CACalifornia through January 31, 2020 and the property leased to Dana, but currently unoccupied, located in Cedar Park, TX. Texas.
Based on an evaluation of the value of these 2 properties, the Company determined that impairment charges were required during the three months ended March 31, 2020 to reflect the reduction in value due to the uncertainty regarding leasing or sale prospects.
Effective August 1, 2020, the Company executed an amendment for the early termination of the Dana lease from July 31, 2024 to July 31, 2022 in exchange for an early termination payment of $1,381,767 due on July 31, 2022 and continued rent payments of $65,000 per month from August 1, 2020 through July 1, 2022. In the event that the Company is able to re-lease or sell the Dana property prior to July 31, 2022, Dana would be obligated to continue paying rent of $65,000 per month through July 1, 2022 or may elect to pay a cash lump sum payment to the Company equal to the net present value of the remaining rent payments.
During the three months ended March 31, 2020, the Company recorded impairment charges aggregating $9,157,068, based on the estimated fair valuevalues of the aforementioned real estate properties discussed above, and duringproperties. During the three months ended June 30, 2020, the Company recorded an additional impairment charge of $349,457 related to its property located in Lake Elsinore, CACalifornia and leased to Rite Aid through February 29, 2028. ThisThe Company determined that the impairment charge representedwas required, representing the excess of the property's carrying value over the property's estimated sale price less estimated selling costs (see below for discussion of the property sale). subsequent sale.
The first quarter aggregate impairment charges of $9,157,068 represented approximately 2.2% of the Company’s total investments in real estate property before impairments as of March 31, 2020 and the second quarter impairment charge of $349,457 represented approximately 0.1% of the Company’s total investments in real estate property before impairments as of June 30, 2020. The properties formerly leased by Rite Aid, Dinan Cars, 24 Hour Fitness and Dana were sold in August, October and December 2020 and July 2021, respectively.
There were 0 additionalno impairment charges recorded during the three months ended September 30, 2020.
2021 and 2020 and the nine months ended September 30, 2021. The details of the Company's real estate impairment charges for the nine months ended September 30, 2020 were as follows:
PropertyLocationNine Months Ended
September 30, 2020
Rite AidLake Elsinore, CA$349,457 
DanaCedar Park, TX2,184,395 
24 Hour FitnessLas Vegas, NV5,664,517 
Dinan CarsMorgan Hill, CA1,308,156 
Total$9,506,525 
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Acquisitions:Acquisition
During the nine months ended September 30, 2021, the Company acquired the following real estate property:
PropertyAcquisition DateLandBuildings and
Improvements		Tenant
Origination
and Absorption
Costs		Total
Raising Cane's7/26/2021$1,902,069 $1,528,155 $213,997 $3,644,221 
During the three and nine months ended September 30, 2021, the Company recognized $47,004 of total revenue related to the above-acquired property.
The noncancellable lease term of the property acquired during the nine months ended September 30, 2021 is as follows:
PropertyLease Expiration
Raising Cane's2/20/2028
The Company did 0tnot acquire any real estate properties during the nine months ended September 30, 2020 or 2019.2020.
Dispositions:Dispositions
The Company sold the following propertiesdispositions during the nine months ended September 30, 2020:2021 and 2020 were as follows:
PropertyLocationDisposition DateProperty TypeRentable Square FeetContract Sale Price(Loss) Gain on Sale
Rite AidLake Elsinore, CA8/3/2020Retail70,960 $7,250,000 $(422)
WalgreensStockbridge, GA8/27/2020Retail15,120 5,538,462 1,306,768 
Island PacificElk Grove, CA9/16/2020Retail27,296 3,155,000 387,296 
113,376 $15,943,462 $1,693,642 
Nine Months Ended September 30, 2021
PropertyLocationDisposition DateProperty TypeRentable Square FeetContract Sale PriceGain on Sale
Chevron Gas StationRoseville, CA1/7/2021Retail3,300 $4,050,000 $228,769 
EcoThriftSacramento, CA1/29/2021Retail38,536 5,375,300 51,415 
Chevron Gas StationSan Jose, CA2/12/2021Retail1,060 4,288,888 9,458 
DanaCedar Park, TX7/7/2021Industrial45,465 10,000,000 4,127,638 
88,361 $23,714,188 4,417,280 
24 Hour Fitness Adjustment115,133 
Total$4,532,413 
On January 7, 2021, the Company completed the sale of its Roseville, California retail property, which was leased to the operator of a Chevron gas station, for $4,050,000, which generated net proceeds of $3,914,909 after payment of commissions and closing costs.
On January 29, 2021, the Company completed the sale of its Sacramento, California retail property, which was leased to EcoThrift, for $5,375,300, which generated net proceeds of $2,684,225 after repayment of the existing mortgage, commissions and closing costs.
On February 12, 2021, the Company completed the sale of its San Jose, California retail property, which was leased to the operator of a Chevron gas station, for $4,288,888, which generated net proceeds of $4,054,327 after payment of commissions and closing costs.
On July 7, 2021, the Company completed the sale of its Cedar Park, Texas industrial property which was leased to Dana Incorporated, but unoccupied, for $10,000,000, which generated net proceeds of $4,975,334 after repayment of the existing mortgage, commissions and closing costs. Upon the sale of the property, Dana Incorporated executed a promissory note payable to the Company for its obligation to continue to pay rent of $65,000 per month through July 2022 and pay its early termination fee of $1,381,767 no later than July 31, 2022. The unpaid amount of the Company's note receivable of $1,966,767 is presented as receivable from early termination of lease in the Company's unaudited condensed consolidated balance sheet as of September 30, 2021.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On September 24, 2021, the Company received a notice of refund amounting to $115,133 related to the sale of its Las Vegas, Nevada retail property on December 16, 2020, which was formerly leased to 24 Hour Fitness. The refund relates to a portion of a holdback from sales proceeds to cover expenses by the buyer to prepare the property for lease, including the payment of accrued interest, common area maintenance, taxes, insurance and other related expenses and building permits to begin construction of improvements on the property. The refund was recognized as an adjustment to the estimate of the amount which was expected to be received and was included in gain on sale of real estate investments in the accompanying unaudited condensed consolidated statements of operations.
Nine Months Ended September 30, 2020
PropertyLocationDisposition DateProperty TypeRentable Square FeetContract Sale Price(Loss) Gain on Sale
Rite AidLake Elsinore, CA8/3/2020Retail70,960 $7,250,000 $(422)
WalgreensStockbridge, GA8/27/2020Retail15,120 5,538,462 1,306,768 
Island PacificElk Grove, CA9/16/2020Retail27,296 3,155,000 387,296 
Total113,376 $15,943,462 $1,693,642 
On August 3, 2020, the Company completed the sale of its Lake Elsinore, CACalifornia retail property, which was leased to Rite Aid, for $7,250,000, which generated net proceeds of $3,299,016 after repayment of the existing mortgage, commissions and closing costs. Prior to the sale, the Company evaluated the Rite Aid property for impairment and recognized a $349,457 impairment charge during the three months ended June 30, 2020 in order to reduce the carrying value of the property to its estimated fair value.
On August 27, 2020, the Company completed the sale of its Stockbridge, GAGeorgia retail property, which was leased to Walgreens, for $5,538,462, which generated net proceeds of $5,296,356 after payment of commissions and closing costs. The mortgage for this property was previously repaid on August 10, 2020 in connection with the refinancing of the Accredo property as discussed in Note 7.
On September 16, 2020, the Company completed the sale of its Elk Grove, CACalifornia retail property, which was leased to Island Pacific, for $3,155,000, which generated net proceeds of $1,124,016 after repayment of the existing mortgage, commissions and closing costs.
Asset Concentration
The Company holdsheld no real estate property with a net book value that is greater than 10% of its total assets as of September 30, 2020 and2021 or December 31, 2019.2020.
Revenue Concentration
No tenantstenant represented the source of 10% of total revenues during the three orand nine months ended September 30, 2020. The Company’s revenue concentration based on tenants representing greater than 10% of total revenues for2021 nor during the three and nine months ended September 30, 2019 was as follows:
Three Months Ended
September 30, 2019
Property and LocationRevenuePercentage of Total Revenue
Costco, Issaquah, WA$662,585 10.8 %
AvAir, Chandler, AZ$671,406 11.0 %
Nine Months Ended
September 30, 2019
Property and LocationRevenuePercentage of Total Revenue
Costco, Issaquah, WA$2,038,609 11.4 %
AvAir, Chandler, AZ$2,004,954 11.2 %
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
2020.
Operating Leases
The Company’s real estate properties are primarily leased to tenants under net leases for which terms and expirations vary. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies or lease guarantors) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
During the first four months of 2020, the Company paid an aggregate of $990,000 in lease incentives to cancel certain termination options related to 2 leases with Walgreens for its Santa Maria, California and Stockbridge, Georgia properties, resulting in extension of the leases for approximately 10 years each. The Stockbridge property was sold on August 27, 20202020. These costs were capitalized and are amortized over the period of the extension for the Santa Maria property and were charged to cost of sale for the Stockbridge property in August 2020.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
During the second quarter of 2021, the tenant in the Company's PreK Education retail property in San Antonio, Texas exercised its option to extend its lease term for eight years from the original termination of July 31, 2021 to July 31, 2029 with an increase in monthly rent. The terms of the original lease required the Company to pay a $2,000,000 term completion incentive upon exercise of the option and the tenant agreed to defer the timing of this payment to no later than January 31, 2022. The deferred lease incentive is presented under prepaid and other assets and the obligation is included in accounts payable, accrued and other liabilities in the Company's balance sheet as discussed above.of September 30, 2021.
As of September 30, 2020,2021, the future minimum contractual rent payments due to the Company under the Company’s non-cancellable operating leases, excluding rents due related to real estate investments held for sale,including lease amendments executed though the date of this report are as follows:
October through December 2020$6,528,690 
202125,681,770 
October through December 2021October through December 2021$6,687,205 
2022202223,147,301 202226,946,631 
2023202319,412,451 202325,024,065 
2024202419,229,235 202424,593,849 
2025202515,813,536 202521,424,993 
2026202614,552,340 
ThereafterThereafter42,540,235 Thereafter60,307,335 
$152,353,218 $179,536,418 
IntangiblesLease Intangible Assets, Net
As of September 30, 2020,2021, the Company’s lease intangiblesintangible assets were as follows:
Tenant Origination and Absorption CostsAbove-Market Lease IntangiblesBelow-Market Lease Intangibles
Cost$24,274,555 $1,194,720 $(15,552,554)
Accumulated amortization(8,689,796)(284,219)2,277,721 
Net amount$15,584,759 $910,501 $(13,274,833)
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Tenant Origination and Absorption CostsAbove-Market Lease IntangiblesBelow-Market Lease Intangibles
Cost$23,784,332 $1,128,549 $(15,097,132)
Accumulated amortization(12,041,766)(405,074)3,631,118 
Net amount$11,742,566 $723,475 $(11,466,014)
The intangible assets acquired in connection with the acquisitions have a weighted average amortization period of approximately 9.3 years as of September 30, 2020.2021. As of September 30, 2020,2021, the amortization of intangible assets for the remaining three months ending December 31, 20202021 and for each year of the next five years and thereafter is expected to be as follows:
Tenant Origination and Absorption CostsAbove-Market Lease IntangiblesBelow-Market Lease IntangiblesTenant Origination and Absorption CostsAbove-Market Lease IntangiblesBelow-Market Lease Intangibles
October through December 2020$1,106,918 $35,445 $(383,344)
20213,698,643 141,779 (1,525,877)
October through December 2021October through December 2021$792,583 $32,455 $(363,041)
202220222,709,134 141,780 (1,280,223)20222,715,030 129,823 (1,217,029)
202320231,832,039 139,131 (984,317)20231,838,120 127,174 (921,169)
202420241,715,028 134,500 (980,897)20241,726,446 122,543 (917,750)
202520251,316,375 122,383 (980,897)20251,344,132 115,996 (917,750)
20262026720,006 78,557 (912,347)
ThereafterThereafter3,206,622 195,483 (7,139,278)Thereafter2,606,249 116,927 (6,216,928)
$15,584,759 $910,501 $(13,274,833)$11,742,566 $723,475 $(11,466,014)
Weighted-average remaining amortization periodWeighted-average remaining amortization period7.0 years7.3 years12.2 yearsWeighted-average remaining amortization period7.1 years6.6 years11.8 years
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Investments Held For Sale
As a result of the COVID-19 pandemic discussed in Note 1, starting during the second quarter of 2020, the Company deemed it necessary to sell certain of its real estate investment properties to generate funds for share repurchases and certain debt obligations. During the three months ended June 30, 2020, the Company identified 49 real estate investment properties (8 retail properties and 1 industrial property) as held for sale. TheseDuring the second half of 2020, 5 of the 9 properties (4 retail properties and 1 industrial property) were sold. Of the 4 remaining retail properties consistedheld for sale as of December 31, 2020, the Company sold 3 retail properties (theduring the first quarter of 2021: the EcoThrift property and the 2 Chevron properties (see Dispositions above for more details). The Harley Davidson retail property, which was the only property held for sale as of March 31, 2021, was reclassified as held for investment and use during the second quarter of 2021 (see discussion in Change in Plan of Salebelow for more details).
During the second quarter of 2021, the Company identified and reclassified the industrial property located in Cedar Park, Texas leased to Island Pacific Supermarket through May 30, 2033 located in Elk Grove, CA, the property leased to Rite Aid through February 29, 2028 located in Lake Elsinore, CA and the property leased to Walgreens through February 28, 2031 located in Stockbridge, GA) and 1 industrial property previously leased to Dinan Cars located in Morgan Hill, CA. These properties were classifiedDana Incorporated, but unoccupied, as real estate investmentsinvestment held for sale, net in the Company's condensed consolidated balance sheet as of June 30, 2020. As discussed above, the 3 retail properties were subsequently sold during the three months ended September 30, 2020. The industrialsale. This property was sold on October 28, 2020 as discussed in Note 11.July 7, 2021.
During the three months ended September 30, 2020, theThe Company also determined to sell 2 additional retail properties (the property leased to Harley Davidson through April 12, 2032 located in Bedford, TX and the property formerly leased to 24 Hour Fitness located in Las Vegas, NV) resulting in a total of 3 properties classified ashad no real estate investments classified as held for sale as of September 30, 2020, including the Morgan Hill, CA industrial property that was sold on October 28, 2020.
On September 17, 2020, the Company’s special purpose subsidiary entered into a purchase and sale agreement to sell the Las Vegas property formerly leased to 24 Hour Fitness, subject to a number of contingencies including lender approval of the buyer’s assumption of the existing mortgage. There can be no assurances that all of the contingencies will be satisfied or that the transaction will close. If the Company's special purpose subsidiary does not complete the sale of the Las Vegas property formerly leased to 24 Hour Fitness, then it would consider allowing the lender to foreclose on, and take possession of, the property. The estimated liability of $3,120,678 under a loan guarantee related to the secured mortgage was accrued and included in liabilities related to real estate held for sale on the condensed consolidated balance sheet as of September 30, 2020.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
2021. The following table summarizes the major components of assets and liabilities related to real estate investments held for sale as of September 30, 2020:December 31, 2020 related to the Harley Davidson, EcoThrift and 2 Chevron properties:
September 30, December 31,
2020
Assets related to real estate investments held for sale:
Land, buildings and improvements$24,971,75425,675,459 
Tenant origination and absorption costs176,276554,788 
Accumulated depreciation and amortization(2,114,912)(1,644,508)
Real estate investments held for sale, net23,033,11824,585,739 
Other assets, net864,0081,079,361 
Total assets related to real estate investments held for sale:$23,897,12625,665,100 
Liabilities related to real estate investments held for sale:
Mortgage notes payable, net$14,671,3709,088,438 
Other liabilities, net (a)3,934,795801,337 
Total liabilities related to real estate investments held for sale:$18,606,1659,889,775 
(a)    Includes the estimated liability for a loan guarantee related to the secured mortgage for the Las Vegas, Nevada property formerly leased to 24 Hour Fitness, as a result of the evaluation of the impact of the COVID-19 pandemic on the tenant's business and the risk that the lender could foreclose on the property if the pending sale described above does not close.
The following table summarizes the major components of rental income, expenses and impairment related to the 3 real estate investments held for sale as of September 30, 2020 (the property previously leased to Dinan Cars located in Morgan Hill, California, the property leased to Harley Davidson located in Bedford, Texas and the property previously leased to 24 Hour Fitness located in Las Vegas, Nevada), which were included in continuing operations for the three and nine months ended September 30, 2020 and 2019:2020:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Total revenues$366,673 $593,981 $2,004,279 $1,750,072 
Expenses:
Interest expense169,871 155,722 554,009 610,583 
Depreciation and amortization145,695 198,785 554,036 594,353 
Other expenses143,173 169,520 414,115 499,998 
Impairment of real estate properties/reserve0 0 10,097,710 0 
Total expenses458,739 524,027 11,619,870 1,704,934 
Net (loss) income$(92,066)$69,954 $(9,615,591)$45,138 
As discussed in Note 3, the property located in Morgan Hill, CA was acquired in the Merger on December 31, 2019 and therefore did not contribute to the Company's rental income or net loss for the three and nine months ended September 30, 2019.
Three Months Ended September 30,Nine Months Ended September 30,
20202020
Total revenues$366,673 $2,004,279 
Expenses:
Interest expense169,871 554,009 
Depreciation and amortization145,695 554,036 
Other expenses143,173 414,115 
Impairment— 10,097,710 
Total expenses458,739 11,619,870 
Net loss$(92,066)$(9,615,591)
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RW HOLDINGS NNN REIT,MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Change in Plan of Sale
On September 30, 2020, the Company reclassified the Harley Davidson property’s net book value (“NBV”) of $12,010,919 to real estate held for sale and suspended recording depreciation for the property as of that date. On December 31, 2020, the Company recorded an impairment loss of $632,233 based on the expected net proceeds of sale of the property of $12,117,500 compared to the property's NBV combined with the outstanding straight-line rent receivable balance. Following unsuccessful efforts to sell the property at a price which would be acceptable to the Company, the Company decided to withdraw its decision to sell the property during June 2021 and reclassified the Harley Davidson property to real estate investment held for investment and use.
At the time of the decision to reclassify the property to real estate investment held for investment and use in June 2021, the carrying value of the property would have been $11,779,687 if continuously depreciated since September 30, 2020. The fair value of the property as of the June 2021 determination was $11,860,000, based on management’s value for the property in the June 30, 2021 NAV analysis (the most recent valuation at the time of the decision).
As provided by ASC 360-10, since the adjusted carrying value of the property of $11,779,687 was lower than its fair value of $11,860,000, the Company adjusted the net book value of the property to its adjusted carrying value of $11,779,687. The recording of the property at its adjusted carrying value resulted in an adjustment to reduce the impairment loss recorded as of December 31, 2020 by $400,999 during the second quarter of 2021.
NOTE 5.4. INVESTMENT IN UNCONSOLIDATED ENTITY
The Company’s investment in unconsolidated entity as of September 30, 20202021 and December 31, 20192020 is as follows:
September 30,
2020		December 31,
2019
The TIC Interest$10,085,476 $10,388,588 
September 30,
2021		December 31,
2020
The TIC Interest$9,977,144 $10,002,368 
As discussed in Note 3, REIT I merged with and into the Company on December 31, 2019. The Company’s income (loss) from investmentsinvestment in unconsolidated entitiesentity for the three and nine months ended September 30, 20202021 and 2019,2020 is as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
The TIC Interest$92,617 $72,613 $239,028 $224,676 
REIT I0 (35,043)0 (57,118)
$92,617 $37,570 $239,028 $167,558 
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
The TIC Interest$75,403 $92,617 $222,705 $239,028 
TIC Interest
During 2017, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired an approximate 72.7% interest in an officeindustrial property in SanSanta Clara, California. The remaining approximate 27.3% of undivided interest in the Santa Clara property is held by Hagg Lane II, LLC (an approximate 23.4% interest) and Hagg Lane III, LLC (an approximate 3.9% interest). The manager of both Hagg Lane II, LLC and Hagg Lane III, LLC became a member of the Company's board of directors in December 2019. The Santa Clara property does not qualify as a variable interest entity and consolidation is not required as the Company’s TIC Interest does not control the property. Therefore, the Company accounts for the TIC Interest using the equity method. The Company receives approximately 72.7% of the cash flow distributions and recognizes approximately 72.7% of the results of operations.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
During the three months ended September 30, 20202021 and 2019,2020, the Company received $207,950$85,962 and $221,739$207,950 in cash distributions, respectively, and $247,929 and $542,140 during the nine months ended September 30, 2021 and 2020, and 2019, the Company received $542,140 and $495,357 in cash distributions, respectively.
The following is summarized financial information for the Santa Clara property as of September 30, 20202021 and December 31, 20192020 and for the three and nine months ended September 30, 2021 and 2020:
September 30,
2021		December 31,
2020
Assets:
Real estate investments, net$29,510,151 $29,906,146 
Cash and cash equivalents670,458 380,774 
Other assets176,583 164,684 
Total assets$30,357,192 $30,451,604 
Liabilities:
Mortgage note payable, net$13,287,876 $13,489,126 
Below-market lease, net2,697,183 2,806,973 
Other liabilities343,815 92,777 
Total liabilities16,328,874 16,388,876 
Total equity14,028,318 14,062,728 
Total liabilities and equity$30,357,192 $30,451,604 
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Total revenues$683,160 $697,851 $2,034,072 $2,047,424 
Expenses:
Interest expense138,616 141,935 414,258 424,544 
Depreciation and amortization250,754 250,015 750,784 749,913 
Other expenses190,086 178,522 562,738 544,225 
Total expenses579,456 570,472 1,727,780 1,718,682 
Net income$103,704 $127,379 $306,292 $328,742 
NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill, Net
The changes in carrying value of goodwill as of September 30, 2021 and December 31, 2020 and 2019:are as follows:
September 30,
2020		December 31,
2019
Assets:
Real estate investments, net$30,156,162 $30,858,240 
Cash and cash equivalents356,848 275,760 
Other assets192,251 228,770 
Total assets$30,705,261 $31,362,770 
Liabilities:
Mortgage notes payable$13,555,271 $13,746,635 
Below-market lease, net2,843,570 2,953,360 
Other liabilities129,110 68,587 
Total liabilities16,527,951 16,768,582 
Total equity14,177,310 14,594,188 
Total liabilities and equity$30,705,261 $31,362,770 
September 30,
2021		December 31,
2020
Beginning balance$17,320,857 $50,588,000 
Impairment of goodwill for the nine and the 12 months period ended, respectively— (33,267,143)
Ending balance$17,320,857 $17,320,857 
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Total revenues$697,851 $672,011 $2,047,424 $2,032,004 
Expenses:
Interest expense141,935 144,329 424,544 430,215 
Depreciation and amortization250,015 248,136 749,913 744,408 
Other expenses178,522 179,680 544,225 548,378 
Total expenses570,472 572,145 1,718,682 1,723,001 
Net income$127,379 $99,866 $328,742 $309,003 
REIT I
PriorThe current COVID-19 pandemic in the United States and globally, and the magnitude and uncertain duration of the economic impacts, have resulted in challenges in attracting investor equity during this period of economic weakness and volatility. The disruption in the Company's Offerings had a protracted impact on capital raising, and the recessionary pressures on the economy resulted in real estate market uncertainty and an approximate 14% decrease in the estimated fair value of the Company’s real estate properties as of April 30, 2020 as compared with the estimated fair value of the Company’s real estate properties as of December 31, 2019. Given these circumstances, the Company revised its capital raise projections, its projections of new investment and other factors contributing to the Merger on December 31, 2019,Company's analysis of estimated fair value of its consolidated business operations as of September 30, 2020. Since the Company had an approximate 4.8% ownership interest in REIT I. Theis a single reporting unit, the Company performed a quantitative analysis to compare the estimated fair value of the Company’s net tangible and intangible assets to the carrying value of its net tangible and intangible assets as of September 30, 2020. Since the estimated fair value of the Company’s net tangible and intangible assets was less than the carrying amount of its net tangible and intangible assets, the Company recorded its sharea goodwill impairment charge of $33,267,143, which was reflected in the Company’s net loss of REIT I based on REIT I’s results of operations for the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2019, the Company received $75,746 and $220,858, respectively, in cash distributions related to its interest in REIT I. The following is REIT I's summarized results of operations for the three and nine months ended September 30, 2019:
Three Months Ended
September 30, 2019		Nine Months Ended
September 30, 2019
Total revenues$3,302,347 $9,868,701 
Expenses:
Depreciation and amortization1,450,227 4,336,641 
Interest expense828,987 2,674,383 
Other expenses1,746,989 4,150,881 
Total expenses4,026,203 11,161,905 
Other income:
Other income (1)0 113,773 
Net loss$(723,856)$(1,179,431)
(1)    The gain on disposal of real estate investment property of $113,773 during the nine months ended September 30, 20192020.
The Company conducted its annual impairment analysis as of December 31, 2020 using qualitative factors and concluded that no additional impairment to goodwill was due to the higher mortgage loan balance and related interest payablenecessary. Management did not identify any triggering events for the Antioch, California Chase property comparednine months ended September 30, 2021 and therefore a qualitative assessment was not required.
Intangible Assets, Net
The following table sets forth the Company's intangible assets, net as of September 30, 2021 and December 31, 2020 and their related useful lives:
Intangible AssetsUseful LifeSeptember 30,
2021		December 31,
2020
Investor list, net5.0 years$3,494,740 $3,494,740 
Web services technology, domains and licenses3.0 years3,661,852 3,466,102 
7,156,592 6,960,842 
Accumulated amortization(3,230,583)(1,833,054)
Net$3,926,009 $5,127,788 
Amortization expense for the three months ended September 30, 2021 and 2020 amounted to its$471,790 and $446,921, respectively, and for the nine months ended September 30, 2021 and 2020 amounted to $1,397,529 and $1,372,910, respectively.
As discussed above, the COVID-19 pandemic caused significant disruptions in the economy and uncertainties in the investment markets. Based on the impacts on the Company's investors and the economy, the Company evaluated the fair value of intangibles to determine if they exceeded the respective carrying values and determined that a portion of the investor list would no longer be viable and, therefore, the Company recorded an impairment charge of $1,305,260, which was reflected in the Company’s net book value when it was relinquished in a foreclosure sale on March 13, 2019.loss for the nine months ended September 30, 2020.
The estimated amortization expense for the remainder of 2021 and the succeeding fiscal years is as follows: October 2021 to December 2021, $476,456; 2022, $1,905,826; 2023, $815,228; and 2024, $728,499.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Tenant Receivables, Net
Tenant receivables consisted of the following:
September 30,
2020		December 31,
2019		September 30,
2021		December 31,
2020
Straight-line rentStraight-line rent$3,880,016 $3,541,238 Straight-line rent$5,399,340 $4,344,388 
Tenant rentTenant rent933,626 420,959 Tenant rent98,363 204,775 
Tenant reimbursementsTenant reimbursements1,811,884 1,854,883 Tenant reimbursements1,849,245 2,116,627 
Tenant other333,085 407,684 
TotalTotal$6,958,611 $6,224,764 Total$7,346,948 $6,665,790 
Accounts Payable, Accrued and Other Liabilities
Accounts payable, accrued and other liabilities were comprised of the following:
September 30,
2020		December 31,
2019
Accounts payable$533,307 $660,111 
Accrued expenses (a)4,385,071 5,773,214 
Accrued distributions694,554 962,615 
Accrued interest payable647,632 1,690,168 
Unearned rent1,679,277 1,963,896 
Lease incentive obligation5,157 505,157 
Total$7,944,998 $11,555,161 
(a)    Includes accrued Merger expenses of $1,570,622 as of December 31, 2019.
September 30,
2021		December 31,
2020
Accounts payable$1,214,828 $1,136,954 
Accrued expenses3,575,331 3,068,714 
Accrued distributions786,120 706,106 
Accrued interest payable611,507 629,628 
Unearned rent1,591,992 2,033,065 
Lease incentive obligation2,133,695 5,157 
Total$9,913,473 $7,579,624 
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 7. DEBT
Mortgage Notes Payable, Net
As of September 30, 20202021 and December 31, 2019,2020, the Company’s mortgage notes payable consisted of the following:
CollateralCollateral2020 Principal
Amount		2019 Principal
Amount		Contractual Interest
Rate (1)		Effective
Interest Rate (1)		Loan
Maturity		Collateral2021 Principal
Amount		2020 Principal
Amount		Contractual Interest
Rate (1)		Effective
Interest Rate (1)		Loan
Maturity
Accredo/Walgreens property (8)(11)$8,538,000 $6,853,442 3.80%3.80%2025-08-01
Accredo propertyAccredo property$8,538,000 $8,538,000 3.80%3.80%8/1/2025
Six Dollar General propertiesSix Dollar General properties3,765,883 3,819,264 4.69%4.69%2022-04-01Six Dollar General properties3,693,074 3,747,520 4.69%4.69%4/1/2022
Dana propertyDana property4,488,612 4,551,250 4.56%4.56%2023-04-01Dana property— 4,466,865 4.56%4.56%4/1/2023
Northrop Grumman property(8)Northrop Grumman property(8)5,556,618 5,666,866 4.40%4.40%2021-03-02Northrop Grumman property(8)6,971,012 5,518,589 3.35%3.35%5/21/2031
exp US Services propertyexp US Services property3,338,239 3,385,353 (3)4.25%2024-11-17exp US Services property3,272,333 3,321,931 (4)4.25%11/17/2024
Harley Davidson property (13)0 6,748,029 4.25%4.25%2024-09-01
Harley Davidson property (2)Harley Davidson property (2)6,525,824 — 4.25%4.25%9/1/2024
Wyndham property (2)(3)Wyndham property (2)(3)5,634,900 5,716,200 One-month LIBOR + 2.05%4.34%2027-06-05Wyndham property (2)(3)5,522,100 5,607,000 One-month LIBOR + 2.05%4.34%6/5/2027
Williams Sonoma property (2)(3)Williams Sonoma property (2)(3)4,461,300 4,530,600 One-month LIBOR + 2.05%4.34%2022-06-05Williams Sonoma property (2)(3)4,368,000 4,438,200 One-month LIBOR + 2.05%4.34%6/5/2022
Omnicare propertyOmnicare property4,213,726 4,273,552 4.36%4.36%2026-05-01Omnicare property4,130,640 4,193,171 4.36%4.36%5/1/2026
EMCOR propertyEMCOR property2,824,657 2,862,484 4.35%4.35%2024-12-01EMCOR property2,771,646 2,811,539 4.35%4.35%12/1/2024
Husqvarna propertyHusqvarna property6,379,182 6,379,182 (4)4.60%2028-02-20Husqvarna property6,379,182 6,379,182 (5)4.60%2/20/2028
AvAir property (9)AvAir property (9)19,950,000 14,575,000 3.80%3.80%2025-08-01AvAir property (9)19,950,000 19,950,000 3.80%3.80%8/1/2025
3M property3M property8,197,500 8,290,000 One-month LIBOR + 2.25%5.09%2023-03-293M property8,058,500 8,166,000 One-month LIBOR + 2.25%5.09%3/29/2023
Cummins propertyCummins property8,364,300 8,458,600 One-month LIBOR + 2.25%5.16%2023-04-04Cummins property8,222,700 8,332,200 One-month LIBOR + 2.25%5.16%4/4/2023
Former 24 Hour Fitness property (5)(13)0 6,283,898 One-month LIBOR + 4.30%4.64%2049-04-01
Texas Health propertyTexas Health property4,382,914 4,400,000 4.00%4.00%2024-12-05Texas Health property4,304,825 4,363,203 4.00%4.00%12/5/2024
Bon Secours propertyBon Secours property5,198,071 5,250,000 5.41%5.41%2026-09-15Bon Secours property5,124,127 5,180,552 5.41%5.41%9/15/2026
Costco propertyCostco property18,850,000 18,850,000 4.85%4.85%2030-01-01Costco property18,850,000 18,850,000 4.85%4.85%1/1/2030
Taylor Fresh FoodsTaylor Fresh Foods12,350,000 12,350,000 3.85%3.85%2029-11-01Taylor Fresh Foods12,350,000 12,350,000 3.85%3.85%11/1/2029
Levins property (6)Levins property (6)2,044,473 2,079,793 One-month LIBOR + 1.93%3.74%2021-01-05Levins property (6)2,671,067 2,032,332 3.75%3.75%2/16/2026
Island Pacific Supermarket property (6)(11)0 1,891,225 One-month LIBOR + 1.93%3.74%2033-05-30
Dollar General Bakersfield property (6)Dollar General Bakersfield property (6)2,283,061 2,324,338 One-month LIBOR + 1.48%3.38%2021-03-05Dollar General Bakersfield property (6)2,244,201 2,268,922 3.65%3.65%2/16/2028
Rite Aid property (6)(11)0 3,659,338 One-month LIBOR + 1.50%3.25%2021-05-05
PMI Preclinical property (6)4,045,472 4,118,613 One-month LIBOR + 1.48%3.38%2021-03-05
EcoThrift property (6)2,590,233 2,639,237 One-month LIBOR + 1.21%2.96%2021-07-05
Labcorp property (6)Labcorp property (6)5,342,133 4,020,418 3.75%3.75%2/16/2026
GSA (MSHA) property (6)GSA (MSHA) property (6)1,763,359 1,796,361 One-month LIBOR + 1.25%3.13%2021-08-05GSA (MSHA) property (6)1,728,428 1,752,092 3.65%3.65%2/16/2026
PreK San Antonio property (6)5,064,184 5,140,343 4.25%4.25%2021-12-01
Dinan Cars property (6)(7)(13)0 2,710,834 2.76%2.76%2022-01-05
Solar Turbines, Amec Foster, ITW Rippey properties (6)9,270,830 9,434,692 3.35%3.35%2026-11-01
Dollar General Big Spring property (6)602,617 611,161 4.50%4.50%2022-04-01
Gap property (6)3,588,893 3,643,166 4.15%4.15%2023-08-01
L-3 Communications property (6)5,211,418 5,284,884 4.69%4.69%2022-04-01
Sutter Health property (6)13,950,432 14,161,776 4.50%4.50%2024-03-09
Walgreens property (6)(10)3,198,668 3,000,000 4.25%4.25%2030-07-16
PreK Education property (7)PreK Education property (7)4,957,705 5,037,846 4.25%4.25%12/1/2021
Solar Turbines, Amec Foster, ITW Rippey properties (7)Solar Turbines, Amec Foster, ITW Rippey properties (7)9,044,276 9,214,700 3.35%3.35%11/1/2026
Dollar General Big Spring property (7)Dollar General Big Spring property (7)590,962 599,756 4.50%4.50%4/1/2022
Gap property (7)Gap property (7)3,512,484 3,569,990 4.15%4.15%8/1/2023
L3Harris property (8)L3Harris property (8)6,260,223 5,185,929 3.35%3.35%5/21/2031
Sutter Health property (7)Sutter Health property (7)13,669,395 13,879,655 4.50%4.50%3/9/2024
Walgreens property (7)Walgreens property (7)3,094,060 3,172,846 4.25%4.25%7/16/2030
Total mortgage notes payableTotal mortgage notes payable180,107,542 195,739,481 Total mortgage notes payable182,146,897 176,948,438 
Plus unamortized mortgage premium, net (12)470,411 489,664 
Plus unamortized mortgage premium, net (9)Plus unamortized mortgage premium, net (9)239,979 447,471 
Less unamortized deferred financing costsLess unamortized deferred financing costs(1,576,836)(2,189,938)Less unamortized deferred financing costs(1,472,537)(1,469,991)
Mortgage notes payable, netMortgage notes payable, net$179,001,117 $194,039,207 Mortgage notes payable, net$180,914,339 $175,925,918 
(1)Contractual interest rate represents the interest rate in effect under the mortgage note payable as of September 30, 2020.2021. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2020,2021, consisting of the contractual interest rate and the effect of the interest rate swap, if applicable (see Note 8for further information regarding the Company’s derivative instruments).
(2)Reclassified to mortgage note payable at June 30, 2021 from mortgage note payable related to real estate investments held for sale as of December 31, 2020 due to a subsequent decision not to sell the real estate investment property securing the loan which was reclassified back to assets held and used from assets held for sale (see Note 3 for additional information).
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RW HOLDINGS NNN REIT,MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(2)(3)The loans on each of the Williams Sonoma and Wyndham properties (collectively, the “Property”) located in Summerlin, Nevada were originated by Nevada State Bank (“Bank”). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing. In addition, the individual loans are subject to a cross collateralization and cross default agreement whereby any default under, or failure to comply with the terms of any one or both of the loans, is an event of default under the terms of both loans. The value of the Property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%.
(3)(4)The initial contractual interest rate is 4.25% and starting November 18, 2022, the interest rate isbecomes the U.S. Treasury Bill index rate plus 3.25%.
(4)(5)The initial contractual interest rate is 4.60% through February 20, 2023 and then the greater of 4.60% or five-year Treasury Constant Maturity (“TCM”) plus 2.45% through February 20, 2028.
(5)(6)The interest rate adjusts in the 133rd, 253rd and 313th months. As discussed in Note 4, during the three months ended September 30, 2020, the Company recorded an impairment charge of $5,664,517 related to its investment in the 24 Hour Fitness property in Las Vegas, Nevada due to the substantial impact on fitness centers from the COVID-19 pandemic and the requirement of an indefinite and potentially extended period of store closures and the resulting inability of the tenant to make rent payments. On April 1, 2020, the Company’s special purpose subsidiary initiated negotiations with the lender on the 24 Hour Fitness property regarding the special purpose subsidiary's request for a deferral of mortgage payments until the tenant resumes paying rent. The lender on this property did not agree to provide any substantial mortgage relief to the Company's special purpose subsidiary, but rather agreed to temporarily reduce its $32,000 monthly mortgage payment by $8,000 for 4 monthly payments from May through August 2020. On June 15, 2020, the Company received written notice that the lease was formally rejected in connection with 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the premises were surrendered to the Company's subsidiary. Asnote as of September 30, 2021 was refinanced on March 5, 2021 with a new lender and terms. The mortgage note as of December 31, 2020 was acquired through the 24 Hour Fitness property was classified as held for sale (see Note 4).Merger on December 31, 2019.
(6)(7)The loan was acquired through the Merger on December 31, 2019.
(7)The Company negotiated a lease termination with Dinan Cars effective January 31, 2020 in exchange for a termination payment from Dinan Cars of $783,182 which was used to reduce the principal balance of this mortgage by $650,000 and establish a payment reserve with the remaining $133,182. In connection with the principal prepayment, the Company terminated the related swap agreement on February 4, 2020 at a cost of $47,000 (see Note 8 for further discussion of the swap agreement termination and Note 11 for details on the sale of the property on October 28, 2020).
(8)The mortgage note with original principalloans on the Northrop Grumman and L3Harris properties were refinanced during the second quarter of $6,800,0002021. The initial contractual interest rate is 3.35% through June 1, 2026 and then the Prime Rate in effect as of June 30, 2020 with an1, 2026 plus 0.25% through May 21, 2031; provided that the second fixed interest rate of 3.95% was refinanced on August 10, 2020 with a new loan for $8,538,000 with an interest rate of 3.80%, secured only by the Accredo property and which will mature on August 1, 2025.not be lower than 3.35% per annum.
(9)The mortgage note with original principal of $14,545,000 as of June 30, 2020 with an effective interest rate of 4.84% was refinanced on July 29, 2020 with a new loan for $19,950,000 with an interest rate of 3.80% and will mature on August 1, 2025. In connection with this refinancing, the mortgage note balance for the Walgreens, Stockbridge, GA property was fully repaid.
(10)The mortgage note of $3,000,000 as of June 30, 2020 with an interest rate of 7.50% was refinanced on July 22, 2020 for $3,217,500 with an interest rate of 4.25%, which will mature on July 16, 2030.
(11)The property was sold during the three months ended September 30, 2020.
(12)Represents unamortized net mortgage premium acquired through the Merger.
(13)The September 30, 2020 principal amount is included in mortgage notes payable related to investments held for sale, net (see details below).
The following summarizes the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement) as of September 30, 20202021 and December 31, 2019:2020:
September 30, 2020December 31, 2019
Face ValueCarrying
Value		Fair ValueFace valueCarrying
Value		Fair Value
Mortgage notes payable$180,107,542 $179,001,117 $179,676,613 $195,739,481 $194,039,207 $200,535,334 
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
September 30, 2021December 31, 2020
Face ValueCarrying
Value		Fair ValueFace valueCarrying
Value		Fair Value
Mortgage notes payable$182,146,897 $180,914,339 $183,304,467 $176,948,438 $175,925,918 $177,573,106 
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of the period end and require a significant amount of judgment. The actual value could be materially different from the Company’s estimate of fair value.
Mortgage Notes Payable Related to Real Estate Investments Held For Sale, Net
As discussed in detail in Note 43, the Company classified 32 properties as real estate held for sale as of December 31, 2020, which were collateral for mortgage notes payable. No properties were classified as held for sale as of September 30, 2020.2021. The following table summarizes the Company's mortgage notes payable related to real estate investments held for sale as of September 30,December 31, 2020:
CollateralSeptember 30, December 31,
2020
Harley Davidson property$6,655,4156,623,346 
24 Hour FitnessEcoThrift property6,241,355 
Dinan Cars property2,019,1682,573,509 
Total14,915,9389,196,855 
Plus unamortized mortgage premium2,3071,550 
Less deferred financing costs(246,875)(109,967)
Mortgage notes payable, net$14,671,3709,088,438 
Unsecured Credit Facility, Net
The details of the Company's unsecured credit facility as of September 30, 2020 and December 31, 2019 follow:
September 30,
2020		December 31,
2019
Unsecured credit facility$6,000,000 $7,740,000 
Less unamortized deferred financing costs(32,271)(90,139)
Unsecured credit facility, net$5,967,729 $7,649,861 
On December 19, 2019, the Company, NNN LP, the Operating Partnership, Merger Sub, BrixInvest and modiv, LLC (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Unsecured Credit Facility”) with Pacific Mercantile Bank (“PMB”). The Unsecured Credit Facility is a line of credit for a maximum principal amount of $12,000,000 and as of September 30, 2020 and December 31, 2019, the Unsecured Credit Facility had an outstanding balance of $6,000,000 and $7,740,000, respectively.
On March 13, 2020, the Company amended the Unsecured Credit Facility to extend the maturity date of $6,940,000 of outstanding borrowings under the Unsecured Credit Facility from March 31, 2020 to July 31, 2020, and to extend the maturity date of $3,060,000 of the outstanding borrowings under the Unsecured Credit Facility from May 4, 2020 to August 31, 2020.
On August 13, 2020, the Company amended the Unsecured Credit Facility to extend the maturity date of $6,000,000 of the outstanding borrowings under the Unsecured Credit Facility to September 1, 2020 and the maturity date of the remaining $6,000,000 of the outstanding borrowings under the Unsecured Credit Facility to October 15, 2021. The Company repaid $6,000,000 of the $12,000,000 then outstanding borrowings under the Unsecured Credit Facility with proceeds generated by property refinancings and asset sales during the three months ended September 30, 2020. Under the August 13, 2020 amendment, there is a moratorium on new borrowings under the Unsecured Credit Facility until the remaining $6,000,000 is fully repaid. The Company paid PMB $25,000 for loan extension and modification fees in connection with the August 13, 2020 amendment.
In connection with the August 13, 2020 amendment to the Unsecured Credit Facility, the Company's Chairman, Mr. Wirta and the Wirta Trust have guaranteed the Company’s obligations under the Unsecured Credit Facility. On July 30, 2020, the Company entered into an indemnification agreement with Mr. Wirta and the Wirta Trust with respect to their guarantees of the Company’s $12,000,000 Unsecured Credit Facility with PMB pursuant to which the Company agreed to indemnify Mr. Wirta and the Wirta Trust if they are required to make payments to PMB pursuant to such guarantees.
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RW HOLDINGS NNN REIT,MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
OnceCredit Facility, Net
The details of the remainingCompany's credit facilities as of September 30, 2021 and December 31, 2020 follow:
September 30,
2021		December 31,
2020
Credit facility$— $6,000,000 
Less unamortized deferred financing costs— (21,724)
Credit facility, net$— $5,978,276 
On March 29, 2021, the Company entered into a new credit facility with Banc of California (the “Credit Facility”) for an aggregate line of credit of $22,000,000 with a maturity date of March 30, 2023, which replaced the prior credit facility provided by Pacific Mercantile Bank (“PMB”) with a balance outstanding of $6,000,000 as of outstanding borrowingsDecember 31, 2020. The Company borrowed $6,000,000 under the Unsecured Credit Facility are fullyand repaid the Unsecured$6,000,000 that was owed to PMB on March 31, 2021. The Credit Facility will again be available to fundprovides the Company’s acquisitionsCompany with a $17,000,000 revolving line of single-tenant, income producing commercial, office, industrial or retailcredit for real estate properties, in an amount of up to 70% ofacquisitions (including the purchase price of such acquisitions. The Company intends$6,000,000 borrowed to repay amounts outstanding under the Unsecured Credit Facility from proceeds generated by asset salesPMB) and mortgage refinancings on one or morean additional $5,000,000 revolving line of the properties owned, either directly or indirectly through one or more wholly-owned single member special purpose entities, by the Operating Partnership, along with gross offering proceeds from the sale of shares of the Company’s common stock.
credit for working capital. Under the terms of the Unsecured Credit Facility, the BorrowersCompany will pay a variable rate of interest on outstanding amounts equal to 1 percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day shall not be less than 5.50%4.75% per annum. The interest rate was 5.50%Company paid Banc of California origination fees of $77,000 in connection with the Credit Facility and 5.75%will pay an unused commitment fee of 0.15% per annum of the unused portion of the Credit Facility, charged quarterly in arrears based on the average unused commitment available under the Credit Facility.
The Credit Facility's unamortized deferred financing costs of $97,092 as of September 30, 20202021 were reclassified and presented under prepaid and other assets in the Company's unaudited condensed consolidated balance sheet as of September 30, 2021. Effective December 31, 2019, respectively. 2021, the Company will present the Credit Facility's unamortized deferred financing costs for the comparative periods under prepaid and other assets in the consolidated balance sheets and will disclose the unamortized values in the consolidated notes to the financial statements.
The current interest rateCredit Facility is 5.50%,secured by substantially all of the Company’s tangible and intangible assets, including intellectual property. The Credit Facility requires the Company to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and minimum tangible NAV (as defined in the loan agreement) of $120,000,000, measured quarterly. Mr. Wirta, the Company’s Chairman, and the Wirta Family Trust guaranteed the $6,000,000 initial borrowing, which isguarantee expired upon the minimum rate.
To securefull repayment of the payment$6,000,000 in August 2021. Mr. Wirta and performancethe Wirta Family Trust have also guaranteed the $5,000,000 revolving line of all obligationscredit for working capital. On March 29, 2021, the Company entered into an updated indemnification agreement with Mr. Wirta and the Wirta Family Trust with respect to their guarantees of borrowings under the Unsecured Credit Facility eachpursuant to which the Company agreed to indemnify Mr. Wirta and the Wirta Family Trust if they are required to make payments to Banc of modiv, LLC and BrixInvest grantedCalifornia pursuant to PMB a security interest in all of their right, title and interest in their accounts, inventory, equipment, deposit accounts, intellectual property, general intangibles, investment property and other property.such guarantees.
The Unsecured Credit Facility contains customary representations, warranties and covenants, which are substantially similar to those in the Company's prior credit facility.facility provided by PMB. The Company’s ability to borrow under the Unsecured Credit Facility will be subject to its ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, tangible net worth, corporate existence and financial reporting obligations. The Unsecured Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, PMBBanc of California may accelerate the repayment of amounts outstanding under the Unsecured Credit Facility, take possession of any collateral securing the Unsecured Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period. The August 13, 2020 amendment to the agreement requires the Company to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and tangible net worth of $125,000,000, measured quarterly.
Short-term Notes Payable
In connection with the Self-Management Transaction, the Company assumed from BrixInvest its unsecured short-term notes payable (formerly known as “Convertible Promissory Notes”) of $4,800,000 on December 31, 2019. The notes represented private party notes and bore interest at a fixed rateAll of 8% with all interest and principal due on the maturity date. Except for six notes from one borrower aggregating $1,024,750 for which the maturity date was extended to April 30, 2020, all notes were repaid prior to March 31, 2020. In exchange for the maturity date extension, the Company agreed to pay 2% of the principal and accrued interest, or $24,845, as an extension fee and agreed to an increase in the interest rate from 8% to 10% per annum during the extension period. The maturity date for the $490,000 of the extended short-term notes was subsequently accelerated to April 6, 2020 in exchange for a $10,000 reduction in the extension fee to $14,845 and these notes were repaid onby April 6, 2020.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Economic Relief Notes Payable
On April 20, 2020, a subsidiary of the Company entered into a loan agreement and promissory note evidencing an unsecured loan in the aggregate amount of $517,000 made to this subsidiary under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act ("(“CARES Act"Act”). The PPP is administered by the U.S. Small Business Administration (the “SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based onIn December 2020, the usesubsidiary of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. Recent modifications to the PPP by the U.S. Treasury and the Paycheck Protection Program Flexibility Act of 2020 have extended the time period for loan forgiveness beyond the original eight-week period to 24 weeks, making it possible for the Company's subsidiary to applyCompany submitted its application for forgiveness of 100%the total amount of the loan to PMB. After PMB’s review, the Company updated its PPP loan priorforgiveness application on February 10, 2021, PMB submitted the application to December 31, 2020. No assurance can be giventhe SBA on February 10, 2021, and on February 16, 2021, the subsidiary of the Company was notified by PMB that the Company's subsidiary will be successful in obtainingapplication for forgiveness of the loan in whole or in part.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The PPP loan was made through PMB. To the extent that the loan is not forgiven, the subsidiary and PMB may mutually agree to fully amortize any unforgiven principal balance of the loan over a period of up to 10 years from the date on which the subsidiary applies for loan forgiveness. The annual interest rate on any unforgiven principal balance of the PPP loan is 1%. The promissory note evidencing the PPP loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations tohad been approved by the SBA or PMB, or breaching the terms of the loan documents. The occurrence of an event of default may result in the repaymentfull amount of all amounts outstanding, collection of all amounts owing from$517,000. Accordingly, the subsidiary, or filing suit and obtaining judgment against the subsidiary.
On May 20, 2020, the Company also obtained a $10,000 Economic Injury Disaster Loan (“EIDL”) from the SBA which is expected to be treated as a grant since the Company has decided not to apply for an EIDL, and will therefore reduce the amountforgiveness of the PPP loan that can be forgiven by $10,000.was recorded as other income in the first quarter of 2021.
Compliance with All Debt Agreements
On March 27, 2020,The Company's maximum leverage, as defined and approved by the Company's conflicts committee and board of directors, approved an increase in the Company's maximum leverage from 50% to 55% in order to allow the Company to take advantageincluding all of the current low interest rate environment,independent directors, is 55% of the aggregate value of the Company’s tangible assets. The Company uses available leverage based on the relative cost of debt and equity capital, and to address strategic borrowing advantages potentially available to the Company.
Pursuant to the terms of mortgage notes payable on certain of the Company’s properties and the Unsecured Credit Facility, the Company and/or the Borrowersborrowers are subject to certain financial loan covenants. The Company and/or the Borrowersborrowers were in compliance with all terms and conditions of the applicablesuch financial loan agreementscovenants as of September 30, 2020. Due to the COVID-19 pandemic, the lender to the Company's special purpose subsidiary which owns the property in Las Vegas, Nevada formerly leased to 24 Hour Fitness agreed to accept reduced payments on the related secured mortgage for four months commencing May 1, 2020 through August 1, 2020 (see Note 4 and above discussion). The Company remains in compliance with the loan agreement for this property and resumed paying the full amount of monthly principal and interest starting September 1, 2020. As discussed in Note 4, the Las Vegas, Nevada property is held for sale as of September 30, 2020.2021.
The following summarizes the future principal repayments of the Company’s mortgage notes payable unsecuredand credit facility and short-term notes payable as of September 30, 2020:2021:
Mortgage Notes
Payable		Unsecured Credit FacilityShort-term Notes Payable (1)Total
October through December 2020$589,782 $0 $527,000 $1,116,782 
202119,665,222 6,000,000 0 25,665,222 
202220,872,760 0 0 20,872,760 
202325,642,334 0 0 25,642,334 
202424,597,822 0 0 24,597,822 
202530,781,081 0 0 30,781,081 
Thereafter57,958,541 0 0 57,958,541 
Total principal180,107,542 6,000,000 527,000 186,634,542 
Plus unamortized mortgage premium, net of unamortized discount470,411 0 0 470,411 
Less deferred financing costs(1,576,836)(32,271)0 (1,609,107)
Net principal$179,001,117 $5,967,729 $527,000 $185,495,846 
(1) The PPP loan is subject to potential forgiveness of up to $517,000 or repayment over an undetermined period of up to 10 years.
Mortgage Notes
Payable		Credit FacilityTotal
October through December 2021$5,578,530 $— $5,578,530 
202211,173,350 — 11,173,350 
202322,204,003 — 22,204,003 
202431,565,888 — 31,565,888 
202528,970,170 — 28,970,170 
202626,484,067 — 26,484,067 
Thereafter56,170,889 — 56,170,889 
Total principal182,146,897 — 182,146,897 
Plus unamortized mortgage premium, net of unamortized discount239,979 — 239,979 
Less deferred financing costs(1,472,537)— (1,472,537)
Net principal$180,914,339 $— $180,914,339 
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RW HOLDINGS NNN REIT,MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Interest Expense
The following is a reconciliation of the components of interest expense for the three and nine months ended September 30, 20202021 and 2019:2020:
Three Months Ended
September 30,		Nine Months Ended
September 30,		Three Months Ended
September 30,		Nine Months Ended
September 30,
20202019202020192021202020212020
Mortgage notes payable:Mortgage notes payable:Mortgage notes payable:
Interest expenseInterest expense$2,135,624 $1,387,785 $6,471,492 $4,232,943 Interest expense$1,812,254 $2,154,363 $5,638,890 $6,454,546 
Amortization of deferred financing costs435,179 120,932 693,810 500,525 
Amortization of deferred financing costs and mortgage premium, netAmortization of deferred financing costs and mortgage premium, net141,235 435,179 355,661 693,810 
Prepayment penaltiesPrepayment penalties138,373 0 138,373 0 Prepayment penalties— 190,574 23,900 237,574 
(Gain) loss on interest rate swaps (1)(Gain) loss on interest rate swaps (1)(179,006)218,642 1,263,691 1,109,027 (Gain) loss on interest rate swaps (1)(166,539)(231,207)(586,782)1,164,490 
Unsecured credit facility:
Credit facilities:Credit facilities:
Interest expenseInterest expense128,333 0 449,791 110,060 Interest expense27,486 128,333 169,571 449,791 
Amortization of deferred financing costsAmortization of deferred financing costs42,288 11,432 117,624 23,311 Amortization of deferred financing costs16,605 42,288 60,468 117,624 
OtherOther31,737 0 61,280 0 Other504 12,998 49,622 78,226 
Total interest expenseTotal interest expense$2,732,528 $1,738,791 $9,196,061 $5,975,866 Total interest expense$1,831,545 $2,732,528 $5,711,330 $9,196,061 
(1)    Includes unrealized (gain) loss on interest rate swaps of $(272,912)$(166,338) and $221,530$(272,912) for the three months ended September 30, 20202021 and 2019,2020, respectively, and $1,019,840$(684,057) and $1,095,547$1,019,840 for the nine months ended September 30, 20202021 and 2019,2020, respectively (see Note 8)for more details). Accrued interest payable of $66,322$54,980 and $22,282$45,636 as of September 30, 20202021 and December 31, 2019,2020, respectively, represents the unsettled portion of the interest rate swaps for the period from origination of the interest rate swap through the respective balance sheet dates.
NOTE 8. INTEREST RATE SWAP DERIVATIVES
The Company, through its limited liability company subsidiaries, entered into interest rate swap agreements with amortizing notional amounts relating to 4 of its mortgage notes payable and assumed 8payable. NaN additional swap agreements assumed in conjunction with the Merger which were in place as of December 31, 2020 were terminated in due course or were terminated in connection with asset sales and terminated 3 swap agreementsrefinancings during the nine months ended September 30, 2020.2021. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks.
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of September 30, 20202021 and December 31, 2019,2020, respectively:
September 30, 2020December 31, 2019September 30, 2021December 31, 2020
Derivative
Instruments		Derivative
Instruments		Number of InstrumentsNotional
Amount (i)		Reference
Rate (ii)		Weighted Average Fixed Pay RateWeighted
Average
Remaining
Term		Number
of
Instruments		Notional
Amount (i)		Reference
Rate (iii)		Weighted Average Fixed Pay RateWeighted
Average
Remaining
Term		Derivative
Instruments		Number of InstrumentsNotional
Amount (i)		Reference
Rate (ii)		Weighted Average Fixed Pay RateWeighted
Average
Remaining
Term		Number
of
Instruments		Notional
Amount (i)		Reference
Rate (iii)		Weighted Average Fixed Pay RateWeighted
Average
Remaining
Term
Interest Rate Swap Derivatives (iv)Interest Rate Swap Derivatives (iv)9$39,384,598 One-month LIBOR + applicable spread/Fixed at 3.13%-5.16%3.53 %2.4 years12$48,215,139 One-month LIBOR + applicable spread/Fixed at 2.76%-5.16%3.87 %2.9 yearsInterest Rate Swap Derivatives (iv)4$26,171,300 One-month LIBOR + applicable spread/Fixed at 4.05%-5.16%4.53 %2.3 years8$36,617,164 One-month LIBOR + applicable spread/Fixed at 3.13%-5.16%3.35 %2.2 years
(i)The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amounts (outstanding principal balance at the maturity date) as of September 30, 20202021 and December 31, 20192020 were $37,528,748$24,935,999 and $45,514,229,$34,989,063, respectively.
(ii)The reference rate was as of September 30, 2020.2021.
(iii)The reference rate was as of December 31, 2019.
(iv)The Company terminated the swap agreement related to the Dinan Cars property mortgage loan on February 4, 2020 at a cost of $47,000 (see Note 7). The Company also terminated the swap agreements related to the Rite Aid property mortgage loan on July 30, 2020 at a cost of $40,700 and Island Pacific property mortgage loan on September 16, 2020 at a cost of $11,500 (see Note 7).2020.
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RW HOLDINGS NNN REIT,MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(iv)During the three months ended September 30, 2020, the Company terminated the swap agreements related to the Rite Aid and Island Pacific properties at aggregate costs of $52,200. No termination of swap agreements were made during the three months ended September 30, 2021. During the nine months ended September 30, 2021 and 2020, the Company terminated swap agreements related to the GSA and Eco-Thrift properties at aggregate costs of $23,900 and terminated the swap agreements related to the Dinan, Rite Aid and Island Pacific properties at aggregate costs of $99,200, respectively.
The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the unaudited condensed consolidated balance sheets:
September 30, 2020December 31, 2019September 30, 2021December 31, 2020
Derivative InstrumentDerivative InstrumentBalance Sheet LocationNumber of
Instruments		Fair ValueNumber of
Instruments		Fair ValueDerivative InstrumentBalance Sheet LocationNumber of
Instruments		Fair ValueNumber of
Instruments		Fair Value
Interest Rate SwapsInterest Rate SwapsAsset - Interest rate swap derivatives, at fair value0$0 5$34,567 Interest Rate SwapsAsset - Interest rate swap derivatives, at fair value—$— —$— 
Interest Rate SwapsInterest Rate SwapsLiability - Interest rate swap derivatives, at fair value9$(2,006,997)7$(1,021,724)Interest Rate SwapsLiability - Interest rate swap derivatives, at fair value4$(1,073,998)8$(1,743,889)
The change in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the unaudited condensed consolidated statements of operations. None of the Company’s derivatives at September 30, 20202021 or December 31, 20192020 were designated as hedging instruments; therefore, the net unrealized (gain) loss recognized on interest rate swaps of $(166,338) and $(272,912) was recorded as a decrease in interest expense for the three months ended September 30, 2021 and $221,5302020, respectively, and $(684,057) and $1,019,840 was recorded as a (decrease) increase in interest expense for the three months ended September 30, 2020 and 2019, respectively, and $1,019,840 and $1,095,547 was recorded as an increase in interest expense for the nine months ended September 30, 2021 and 2020, respectively.
NOTE 9. PREFERRED STOCK
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of preferred stock. In connection with an underwritten public offering in September 2021 (discussed below in detail), the Company classified and 2019, respectivelydesignated 2,000,000 shares of its authorized preferred stock as authorized shares of Series A Preferred Stock. As of September 30, 2021, 2,000,000 shares of authorized Series A Preferred Stock were issued and outstanding.
Underwritten Offering - Series A Preferred Stock
On September 14, 2021, the Company and the Operating Partnership entered into the Underwriting Agreement with the Underwriters, pursuant to which the Company agreed to issue and sell 1,800,000 shares of the Company’s Series A Preferred Stock, with a liquidation preference of $25.00 per share, in the Preferred Offering at a price per share of $25.00. In addition, the Company granted the Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Underwriters exercised in full on September 16, 2021.
In the Underwriting Agreement, the Company and the Operating Partnership made certain customary representations, warranties and covenants and agreed to indemnify the Underwriters against certain liabilities. The issuance and sale of the shares of Series A Preferred Stock, including the issuance and sale of 200,000 shares pursuant to the Underwriters’ full exercise of their option to purchase additional shares, closed on September 17, 2021. The gross proceeds from the Preferred Offering were $50,000,000 and the net proceeds were $47,570,374, after deducting the underwriting discount of $1,575,000 and other offering costs of $854,626.
The Company contributed the net proceeds from the Preferred Offering to the Operating Partnership in exchange for a new class of 7.375% Series A Cumulative Redeemable Perpetual Preferred Units of the Operating Partnership (the “Series A Preferred Units”), which have economic interests that are substantially similar to the designations, preferences and other rights of Series A Preferred Stock. The Company, acting through the Operating Partnership, intends to use the net proceeds from such contribution for general corporate purposes, which is expected to include purchases of additional properties and other real estate and real estate-related assets (see Note 713 for pending real estate investment acquisitions).
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Series A Preferred Stock - Terms
Holders of Series A Preferred Stock are entitled to cumulative dividends in the amount of $1.84375 per share each year, which is equivalent to the rate of 7.375% of the $25.00 liquidation preference per share per annum. The Series A Preferred Stock has no stated maturity and will remain outstanding indefinitely unless redeemed, converted or otherwise repurchased. Except in limited circumstances relating to the Company's qualification as a REIT for U.S. federal income tax purposes, and as described in the articles supplementary governing the terms of the Series A Preferred Stock (the “Articles Supplementary”), the Series A Preferred Stock is not redeemable prior to September 17, 2026.
On and after September 17, 2026, at any time and from time to time, the Series A Preferred Stock will be redeemable in whole or in part, at the Company's option, at a cash redemption price of $25.00 per share, plus an amount equal to all dividends accrued and unpaid (whether or not authorized or declared), if any, to, but not including, the redemption date. In addition, upon the occurrence of a Delisting Event or a Change of Control (each as defined in the Articles Supplementary), the Company may, subject to certain conditions, at its option, redeem the Series A Preferred Stock, in whole or in part, (i) after the first date on which the Delisting Event occurred or (ii) on, or within 120 days after, the first date on which the Change of Control occurred, as applicable, by paying the liquidation preference of $25.00 per share, plus an amount equal to all dividends accrued and unpaid (whether or not authorized or declared), if any, to, but not including, the redemption date.
Upon the occurrence of a Change of Control during a continuing Delisting Event, unless the Company has elected to exercise its redemption right, holders of the Series A Preferred Stock will have certain rights to convert the Series A Preferred Stock into shares of the Company’s Class C common stock. In addition, upon the occurrence of a Delisting Event, the dividend rate will be increased on the day after the occurrence of the Delisting Event by 2.00% per annum to the rate of 9.375% of the $25.00 liquidation preference per share per annum (equivalent to $2.34375 per share each year) from and after the date of the Delisting Event. Following the cure of such Delisting Event, the dividend rate will revert to the rate of 7.375% of the $25.00 liquidation preference per share per annum. The necessary conditions to convert the Series A Preferred Stock into the Company's Class C common stock have not been met as of September 30, 2021. Therefore, the Series A Preferred Stock did not impact the Company’s earnings per share calculations for the three and nine months ended September 30, 2021.
The Series A Preferred Stock ranks senior to the Company's Class C common stock and Class S common stock, with respect to dividend rights and rights upon Company’s or voluntary or involuntary liquidation, dissolution or winding up.
Voting rights for holders of Series A Preferred Stock exist primarily with respect to the ability to elect two additional directors to the board of directors if six or more quarterly dividends (whether or not authorized or declared or consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to the Company’s charter (which includes the Articles Supplementary) that materially and adversely affect the rights of the Series A Preferred Stock or create additional classes or series of shares of the Company’s capital stock that are senior to the Series A Preferred Stock. Other than the limited circumstances described above and in the Articles Supplementary, holders of Series A Preferred Stock do not have any voting rights.
Series A Preferred Stock Dividend
Dividends on the Company's Series A Preferred Stock accrue in an amount equal to $1.84375 per share each year ($0.460938 per share per quarter) to holders of Series A Preferred Stock, which is equivalent to 7.375% of the $25.00 liquidation preference per share per annum. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year (or, if not a business day, the next succeeding business day) to holders of record on applicable record date. The first quarterly dividend for the Series A Preferred Stock sold in the Preferred Offering will be paid on January 15, 2022 and will represent an accrual for more than a full quarter, covering the period from September 17, 2021 to, and including, December 31, 2021. As of September 30, 2021, the Company has accrued dividends of $143,403. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof. On November 11, 2021, the Company’s board of directors declared Series A Preferred Stock distributions payable of $1,065,278 for the fourth quarter of 2021, including the $143,403 of accrued dividends as of September 30, 2021, which are payable on January 15, 2022 (see Note 13).
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 9.10. RELATED PARTY TRANSACTIONS
The Company pays the members of its board of directors who are not executive officers for services rendered through cash payments or by issuing shares of Class C common stock to them. The total fees incurred for board services and paid by the Company for the three and nine months ended September 30, 2021 and 2020, is as follows:
For
Three Months Ended
September 30,		Nine Months Ended
September 30,
Board of Directors Compensation2021202020212020
Cash paid for services rendered$25,000 $18,750 $85,000 $50,000 
Value of shares issued for services rendered95,000 82,500 275,000 255,833 
Total$120,000 $101,250 $360,000 $305,833 
Number of shares issued for services rendered (*)3,647 3,929 12,168 11,022 
*    Adjusted for the 1:3 reverse stock split for the three and nine months ended September 30, 2020.
As of September 30, 2020, $101,250 was accrued for the second quarter of 2020 services. This amount was paid in July 2020 by paying cash of $31,250 and issuing 4,821 shares of Class C common stock (adjusted for the 1:3 reverse stock split).
Related Party Transactions with Unconsolidated Entities
The Company's taxable REIT subsidiary serves as the asset manager of the TIC Interest property and earned asset management fees of $47,984 for both the three months ended September 30, 2021 and 2020, respectively, and 2019, the total amount of fees incurred$95,967 for board services was $101,250 and $105,000, respectively. For the three months ended September 30, 2020, $18,750 was paid in cash and the value paid by issuing shares of Class C common stock to directors was $101,250 in July 2020 (issued in arrears for second quarter services) and $82,500 for third quarter services on September 30, 2020, for which the Company issued 14,464 and 11,786 shares, respectively. During the three months ended September 30, 2019, the value paid by issuing shares of Class C common stock was $105,000 for which the Company issued 10,334 shares for the second quarter services, including service on a special committee. Forboth the nine months ended September 30, 20202021 and 2019, the total amount of fees incurred for board services was $305,833 and $281,667, respectively, and the value paid during the periods by issuing shares of Class C common stock was $255,833 and $210,000, respectively, for which the Company issued 33,066 and 20,669 shares,2020, respectively.
In conjunctionTransactions with the Self-Management Transaction effective December 31, 2019, the Advisory Agreement was terminated. The Advisory Agreement entitled the Former Advisor to specified fees upon the provision of certain services with regard to investments in real estate and the management of those investments, among other services, and the disposition of investments, as well as entitled the Former Advisor to reimbursement of organizational and offering costs incurred by the Former Advisor or Former Sponsor on behalf of the Company, such as expenses related to the Offerings, and certain costs incurred by the Former Advisor or Former Sponsor in providing services to the Company. In addition, the Former Advisor was entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. The Former Sponsor also served as the sponsor for REIT I and BRIX REIT. Other Related Parties
Effective February 3, 2020, the Company's indirect subsidiary, modivModiv Advisors, LLC, became the advisor to BRIX REIT.
REIT, Inc., a REIT originally sponsored by BrixInvest, which also sponsored the Company until the Self-Management Transaction on December 31, 2019. During the three and nine months ended September 30, 20202021 and 2019,2020, no business transactions occurred between the Company and BRIX REIT, Inc. other than minor expenses advanced and, during the three and nine months ended September 30, 2019, no business transactions occurred between the Company and REIT I, other than as described below or elsewhere herein, and those relating to the Company’s investment in REIT I before the Merger, as described in Note 5.advanced.
On March 2, 2020, the Company borrowed a total of $4,000,000, secured by mortgages on its 2 Chevron properties, from the Company's Chairman, Mr. Wirta. The Company's conflicts committee approved the terms of these mortgages which bore interest at an annual rate of 8% and were scheduled to mature on June 2, 2020. On June 1, 2020, the maturity date of these mortgages was extended to September 1, 2020 on the same terms, along with an option for a further extension to November 30, 2020 at the Company’s election prior to August 18, 2020, which the Company elected not to exercise. On July 31, 2020 and August 28, 2020, the mortgages secured by the Chevron San Jose, CACalifornia property and Chevron Roseville, CACalifornia property, each for $2,000,000, were repaid along with all related accrued interest.
There were no related party costs, including those incurred pursuant to the Advisory Agreement, for the three and nine months ended September 30, 2020 and no related party receivable and payable as of September 30, 2020. Summarized below are
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
the related party costs incurred by the Company for the three and nine months ended September 30, 2019 and related party receivable and payable as of December 31, 2019:
Three Months EndedNine Months Ended
September 30, 2019December 31, 2019
IncurredIncurredReceivablePayable
Expensed:
Asset management fees (1)$680,349 $2,040,386 $0 $0 
Operating expense reimbursements132,000 396,000 0 0 
Fees to affiliates812,349 2,436,386 
Property management fees*56,122 168,194 0 0 
Directors and officers insurance and other reimbursements**64,433 198,108 0 0 
Expense reimbursements from Former Sponsor (2)(96,104)(332,336)0 0 
Capitalized:
Acquisition fees5,459 5,459 0 0 
Financing coordination fees0 63,500 0 0 
Reimbursable organizational and offering expenses (3)307,217 1,207,080 0 0 
Other:
Due from BRIX REIT (4)0 0 1,378 0 
Due from TIC0 0 954 0 
Notes due to Chairman of the Board0 0 0 630,820 
$2,332 $630,820 
*Property management fees are classified within property operating expenses on the condensed consolidated statements of operations.
**    Directors and officers insurance and other reimbursements are classified within general and administrative expenses on the condensed consolidated statements of operations.
(1)To the extent the Former Advisor elected, in its sole discretion, to defer all or any portion of its monthly asset management fee, the Former Advisor was deemed to have waived, not deferred, that portion up to 0.025% of the total investment value of the Company’s assets. For the three and nine months ended September 30, 2019, the Former Advisor did 0t waive any of the asset management fees. In addition to amounts presented in this table, the Company also incurred asset management fees to the Former Advisor of $47,977 and $143,930 related to the TIC Interest during the three and nine months ended September 30, 2019, respectively, which amounts were reflected as reductions of income recognized from investments in unconsolidated entities (see Note 5).
(2)Includes payroll costs related to Company employees that answered questions from prospective stockholders. See “Investor Relations Payroll Expense Reimbursement from Former Sponsor” below. The Former Sponsor agreed to reimburse the Company for these investor relations compensation costs which the Former Sponsor considered to be offering expenses in accordance with the Advisory Agreement which was terminated effective September 30, 2019. The expense reimbursements from the Former Sponsor for the three and nine months ended September 30, 2019 also included a refund of $0 and $40,915 of employment related legal fees, respectively, which the Former Sponsor agreed to reimburse the Company.
(3)As of September 30, 2019, the Former Sponsor had incurred $9,189,209 of organizational and offering costs on behalf of the Company. However, the Company was only obligated to reimburse the Former Sponsor for such organizational and offering expenses to the extent of 3% of gross offering proceeds.
(4)The receivables represent incidental expenses advanced to BRIX REIT, which included unpaid asset management fees of $242,299 as of December 31, 2019 due from BRIX REIT, which were fully reserved and the Company agreed to waive in May 2020 given the impact of the COVID-19 pandemic on BRIX REIT.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Organizational and Offering Expenses
The Company was obligated to reimburse the Former Sponsor or its affiliates for organizational and offering expenses (as defined in the Advisory Agreement) paid by the Former Sponsor on behalf of the Company. The Company reimbursed the Former Sponsor for organizational and offering expenses up to 3% of gross offering proceeds. Pursuant to an amendment to the Advisory Agreement dated October 14, 2019, the Company agreed to pay all future organization and offering costs, and to no longer be reimbursed by the Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for the Former Sponsor's agreement to terminate its right to receive 3% of all offering proceeds as a reimbursement for organization and offering costs paid by the Former Sponsor.
The Former Sponsor and its affiliates were responsible for any organizational and offering expenses to the extent they exceeded 3% of gross offering proceeds through September 30, 2019. Through September 30, 2019, the Former Sponsor had incurred organizational and offering expenses in excess of 3% of the gross offering proceeds received by the Company. Through September 30, 2019, the Company reimbursed the Former Sponsor $5,429,105 in organization and offering costs, which was the Company's maximum liability for organization and offering costs.
Investor Relations Payroll Expense Reimbursement from Former Sponsor
The Company employs investor relations personnel to answer inquiries from potential and existing investors regarding the Company and/or its Registered Offerings. The payroll expenses associated with the investor relations personnel were reimbursed by the Former Sponsor through September 30, 2019. The Former Sponsor considered these payroll expenses to be offering expenses. The amount of payroll expenses reimbursements from the Former Sponsor for the three and nine months ended September 30, 2019 was $96,104 and $373,251, respectively, which was partially offset by a refund of employment related legal costs of $0 and $40,915, respectively.
Acquisition Fees
The Company paid the Former Advisor an amount equal to 3% of the contract purchase price of the Company’s properties plus additions to real estate investments as acquisition fees. The total of all acquisition fees and acquisition expenses was required to be reasonable and not to exceed 6% of the contract price of the property. However, a majority of the directors (including a majority of the independent directors) not otherwise interested in the transaction had the authority to approve fees in excess of these limits if they determined the transaction to be commercially competitive, fair and reasonable to the Company. Acqusition fees incurred were $5,459 during the three and nine months ended September 30, 2019.
Asset Management Fee
The Company paid the Former Advisor, as compensation for the advisory services rendered to the Company, a monthly fee in an amount equal to 0.1% of the total investment value, as defined in the Advisory Agreement (the “Asset Management Fee”), as of the end of the preceding month plus the book value of any properties acquired during the month, pro-rated based on the number of days owned. The Asset Management Fee was payable monthly on the last business day of such month. The Asset Management Fee, which was required to be reasonable in the determination of the Company’s independent directors at least annually, was to be taken or waived, in whole or in part as to any year, in the sole discretion of the Former Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year was allowed to be deferred without interest and paid in such other fiscal year as the Former Advisor determined.
Additionally, to the extent the Former Advisor elected, in its sole discretion, to defer all or any portion of its monthly Asset Management Fee, the Former Advisor was deemed to have waived, not deferred, that portion of its monthly Asset Management Fee that was up to 0.025% of the total investment value of the Company’s assets. The total amount of Asset Management Fees incurred during the three and nine months ended September 30, 2019 was $680,349 and $2,040,386, respectively, of which NaN was waived.
Financing Coordination Fee
Other than with respect to any mortgage or other financing related to a property concurrent with its acquisition, if the Former Advisor or an affiliate provided a substantial amount of the services (as determined by a majority of the Company’s independent directors) in connection with the post-acquisition financing or refinancing of any debt that the Company obtained relative to a property, then the Company was to pay the Former Advisor or such affiliate a financing coordination fee equal to 1% of the amount of such financing.
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RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
There were 0 financing coordination fees during the three months ended September 30, 2019 as there were no loans obtained during the quarter but the Company incurred and paid $63,500 of financing coordination fees related to a single loan during the nine months ended September 30, 2019.
Property Management Fees
If the Former Advisor or any of its affiliates provided a substantial amount of the property management services (as determined by a majority of the Company’s independent directors) for the Company’s properties, then the Company paid the Former Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also reimbursed the Former Advisor and any of its affiliates for property-level expenses that such tenant paid or incurred to the Company, including salaries, bonuses and benefits of persons employed by the Former Advisor, except for the salaries, bonuses and benefits of persons who also served as one of the Company’s executive officers. The Former Advisor or its affiliate were entitled to subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracted for these services. The Former Advisor provided property management services for 10 properties in the Company's portfolio during the three and nine months ended September 30, 2019. The Company incurred and paid $56,122 and $168,194 of property management fees during the three and nine months ended September 30, 2019, respectively.
Disposition Fees
For substantial assistance in connection with the sale of properties, the Company was to pay the Former Advisor or one of its affiliates 3% of the contract sales price, as defined in the Advisory Agreement, of each property sold; provided, however, that if, in connection with such disposition, commissions were paid to third parties unaffiliated with the Former Advisor or its affiliates, the disposition fees paid to the Former Advisor, the Former Sponsor, their affiliates and unaffiliated third parties could not exceed the lesser of the competitive real estate commission or 6% of the contract sales price. There were 0 disposition fees incurred during the three and nine months ended September 30, 2019.
Subordinated Participation Fees
The Company incurred a subordinated participation fee calculated as of December 31 of each year through 2018, payable to the Former Advisor or an affiliate thereof, which was paid (if owed) in the immediately following January. The subordinated participation fee was only due if the Preferred Return, as defined in the Advisory Agreement, was achieved and was equal to the sum of (using terms as defined in the Advisory Agreement):
(i)30% of the product of (a) the difference of (x) the Preliminary NAV per share minus (y) the Highest Prior NAV per share, multiplied by (b) the number of shares outstanding as of December 31 of the relevant annual period, but only if this resulted in a positive number, plus
(ii)30% of the product of: (a) the amount by which aggregate distributions to stockholders during the annual period, excluding return of capital distributions, divided by the weighted average number of shares outstanding for the annual period, exceeded the Preferred Return, multiplied by (b) the weighted average number of shares outstanding for the annual period calculated on a monthly basis.
The Company calculated a subordinated participation fee of $839,050, which was accrued as of December 31, 2018 and paid in cash during the three months ended March 31, 2019. On August 9, 2019, the Advisory Agreement was amended to eliminate the Subordinated Participation Fee.
Leasing Commission Fees
If a property or properties of the Company became unleased and the Former Advisor or any of its affiliates provided a substantial amount of the services (as determined by a majority of the Company’s independent directors) in connection with the Company’s leasing of a property or properties to unaffiliated third parties, then the Company paid the Former Advisor or such affiliate leasing commissions equal to 6% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease was less than ten years, such commission percentage was applied to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) accrued a commission of 3% in lieu of the aforementioned 6% commission. There were 0 leasing commission fees incurred during the three and nine months ended September 30, 2019.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Other Operating Expense Reimbursements
Under the Company's charter, prior to December 31, 2019, total operating expenses of the Company were limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the “2%/25% Limitation”). If the Company exceeded the 2%/25% Limitation, the Former Advisor was required to reimburse the Company the amount by which the aggregate total operating expenses exceeded the limitation, or the Company was required to obtain a waiver from the Company's conflicts committee. For purposes of determining the 2%/25% Limitation amount, “average invested assets” meant the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” meant all expenses paid or incurred by the Company, as determined by GAAP, that were in any way related to the Company’s operation including asset management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in NAV per share; (f) acquisition fees and acquisition expenses (including expenses related to potential investments that the Company did not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property. The total reimbursable operating expenses incurred were $132,000 and $396,000 during the three and nine months ended September 30, 2019, respectively. The Company was in compliance with the 2%/25% Limitation for operating expenses for the four fiscal quarters ended September 30, 2019.
Due to Affiliates
In connection with the Self-Management Transaction, the Company assumed two2 notes payable aggregating $630,820 on December 31, 2019 owed to Mr. Wirta, the Company's Chairman, which were presented under due to affiliates in the Company's condensed consolidated balance sheets as of December 31, 2019.Chairman. The notes payable had identical terms including a fixed interest rate of 10% paid semi-monthly and a maturity date of April 23, 2020. The remaining principal amount of $218,931 due for each note, aggregating $437,862, was paid on the maturity date.
Related Party Transactions with Unconsolidated Entities
The Company’s portionrepayments are reflected in the change in due to affiliates in the accompanying unaudited statement of asset management fees paid to the Former Advisor relating to the TIC Interest for the three and nine months ended September 30, 2019 was $47,977 and $143,930, respectively. The advisory agreement with the entity that owns the TIC Interest property was assigned to the Company's taxable REIT subsidiary following the Self-Management Transaction and the Company earns a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a fee of $65,993 for the three months ended September 30, 2020, of which the Company's portion was $47,984, and a fee of $197,979cash flows for the nine months ended September 30, 2020,2020.
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Table of which the Company's portion was $143,951.Contents
The Company’s portion of asset management fees paidMODIV INC.
Notes to the Former Advisor relating to REIT I for the three and nine months ended September 30, 2019 was $9,483 and $29,606, respectively.Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 10.11. COMMITMENTS AND CONTINGENCIES
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities.
Tenant Improvements
Pursuant to lease agreements, as of September 30, 20202021 and December 31, 2019,2020, the Company had obligations to pay $60,598$189,136 and $98,329,$60,598, respectively, for on-site and tenant improvements to be incurred by tenants, including a 72.7% share of the tenant improvements for the Santa Clara, California TIC Interest.tenants. As of both September 30, 20202021 and December 31, 2019,2020, the Company had $2,271,462 and $92,684 of restricted cash held to fund other building improvements, tenant improvements.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Operating Lease
As a result of the Self-Management Transaction, on December 31, 2019, a subsidiary of the Company assumed the operating lease of the corporate office in Costa Mesa, California from BrixInvest. The office lease had a remaining term of four years, ending on June 30, 2024. During the second quarter of 2020, the Company's subsidiary re-evaluated its physical office space requirement given the effect of the COVID-19 pandemic, commenced negotiations with the landlord in May 2020improvements and vacated the premises to the landlord on June 1, 2020. Effective October 29, 2020, the Company’s subsidiary entered into a lease amendment for early termination of the lease in exchange for a lease termination fee of $1,350,000 and as such the Company derecognized the right of use asset and the corresponding lease liability as of September 30, 2020. The termination fee was paid by the Company's subsidiary releasing its $135,544 security deposit and the Company's cash payment of $1,214,456. As a result of this transaction, the operating lease liability of $2,087,713 and the amount of accrued but unpaid lease payments of $242,216 which were previously included in accounts payable, accrued and other liabilities were partially offset by the elimination of the right of use asset of $2,019,577 and the release of the security deposit, resulting in a lease termination expense of $1,175,192 included in other expense for the three and nine months ended September 30, 2020.
Because the rate implicit in the subsidiary's lease was not readily determinable, the Company used an incremental borrowing rate to account for the lease as of December 31, 2019. In determining the Company's incremental borrowing rate for the lease, the Company considered the rate on its unsecured borrowings, observable risk-free interest rates and credit spreads correlating to the Company's creditworthiness and the term of the subsidiary's lease agreement. The discount rate used was 5.75%.leasing commissions.
Redemption of Common Stock
The Company has a share repurchase program that enables qualifying stockholders to sell their Class C common stock or Class S common stock to the Company in limited circumstances. The maximum amount of common stock that may be repurchased per month is limited to no more than 2% of the Company’s most recently determined aggregate NAV. Repurchases for any calendar quarter are limited to no more than 5% of its most recently determined aggregate NAV. The foregoing repurchase limitations are based on “net repurchases” during a quarter or month, as applicable. Thus, for any given calendar quarter or month, the maximum amount of repurchases during that quarter or month will be equal to (1) 5% or 2% (as applicable) of the Company’s most recently determined aggregate NAV, plus (2) proceeds from sales of new shares in the Registered Offerings and Class S Offering (including purchases pursuant to its Registered DRP Offering) since the beginning of a current calendar quarter or month, less (3) repurchase proceeds paid since the beginning of the current calendar quarter or month.
The Company has the discretion to repurchase fewer shares than have been requested to be repurchased in a particular month or quarter, or to repurchase no shares at all, in the event that it lacks readily available funds to do so due to market conditions beyond the Company’s control, it needs to maintain liquidity for its operations, or because the Company determines that investing in real property or other illiquid investments is a better use of its capital than repurchasing its shares. In the event that the Company repurchases some but not all of the shares submitted for repurchase in a given period, shares submitted for repurchase during such period will be repurchased on a pro-rata basis, subject to any Extraordinary Circumstance Repurchase (defined below).
The Company has the discretion, but not the obligation, under extraordinary market or economic circumstances, to make a special repurchase in equal, nominal quantities of shares from all stockholders who have submitted share repurchase requests during the period (“Extraordinary Circumstance Repurchase”). Extraordinary Circumstance Repurchases will precede any pro rata share repurchases that may be made during the period.
DuringAs further discussed in Note 13, on November 4, 2021, the period July 2020Company’s board of directors approved management’s recommendation to October 2020,terminate the Company's Class C and Class S share repurchase programs and the Company receiveddoes not plan to make any further share repurchase requests and repurchased shares as follows:
Value of Share Repurchase Requests ReceivedRepurchase DateValue of Shares Repurchased (1)
July 2020$8,359,586 August 5, 2020$995,028 
August 2020$8,002,288 September 3, 2020$1,420,636 
September 2020$6,747,834 October 5, 2020$1,393,275 
October 2020$5,907,195 November 4, 2020$1,537,198 
(1) Included Extraordinary Circumstance Repurchases and after applicable administrative fees for shares held less than three years.repurchases.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In addition, the Company’s board of directors may amend, suspend or terminate the share repurchase program without stockholder approval upon 10 days’ notice if its directors believe such action is in the Company and its stockholders’ best interests. The Company’s board of directors may also amend, suspend or terminate the share repurchase program due to changes in law or regulation, or if the board of directors becomes aware of undisclosed material information that the Company believes should be publicly disclosed before shares are repurchased.
Legal Matters
From time-to-time, the Company may become party to legal proceedings that arise in the ordinary course of its business. Other than as described below, the Company is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
On September 18, 2019, a lawsuit was filed in the Superior Court of the State of California, County of Los Angeles (the “State Court Action”), against the Former Advisorformer advisor by “John Doe,” a fictitiously-named individual who wasClay Kramer, one of the Former Advisor'sformer advisor's former employees. The Former Advisor understands thatKramer was previously the plaintiff was its former advisor's Chief Digital Officer, who along with six other employees was subject to a reduction in force, communicated to all in advance, that was a result of financial constraints of the Former Advisorformer advisor which necessitated the elimination of numerous job positions in May 2019. In the lawsuit, the former employeeKramer claims he was terminated in retaliation for his purported whistleblowing with respect to alleged attempts to plagiarize materials and for alleged misleading statements made by the Former Advisor and fraudulently induced arbitration requirements applicable to employees and investors. The complaint seeks to enjoin and rescind the enforcement of the arbitration agreement signed by the former employee and the arbitration requirements related to this complaint.advisor. In September 2020, the State Court Action was removed to the United States District Court, Central District of California.California (“U.S. District Court”). On June 14, 2021, the U.S. District Court scheduled a jury trial commencing April 11, 2022 and depositions and discovery are in process. The Company is not a party to the lawsuit. The Former Advisorformer advisor has denied all the accusations and allegations in the complaint and the Former Advisorformer advisor intends to vigorously defend against the claims made by the plaintiff.
NOTE 12. OPERATING PARTNERSHIP UNITS
Class M OP Units
On September 19, 2019, the Company, the Operating Partnership, BrixInvest and Daisho OP Holdings, LLC, a formerly wholly owned subsidiary of BrixInvest (“Daisho”) which was spun off from BrixInvest on December 31, 2019, entered into the Contribution Agreement pursuant to which the Company agreed to acquire substantially all of the net assets of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership and assumed certain liabilities. The consideration transferred as of December 31, 2019 was determined to have a fair value of $50,603,000 based on a probability weighted analysis of achieving the requisite assets under management (“AUM”) and adjusted funds from operations (“AFFO”) hurdles.
The Class M OP Units were issued to Daisho on December 31, 2019 in connection with the Self-Management Transaction and are non-voting, non-dividend accruing, and were not able to be converted or exchanged prior to the one-year anniversary of the Self-Management Transaction. Investors holding units in BrixInvest received Daisho units in a ratio of 1:1 for an aggregate of 657,949.5 Daisho units. During 2020, Daisho distributed the Class M OP Units to its members. The Class M OP Units are convertible into Class C OP Units at a conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit (adjusted for the 1:3 reverse stock split on February 1, 2021), subject to a reduction in the conversion ratio (which reduction will vary depending upon the amount of time held) if the exchange occurs prior to the four-year anniversary of the completion of the Self-Management Transaction. In the event that the Class M OP Units are converted into Class C OP Units prior to December 31, 2023, such Class M OP Units shall be exchanged at the rate indicated below:
Date of ExchangeEarly Conversion Rate
From December 31, 2020 to December 30, 202150% of the Class M conversion ratio
From December 31, 2021 to December 30, 202260% of the Class M conversion ratio
From December 31, 2022 to December 30, 202370% of the Class M conversion ratio
The Class M OP Units are eligible for an increase in the conversion ratio (conversion ratio enhancement) if the Company achieves both of the targets for AUM and AFFO in a given year as set forth below and as adjusted for the 1:3 reverse stock split:
Hurdles
AUMAFFOClass M
($ in billions)Per Share ($)Conversion Ratio
Initial Conversion Ratio1:1.6667
Fiscal Year 2021$0.860 $1.77 1:1.9167
Fiscal Year 2022$1.175 $1.95 1:2.5000
Fiscal Year 2023$1.551 $2.10 1:3.0000
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Based on the current conversion ratio of 1.6667 Class C OP Units (adjusted for the 1:3 reverse stock split) for each one Class M OP Unit, if a Class M OP Unit is converted on or after December 31, 2023, and based on the NAV per share of $27.29 (unaudited) as of September 30, 2021, a Class M OP Unit would be valued at $45.48 (unaudited). This NAV does not reflect the early conversion rate or the future conversion enhancement ratio of the Class M OP Units and Class P OP Units, as discussed above.
Class P OP Units
The Company also issued a portion of the Class P OP Units described below in connection with the Self-Management Transaction. The Class P OP Units are intended to be treated as “profits interests” in the Operating Partnership, which are non-voting, non-dividend accruing, and are not able to be transferred or exchanged prior to the earlier of (1) March 31, 2024, (2) a change of control (as defined in the Third Amended and Restated Agreement of Limited Partnership of the Operating Partnership, as amended (the “Amended OP Agreement”)), or (3) the date of the recipient's involuntary termination (as defined in the relevant award agreement for the Class P OP Units) (collectively, the “Lockup Period”). Following the expiration of the Lockup Period, the Class P OP Units are convertible into Class C OP Units at a conversion ratio of 1.6667 Class C OP Units (adjusted for the 1:3 reverse stock split) for each one Class P OP Unit; provided, however, that the foregoing conversion ratio shall be subject to increase on generally the same terms and conditions as the Class M OP Units, as set forth above.
The Company issued a total of 56,029 Class P OP Units to Messrs. Aaron S. Halfacre, the Company’s Chief Executive Officer and President, and Raymond J. Pacini, the Company’s Chief Financial Officer, including 26,318 Class P OP Units issued in exchange for Messrs. Halfacre's and Pacini's agreements to forfeit a similar number of restricted units in BrixInvest in connection with the Self-Management Transaction. The remaining 29,711 Class P OP Units were issued to these executives as a portion of their incentive compensation for 2020 in connection with their entry into restrictive covenant agreements. The 29,711 Class P OP Units were valued based on the estimated NAV per share of $30.48 (unaudited and adjusted for the 1:3 reverse stock split) when issued on December 31, 2019 and the expected minimum conversion ratio of 1.6667 Class C OP Units (adjusted for the 1:3 reverse stock split) for each one Class P OP Unit, which resulted in a valuation of $1,509,319. This amount is amortized on a straight-line basis over 51 months through March 31, 2024, the expected vesting date of the units, as a periodic charge to stock compensation expense.
During the three months ended September 30, 2021 and 2020, the Company amortized and charged $88,783 and $88,784, respectively, and during the nine months ended September 30, 2021 and 2020, the Company amortized and charged $266,350 and $266,350, respectively, to stock compensation expense. The unamortized value of these units was $887,835 as of September 30, 2021.
Under the Amended OP Agreement, once the Class M OP Units or Class P OP Units are converted into Class C OP Units, they will be exchangeable for the Company’s shares of Class C common stock on a 1-for-1 basis, or for cash at the sole and absolute discretion of the Company. The Company recorded the ownership interests of the Class M OP Units and Class P OP Units as noncontrolling interests in the Operating Partnership, representing a combined total of approximately 13% of the equity in the Operating Partnership on December 31, 2019.
Class R OP Units
On January 25, 2021, the compensation committee of the Company's board of directors recommended, and the board of directors approved, the grant of 120,000 Class R OP Units to Mr. Halfacre in recognition of his voluntary reduction in his 2020 compensation plus 512,000 Class R OP Units to Mr. Halfacre as equity incentive compensation for the next three years, and the grant of 100,000 Class R OP Units to Mr. Pacini as equity incentive compensation for the next three years. An additional 348,000 Class R OP Units were granted to the rest of the employees of the Company. All Class R OP Units granted vest on January 25, 2024 and are then mandatorily convertible into Class C OP Units on March 31, 2024 at a conversion ratio of 1:1, which conversion ratio can increase to 1:2.5 Class C OP Units if the Company generates funds from operations of $1.05, or more, per weighted average fully-diluted share outstanding for the year ending December 31, 2023. The Company has initially concluded that as of each quarter end, including September 30, 2021, achieving the performance target is not deemed probable and will adjust compensation expense prospectively if achieving the enhancement is deemed probable in the future.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As a result of the Company’s 1:3 reverse stock split on February 1, 2021, Mr. Halfacre’s, Mr. Pacini’s and the remaining employees’ Class R OP Units were adjusted to 210,667 Class R OP Units, 33,333 Class R OP Units and 116,000 Class R OP Units, respectively, for a total of 360,000 Class R OP Units outstanding after adjustment for the 1:3 reverse stock split on February 1, 2021. Stock compensation expense related to the 360,000 Class R OP Units is based on the estimated value per share, including a discount for the illiquid nature of the underlying equity, and will be recognized over the three-year vesting period. During the three and nine months ended September 30, 2021, 5,663 and 6,997 Class R OP Units, respectively were forfeited due to the departure of employees.
During the three and nine months ended September 30, 2021, the Company amortized and charged $559,827 and $1,573,991, respectively, to stock compensation expense for the Class R OP Units since the grant date, adjusted for the reversal of the previous amortization of the forfeited units. The unamortized value of these units was $5,421,040 as of September 30, 2021.
NOTE 11.13. SUBSEQUENT EVENTS
The Company evaluates subsequent events until the date the unaudited condensed consolidated financial statements are issued. Significant subsequent events are described below:
Offering Status
Through October 31, 2020, the Company had sold 19,727,497 shares of Class C common stock in the Registered Offerings, for aggregate gross offering proceeds of $196,433,674, which included 2,262,304 shares of Class C common stock sold under its distribution reinvestment plan for gross proceeds of $21,556,543. Through October 31, 2020, the Company had sold 190,616 shares of Class S common stock in the Class S Offering, for aggregate gross offering proceeds of $1,928,448, which included 5,652 shares of Class S common stock sold under its distribution reinvestment plan for gross proceeds of $51,284.
Common Stock Distributions
The Company paid the September 2020 distribution2021 distributions of $688,630$643,025 on October 26, 2020,25, 2021, based on the daily distribution rate of $0.00095890$0.00287670 per share per day of Class C and Class S common stock, which reflects an annualized distribution rate of $0.35$1.05 per share or 5.0%4.03% per share based on the Company's estimated NAV per share of $7.00$26.05 (unaudited). during September 2021. The Company generally paysplans to pay its October distributions on November 24, 2021 based on the 25thdaily distribution rate of $0.00315070 per share per day followingof Class C and Class S common stock, which reflects an annualized distribution rate of $1.15 per share or 4.21% per share based on the endCompany's estimated NAV per share of each month, or$27.29 (unaudited) as of September 30, 2021.
Preferred Dividends
On November 11, 2021, the next business day ifCompany’s board of directors declared Series A Preferred Stock distributions payable of $1,065,278 for the 25th day fallsfourth quarter of 2021, including the $143,403 accrued dividends as of September 30, 2021, which are payable on a weekend or holiday.January 15, 2022.
Redeemable Common Stock
Subsequent to September 30, 2020,2021, the Company redeemed 419,92980,614 shares of Class C common stock for $2,926,160$2,098,452 and 616no shares of Class S common stock.
Updated Estimated NAV Per Share
On November 4, 2021, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’s Class C common stock and Class S common stock of $27.29 (unaudited) as of September 30, 2021. Additional information on the determination of the Company's updated estimated NAV per share, including the process used to determine its updated estimated NAV per share, can be found in the Company's Current Report on Form 8-K filed with the SEC on November 5, 2021.
Extension of Leases
Effective October 27, 2021, the Company extended the lease terms of its property located in Carlsbad, California leased to L3Harris from April 30, 2022 to April 30, 2029 for $4,313.minimum annual rents increasing annually in exchange for two months of free rent, which amounted to $139,258. The Company will pay a leasing commission of $208,087 in connection with this extension.
Effective October 29, 2021, the Company also extended the lease term of its property located in Dekalb, Illinois leased to 3M Company from July 31, 2022 to July 31, 2034 for minimum annual rents increasing annually. The Company will provide a tenant improvement allowance of $1,026,000 as agreed to in the lease amendment in the form of reimbursements to the tenant following receipt of supporting documents and will pay a leasing commission of $640,696 in connection with this extension.
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Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Sale ofPending Real Estate Investment Acquisitions
On October 28, 2020,29, 2021, the Company completed theentered into a non-binding letter of intent for a sale of its Morgan Hill, CAand leaseback transaction to acquire an industrial property which wasis used in the manufacturing of garage door parts and located in Archbold, Ohio for $11,460,000. The Company expects to complete this purchase in early December 2021, subject to satisfaction of customary due diligence and other conditions, and therefore no assurances can be made that the purchase will be completed within that timeframe or at all. The Company intends to use a portion of the proceeds from the Preferred Offering (see Note 9)to fund this potential acquisition.
On November 3, 2021, the Company entered into a purchase and sale agreement to acquire a portfolio of 10 retail properties leased to Dinan Cars for $6,100,000, which generated net proceedsWalgreens and located in Iowa, Indiana, Wisconsin, Kansas and Louisiana, subject to customary due diligence conditions. The purchase price is $63,100,000 and the Company will assume existing collateralized mortgage indebtedness of $3,811,580 after repayment$35,048,994 (“CMBS”) upon approval of the existing mortgage,CMBS servicer and completing the acquisition. The Company will use a portion of the proceeds from its September 2021 offering of Series A Preferred Stock (see Note 9) to fund the estimated $28,651,000 balance of the purchase price and related commissions and closing costs. The Company expects to complete this purchase prior to December 31, 2021, subject to satisfaction of customary due diligence conditions and obtaining approval of the CMBS servicer.
Operating LeasePending Real Estate Investment Sales
Effective October 29, 2020,On November 5, 2021, the Company entered into an agreement to sell its property in Bedford, Texas and leased to a Harley Davidson dealer for $15,300,000 to an unrelated third party subject to customary due diligence conditions. The potential buyer has 30 days to complete its due diligence and an additional 10 days thereafter to complete the potential purchase. There can be no assurances that the buyer will complete this transaction.
On November 11, 2021, the Company entered into an agreement to sell 3 of its office properties, which have leases scheduled to expire in less than five years, for a total of $27,240,000 to an unrelated third party, subject to customary due diligence conditions. The 3 properties include a property in Dallas, Texas, which is leased to Texas Health, and 2 properties in Richmond, Virginia, which are leased to Bon Secours and Omnicare. The potential buyer has 30 days to complete its due diligence and up to an additional 60 days thereafter to complete the potential purchase. There can be no assurances that the buyer will complete this transaction.
Termination of Reg A Offering and Share Repurchase Programs
On November 2, 2021, the Company's board of directors reviewed and approved management’s recommendation to terminate the Company's Reg A Offering effective upon the close of business on November 24, 2021 and to seek a listing of the Company's Class C common stock on a national securities exchange in early 2022; however, there can be no assurances that such a listing can be completed in that time frame or at all. As a result, the Company expects to record an impairment charge related to its intangible assets of approximately $3,700,000 during the fourth quarter of 2021 for its intangible assets related to investor lists, website services technology, domains and licenses. These assets have been used by the Company in its crowdfunding capital-raising activities, and prior to the board of directors’ approval to seek a listing of the Company's Class C common stock on a national securities exchange, these assets were the primary mechanism through which the Company sold shares of its Class C common stock.
The Company’s board of directors also approved management’s recommendation to terminate the Company's Class C and Class S share repurchase programs and the Company does not plan to make any further share repurchases.
New Credit Facility
On November 12, 2021, the Company and KeyBank National Association (“KeyBank”) agreed on a non-binding term sheet for a new $225,000,000 credit facility (the “Facility”) to be syndicated by KeyBank as Administrative Agent and Lead Arranger. The term sheet provides for a four-year revolving line of credit, which may be extended by up to 12 months subject to certain conditions, and a five-year term loan. The Facility is expected to be available for general corporate purposes including but not limited to acquisitions, repayment of existing indebtedness and capital expenditures. The Facility will be priced on a leverage-based pricing grid that fluctuates based on the Company’s subsidiary entered into a lease amendment for early terminationactual leverage ratio. Closing of the lease of its former corporate office in Costa Mesa, California in exchange for a lease termination fee of $1,350,000 which was paid by release ofFacility will be subject to customary closing conditions; however, there can be no assurances that the subsidiary’s $135,544 security deposit and the Company's cash payment of $1,214,456 (see Note 10 for further details).Facility will close.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 20192020 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”“SEC”) on April 6, 2020, and our Quarterly Reports for the three months ended March 31, 2020 and June 30, 2020 filed with the SEC on June 24, 2020 and August 14, 2020, respectively.2021. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. See “Forward-Looking Statements”“Forward-Looking Statements” above.
Management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We are a real estate investment trust (“REIT") with public, non-listed shares of common stock and publicly traded shares of Series A preferred stock that acquires, owns and manages single-tenant net-lease industrial, retail and office properties throughout the United States, with a focus on strategically important and mission critical properties. We were formed on May 14,15, 2015 as a Maryland corporation that elected to be taxed as a real estate investment trust, or REIT for federal income tax purposes beginning with our taxable year ended December 31, 2016 and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes thereafter. Through the Merger (defined below) and acquisitions, we created one of the largest non-listed real estate investment funds to be raised via crowdfunding technology and the first real estate crowdfunding platform to be completely investor-owned. Driven by innovation, an investor-first focus and an experienced management team, Modiv leveraged its crowdfunding platform to create a $400 million real estate fund comprising 2.2 million square feet of income-producing real estate.
On November 4, 2021, our board of directors (the “Board”) reviewed and approved management’s recommendation to seek a listing of our Class C common stock on a national securities exchange in early 2022, subject to market conditions. There can be no assurances that a listing will be completed in the time frame outlined, or at all, given various factors including general economic conditions and sentiment within the broader equity capital markets. In preparation for seeking a listing on a national securities exchange, our Board also approved management’s recommendation to terminate our offering of shares of our Class C common stock pursuant to Regulation A under the Securities Act of 1933, as amended (the “Securities Act”) (the “Reg A Offering”), effective upon the close of business on November 24, 2021 and to terminate our share repurchase programs (“SRPs”). We do not plan to make any further share repurchases. Following these changes, we intend to invest primarilymaintain our monthly distributions and the ability for investors to reinvest their distributions via our distribution reinvestment plan (“DRP”). Our five-year emerging growth company registration with the SEC will end on December 30, 2021 but we will continue to report with the SEC as a smaller reporting company under Rule 12b-2 of the Exchange Act.
We have the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001 par value per share, 300,000,000 shares of Class C common stock, $0.001 par value per share, and 100,000,000 shares of Class S common stock, $0.001 par value per share. Effective February 1, 2021, with the authorization of the Board, we filed Articles of Amendment to our charter in single tenant income-producingthe State of Maryland in order to effect a 1:3 reverse stock split of our Class C common stock and Class S common stock and, following the implementation of the reverse stock split, to decrease the par value of each post-split share of our Class C common stock and Class S common stock from $0.003 per share to $0.001 per share.
Since December 31, 2019, we have been internally managed following our acquisition of the business of BrixInvest, LLC, a Delaware limited liability company and our former sponsor (“BrixInvest”), and our merger with Rich Uncles Real Estate Investment Trust I (“REIT I”) as further described below. As of September 30, 2021, we have a portfolio of approximately 2.2 million square feet of aggregate leasable space including 38 commercial real estate properties which are leasedin 14 states, comprised of 13 retail properties, 14 office properties and 11 industrial properties, including an approximate 72.7% tenant-in-common interest (the “TIC Interest”) in a 91,740 square foot Santa Clara, California industrial property as discussed in Note 4 to creditworthy tenants under long-term net leases. our accompanying unaudited condensed consolidated financial statements.
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Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We will make substantially all acquisitions of our real estate investments directly through RW Holdings NNN REITModiv Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties, some of which may be affiliated with us or our executive officers or directors.
We consider our Company to be a perpetual-life investment vehicle because we have no finite date for liquidation and no current intention to list our shares of common stock for trading on a national securities exchange or over-the-counter trading market. Although we have registered a fixed number of shares pursuant to the Registered Offerings, we intend to effectively conduct a continuous offering of an unlimited amount of our shares of common stock over an unlimited time period by conducting an uninterrupted series of additional public offerings, subject to regulatory approval of our filings for such additional offerings. This perpetual-life structure is aligned with our overall objective of investing in real estate assets with a long-term view towards making regular cash distributions and generating capital appreciation.
We hold our investments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of the Operating Partnership or Katana Merger Sub, LP (“Merger Sub”), which is described below. The Operating Partnership was formed on January 28, 2016. We are the sole general partner of, and owned a 99%an 86% partnership interest in the Operating Partnership prior on September 30, 2021. The Operating Partnership limited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 12 to the completion of the our accompanying unaudited condensed consolidated financial statements.
Self-Management Transaction (defined below)and Merger on December 31, 2019. Our wholly-owned subsidiary,2019
We were externally managed through December 31, 2019 by our former external advisor, Rich Uncles NNN LP,REIT Operator, LLC, a Delaware limited liability company formed on May 13, 2016 (“NNN LP”company. On December 31, 2019, we merged with REIT I and a self-management transaction was completed, whereby we effectuated a contribution agreement dated September 19, 2019 (the “Contribution Agreement”), owned pursuant to which we acquired substantially all of the remaining 1%assets and assumed certain liabilities of our former external advisor and our former sponsor in exchange for units of limited partnership interest in the Operating Partnership and was the sole limited partner(the “Self-Management Transaction”). As a result of the Operating Partnership prior to the completion of the Self-Management Transaction on December 31, 2019.
Following the completion of the Self-Management Transaction, we including NNN LP, own an approximately 87% partnership interest in the Operating Partnership. Daisho OP Holdings, LLC, a formerly wholly-owned subsidiarybecame self-managed and eliminated all fees for acquisitions, dispositions and management of BrixInvest (defined below) (“Daisho”)our properties, which was spun off from BrixInvest on December 31, 2019, was issued and held 657,949.5 units of Class M limited partnership interest (the “Class M OP Units”), or an approximate 12% limited partnership interest, in the Operating Partnership as of December 31, 2019. The Class M OP Units were distributedpreviously paid to the members of Daisho during 2020. In connection with the Self-Management Transaction, our Chief Executive Officer and Chief Financial Officer were issued an aggregate of 56,029 units of Class P limited partnership interest (the “Class P OP Units”) in the Operating Partnership and thereby own the remaining approximate 1% limited partnership interest in the Operating Partnership.
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We were externally managed by our former advisor, Rich Uncles NNN REIT Operator, LLC (the “Former Advisor”), a Delaware limited liability company, pursuant to the Second Amended and Restated Advisory Agreement dated August 11, 2017, as amended (the “Advisory Agreement”), through December 31, 2019. The Former Advisor was wholly-owned by our former sponsor, BrixInvest, LLC (f/k/a Rich Uncles, LLC) (“BrixInvest” or the “Former Sponsor”), a Delaware limited liability company whose members included Messrs. Halfacre and Wirta.external advisor.
On December 31, 2019, pursuant to an Agreement and Plan of Merger dated September 19, 2019, (the “Merger Agreement”), Rich Uncles Real Estate Investment TrustREIT I (“REIT I”) merged with and into Katana Merger Sub, LP (“Merger Sub”), a Delaware limited partnership and our wholly-owned subsidiary of our Company, with Merger Sub surviving as our direct, wholly-owned subsidiary (the “Merger”). At such time, the separate existence of REIT I ceased. As a result, we issued 8,042,221.62,680,740.5 shares (adjusted for the 1:3 reverse stock split) of our Class C common stock to former shareholders of REIT I. In addition, onOn December 31, 2019, a self-management transaction2020, Merger Sub was completed, whereby we,merged into the Operating Partnership BrixInvest and Daisho effectuatedceased to exist as of December 31, 2020.
Offerings
On July 15, 2015, we filed a Contribution Agreementregistration statement on Form S-11 (File No. 333-205684) with the SEC to register an initial public offering of a maximum of 30,000,000 (adjusted for the 1:3 reverse stock split) of our shares of common stock for sale to the public (the “Contribution Agreement”“Initial Primary Offering”). We also registered a maximum of 3,333,333 (adjusted for the 1:3 reverse stock split) of our shares of common stock pursuant to which we acquired substantially all of the assetsour DRP (the “Initial DRP Offering” and assumed certain liabilities of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership (the “Self-Management Transaction”). As a result of the completion of the Merger and the Self-Management Transaction, we became self-managed.
Our Former Advisor managed our operations and our portfolio of core real estate properties and real estate related assets and provided asset-management and other administrative services on our behalf. Our Former Advisor was paid certain fees as set forth in Note 9 to our unaudited condensed consolidated financial statements. As discussed above, beginning on January 1, 2020, we became self-managed.
We expect to use substantially all of the net proceeds from the Offerings to acquire and manage a portfolio of real estate investments. While our current focus is on single tenant net leased properties, we plan to diversify our portfolio by geography, investment size and investment risktogether with the goalInitial Primary Offering, the “Initial Registered Offering”). During 2016, the SEC declared our registration statement effective and we began offering shares of acquiringcommon stock to the public. Pursuant to the Initial Registered Offering, we sold shares of Class C common stock directly to investors, with a portfoliominimum investment in shares of income-producing real estate investments that provides attractive and stable returns to our stockholders. Although$500. Commencing in August 2017, we have no plans at this time to change anybegan selling shares of our investment objectivesClass C common stock only to U.S. persons as defined under Rule 903 promulgated under the Securities Act, and policies, our board of directors may change any and all such investment objectives and policies, including our focus on single tenant commercial properties, if it believes such changes are in the best interestsbegan selling shares of our stockholders.
As we accept subscriptions for shares in the Offerings, we transfer substantially all of the net proceeds of the Offerings to our Operating Partnership as a capital contribution in exchange for units of general partnership and/or limited partnership interest; however, we will be deemed to have made capital contributions to the Operating Partnership in the amount of the gross offering proceeds received from investors. All offerings of ourClass S common stock are made through a registered broker-dealer, and we are directly responsible for all organization and offering costs, including our investor relations personnel.
Because we plan to conduct substantially all of our operations through the Operating Partnership, we are considered an Umbrella Partnership Real Estate Investment Trust, or UPREIT. Using an UPREIT structure may give us an advantage in acquiring properties from persons who might not otherwise sell their properties because of unfavorable tax results. Generally, a sale of property directly to a REIT, or a contribution in exchange for REIT shares, is a taxable transaction to the selling property owner. However, in an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of property may transfer the property to the Operating Partnership in exchange for partnership interests in the Operating Partnership without recognizing gain for tax purposes.
Although we historically have conducted, and intend to continue to conduct, substantially all of our operations through the Operating Partnership, as a result of the Merger with REIT I, we hold the assets acquired from REIT I through Merger Sub, our wholly-owned subsidiary.
We present our financial statements on a consolidated basis, including the Operating Partnership and Merger Sub. All items of income, gain, deduction (including depreciation), loss and creditcommencement of the Operating PartnershipClass S Offering (as defined below) to non-U.S. Persons.
In August 2017, we began offering up to 33,333,333 shares (adjusted for the 1:3 reverse stock split) of Class S common stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act, pursuant to an exemption from the registration requirements of the Securities Act and Merger Sub flowin accordance with Regulation S of the Securities Act (the “Class S Offering”). The Class S common stock has similar features and rights as the Class C common stock, including with respect to us as all subsidiary entities are disregarded for federal tax purposesvoting and liquidation, except forthat the Class S common stock offered in the Class S Offering may be sold only to non-U.S. Persons and may be sold through brokers or other persons who may be paid upfront and deferred selling commissions and fees.
On December 23, 2019, we commenced a taxable REIT subsidiary formedfollow-on offering pursuant to a new registration statement on January 15, 2020. These tax items do not generally flow through usForm S-11 (File No. 333-231724) (the “Follow-on Offering”), which registered the offer and sale of up to $800,000,000 in share value of Class C common stock, including $725,000,000 in share value of Class C common stock pursuant to the primary portion of the Follow-on Offering and $75,000,000 in share value of Class C common stock pursuant to our stockholders. Rather, our net income and net capital gain effectively flow through usDRP. We ceased offering shares pursuant to our stockholders as and when we pay distributions.the Initial Registered Offering concurrently with the commencement of the Follow-on Offering.
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ImpactOn January 22, 2021, with the authorization of the COVID-19 Pandemic
DueBoard, we amended and restated our DRP with respect to our shares of Class C common stock in order to reflect our corporate name change and to remove the current COVID-19 pandemicability of our stockholders to elect to reinvest only a portion of their cash distributions in shares through the DRP so that investors who elect to participate in the United StatesDRP must reinvest all cash distributions in shares. In addition, the amended and globally, our tenants and operating partners, property locations andrestated DRP provides for determinations by the economy as a whole are severely impacted. The magnitude and durationBoard of the COVID-19 pandemic and its impact on our tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets. The U.S. and global economies entered into a recession during the first quarter of 2020. Weakness in the U.S. and global economies continues, the severity and duration of which are unpredictable but expected to be significant as evidenced by approximately 12.6 million U.S. workers unemployed as of September 30, 2020. The prolonged duration and impact of the COVID-19 pandemic continues to disrupt our business operations and impact our financial performance. Several tenants have requested rent abatements and one tenant (24 Hour Fitness) has not paid rent since March 2020 and has provided formal notice that it has rejected the lease through its Chapter 11 bankruptcy proceeding and the premises were surrendered to our subsidiary. We have collected approximately 95% of rents due during the third quarter of 2020 and for the month of October 2020; however, there can be no assurance that this rate of collections will continue. In certain cases, we have negotiated with tenants and lenders regarding the deferral or resumption of rent payments and the partial deferral of mortgage payments, as appropriate, and further negotiations may occur.

During the second quarter of 2020, our subsidiary re-evaluated its physical office space requirement given the effect of the COVID-19 pandemic, commenced negotiations with the landlord in May 2020 and vacated the premises to the landlord on June 1, 2020. Effective October 29, 2020, our subsidiary entered into an agreement with the landlord for early termination of the lease in exchange for a lease termination fee of $1,350,000. The termination fee was paid by our subsidiary releasing its $135,544 security deposit and we made a cash payment of $1,214,456. As a result of this transaction, we recorded a lease termination expense of $1,175,192 (which was net of previously accrued rent expense) in other expense for the three and nine months ended September 30, 2020.
Updated Estimated Net Asset Value Per Share, Temporary Suspension of Primary Offerings and Resumption of Primary Offerings
On May 8, 2020, we announced that due to the impacts of the COVID-19 pandemic on our real estate properties, our board of directors authorized the engagement of an independent third-party real estate advisory and consulting firm to perform an independent valuation of our real estate assets and real estate related liabilities associated with our properties for the purpose of assisting the board of directors in updating our estimated net asset value (“NAV”) per share more frequently than annually. The amended and restated DRP was effective with respect to reflectdistributions that were paid in February 2021.
On January 22, 2021, we filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 of additional shares of Class C common stock to be issued pursuant to the impactamended and restated DRP (the “2021 DRP Offering” and, collectively with the Initial DRP Offering, the “Registered DRP Offering”; the Registered DRP Offering collectively with the Follow-on Offering and the Reg A Offering, the “Registered Offerings”). We commenced offering shares of Class C common stock pursuant to the 2021 DRP Offering upon termination of the COVID-19 pandemic. Our boardFollow-on Offering.
Effective January 27, 2021, our Company, with the approval of directors announcedthe Board, terminated the Follow-on Offering. In connection with the termination of the Follow-on Offering, we stopped accepting investor subscriptions on January 22, 2021. As of January 27, 2021, we had $600,547,672 in share value of unsold shares in the Follow-on Offering, which were deregistered with the SEC. On February 1, 2021, we commenced a newprivate offering of Class C common stock under Regulation D promulgated under the Securities Act (the “Private Offering” and, collectively with the Registered Offerings, the “Offerings”) and accepted investor subscriptions from only accredited investors until we terminated the Private Offering on August 12, 2021.
On June 29, 2021, we filed with the SEC a Regulation A Offering Statement on Form 1-A, including our preliminary offering circular, for a $75,000,000 offering of our Class C common stock and filed an amended Form 1-A on August 13, 2021. The SEC qualified the amended Regulation A Offering Statement on Form 1-A on August 16, 2021.
Preferred Stock
On September 14, 2021, we and the Operating Partnership entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (collectively, the “Underwriters”), pursuant to which we agreed to issue and sell 1,800,000 shares of our 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value per share, with a liquidation preference of $25.00 per share (the “Series A Preferred Stock”), in an underwritten public offering (the “Preferred Offering”) at a price per share of $25.00. In addition, we granted the Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Underwriters exercised in full on September 16, 2021. The issuance and sale of the shares of Series A Preferred Stock, including the issuance and sale of an additional 200,000 shares pursuant to the Underwriters’ full exercise of their option to purchase additional shares, closed on September 17, 2021 (see Note 9 to our accompanying unaudited condensed consolidated financial statements for additional information).
Updated Estimated Net Asset Value Per Share
On January 27, 2021, May 5, 2021, August 4, 2021 and November 4, 2021, the Board approved and established an updated estimated NAV per share of $7.00our Class C common stock and Class S common stock of $23.03 (adjusted for the 1:3 reverse stock split), $24.61, $26.05 and $27.29, respectively (all unaudited).
On November 4, 2021, the Board approved and established an updated estimated NAV per share of our Class C common stock and Class S common stock of $27.29 (unaudited) on May 22, 2020. as of September 30, 2021. Effective November 5, 2021, the purchase price per share of our Class C common stock was increased from $26.05 to $27.29. Also, commencing November 5, 2021, the purchase price per share in the primary portion of the Class S Offering was increased to $27.29 plus the amount of any applicable upfront commissions and fees.
Additional information on the determination of our most recent estimated NAV per share, including the process used to determine our estimated NAV per share, can be found in our Current Report on Form 8-K filed with the SEC on May 22, 2020.
In connectionNovember 5, 2021. Beginning with our plandistributions scheduled to update the estimated NAV per share, the board of directors approved the temporary suspension of the primary offerings of our shares of Class C common stock and Class S common stock, effective as of the close of businessbe paid to stockholders on May 7, 2020. On May 29, 2020, our board of directors approved and directed the resumption of the primary offerings effective June 1, 2020. The purchase price per share in the primary portion of the offering of our Class C common stock was decreased from $10.27 to $7.00, andNovember 24, 2021, the purchase price per share of our common stock in the primary portion ofClass C and the offering of our Class S common stockDRPs was also decreasedincreased from $26.05 to $7.00 plus the amount of any applicable upfront commissions and fees.$27.29.
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The Company
We are a publicly registered, non-exchange traded company. We believe we are qualified to operate as a REIT, which requires us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of distributions to our stockholders.
Our primary business consists of acquiring, financing and owning single-tenant net-lease industrial, retail office and industrialoffice real estate properties throughout the United States leased to creditworthy tenants on long-term leases.leases, with a focus on strategically important and mission critical properties. We primarily generate revenues by leasing properties to tenants pursuant to net leases. As of September 30, 2020,2021, our real estate investment portfolio excluding real estate investments held for sale, consisted of (i) 3938 properties (including 17 operating properties acquired in connection with the Merger on December 31, 2019) located in 14 states consisting of 1413 retail properties, 14 office properties and 11 industrial properties, (ii) one parcel of land, which serves as an easement to one of our operating properties, and (iii) a 72.7% undivided tenant-in-common interest (the “TIC Interest”) in an office property in Santa Clara, CA interest as discussed in Note 5 to our unaudited condensed consolidated financial statements.including the TIC Interest. The net book value of theseour real estate investments at September 30, 2020 was $356,512,884. We also owned three properties held for sale (including one property acquired in the Merger) with a net book value of $23,033,118 as of September 30, 2020.
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2021 was $339,666,361.
With respect to our diversified portfolio of 3938 operating properties, including the TIC Interest, as of September 30, 2020:2021:
•1413 properties are retail properties which represent an approximate 12%approximately 13% of the portfolio, 14 properties are office properties which represent an approximate 50%approximately 48% of the portfolio, and 11 properties, including the TIC Interest, are industrial properties which represent an approximate 38%approximately 39% of the portfolio (expressed as a percentage of annualized net operating income);
•Occupancy rate of 94%100.0%;
•Leased to 3331 different commercial tenants doing business in 1413 separate industries;
•Located in 14 states;
•Approximately 2,171,1912.2 million square feet of aggregate leasable space;space, including the TIC Interest;
•An average leasable space per property of approximately 51,00059,000 square feet; approximately 16,000100,000 square feet per industrial property; approximately 23,000 square feet per retail property and approximately 57,00061,000 square feet per office property, and approximately 118,000 square feet per industrial property; and
•Outstanding mortgage note payable balance of $180,107,542.$182,146,897.
As of September 30, 2020,2021, all 3938 operating properties in our portfolio are single-tenant net-lease properties and all 3938 properties were leased, with a weighted average remaining lease term, (excludingexcluding rights to extend a lease at the option of the tenant)tenant, of approximately 5.6 years.years, which increased to 6.0 years as of October 31, 2021 with the lease extensions signed by L3Harris and 3M Company during October 2021.
As of September 30, 2020,2021, we also held an approximate 72.7% TIC Interest in a a 91,740 square feetfoot industrial property located in Santa Clara, California. The remaining approximateapproximately 27.3% of undivided interest in the Santa Clara property is held by Hagg Lane II, LLC (an approximate 23.4% interest) and Hagg Lane III, LLC (an approximate 3.9% interest). The manager of Hagg Lane II, LLC and Hagg Lane III, LLC became a member of our board of directorsthe Board in December 2019.
Primary Investment Objectives
Our primary investment objectives are:
•to provide attractive growth in adjusted funds from operations (“AFFO”) and sustainable cash distributions;
•to preserve and return capital contributions;
•to realize value appreciation from proactive investment selection and asset management;
•to provide future opportunities for growth and value creation; and
•to provide an investment alternative for stockholders seeking to allocate a portion of their long-term investment portfolios to commercial real estate.
We cannot assure you that we will achieve our investment objectives.
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Investment Strategy
WeCommercial Real Estate
In pursuit of our primary objectives, we plan to grow our current single-tenant portfolio of triple-net leased properties and seek to acquire a diversified portfolio consisting primarily of single tenant net leased propertiesincome-generating commercial real estate investments throughout the United States diversified by corporate credit, physical geography, product type, and lease duration. Although we have no current intention to do so, we may also invest a portion of the net proceeds from our Offeringsofferings in single tenant net leasedcommercial real estate properties outside the United States.
We intend to acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
•     where construction is substantially complete to reduce risks associated with construction of new buildings;
•     leased on a “net” basis, where the tenant is responsible for the payment, and fluctuations in costs, of real estate and other taxes, insurance, utilities, and property maintenance;
•properties located in primary, secondary and certain select tertiary markets;
•markets and leased to tenants, with strong financial statements, including, but not limited to investment grade credit quality, at the time we acquire them;them, with strong financial statements, which may include investment grade credit quality, and
• typically subject to long-term leases with defined rental rate increases. We may also acquire assets that require some amount of capital investment in order to be renovated or repositioned. We generally will limit investment in new developments on a standalone basis, but may consider development that is ancillary to an overall investment. We do not designate specific geography or sector allocations for the portfolio; rather we intend to invest in regions or asset classes where we see the best opportunities that support our investment objectives.
Other Non-Listed REITs and Real Estate Products or Managers
We believe there will be opportunities to acquire other non-listed REITs and real estate products or managers given the current fragmented nature of the industry. There are many smaller non-listed REITs that have not been able to raise sufficient capital to grow their investment portfolio and provide liquidity to their stockholders. Given their limited alternatives, some of these non-listed REITs may be receptive to potential acquisitions by us. There are also other non-listed real estate products and managers that face similar challenges and may also be receptive to potential acquisitions by us.
We cannot assure you that any of the properties we acquire or real estate-related investments we make will result in the benefits discussed above.
Liquidity and Capital Resources
Liquidity
Our proceedsProceeds from the sale of our shares sold in the Offeringsof common stock have been, and will continue to be, primarily used to invest in real estate and real estate-related investments or to re-lease and reposition our properties in accordance with our investment strategy and policies, including costscommissions and feestenant improvement costs associated with such investments. We also expect to use a portion of the proceeds from the sale of the Offeringsour shares of common stock for paymentpayments of principal onobligations with respect to our outstanding indebtedness; for payment of capital expenditures tenant improvement costs and leasing costs related to our real estate investments; to provide liquidity toreserves required by financings of our stockholders pursuant to our share repurchase programs;real estate investments; and for general corporate purposes.
Generally, our cash requirements for property acquisitions, debt payments, capital expenditures and other investments will be funded by the sale of shares of our common stock and bank borrowings from financial institutions and mortgage indebtedness on our properties, and to a lesser extent, by internally generated funds. Our cash requirements for operating and interest expenses, and distributions will generally be funded by internally generated funds. Proceeds from the sale of our common stock and debt financings have also been used to fund repurchases of common stock; however, we are terminating our SRPs as discussed above. When available, sources of capital include proceeds from the sale of properties, proceeds from the sale of shares of our common stock and secured or unsecured borrowings from banks or other lenders, as well as undistributed funds from operations.
Our Credit Facility (as defined below) provides a $22,000,000 line of credit including a $17,000,000 revolving line of credit for real estate acquisitions and an additional $5,000,000 revolving line of credit for working capital. After our initial draw of $6,000,000 to fund the repayment of our prior credit facility provided by Pacific Mercantile Bank (“PMB”), on March 31, 2021, and subsequent repayments of $3,000,000 in June 2021 and $1,500,000 each in July and August 2021, we have $17,000,000 available to finance real estate acquisitions and $5,000,000 available for working capital purposes as of September 30, 2021.
Subsequent to the third quarter of 2021, on November 12, 2021, we and KeyBank National Association (“KeyBank”) agreed on a non-binding term sheet for a new $225,000,000 credit facility (the "Facility") to be syndicated by KeyBank as Administrative Agent and Lead Arranger. The term sheet provides for a four-year revolving line of credit, which may be extended by up to 12 months subject to certain conditions, and a five-year term loan. The Facility is expected to be available for general corporate purposes including but not limited to acquisitions, repayment of existing indebtedness and capital expenditures. The Facility will be priced on a leverage-based pricing grid that fluctuates based on the Company’s actual leverage ratio. Closing of the Facility will be subject to customary closing conditions; however, there can be no assurances that the Facility will close.
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Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our tangible assets. Our charter limits the amount we may borrow to 300% of our net assets, unless any excess borrowing ismaximum leverage as defined and approved by a majoritythe Board, including all of ourthe independent directors, and disclosed to our stockholders in our next quarterly report, along with a justification for such increase; however, historically we have limited borrowings to 50%is 55% of the aggregate fair value of our tangible assets unless any excess borrowing is approved by a majority of the conflicts committee ofreal estate properties, plus our board of directorscash and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess. On March 27, 2020, our conflicts committee and board of directors approved an increase in our maximumcash equivalents. We use available leverage from 50% to 55% in order to allow us to take advantage of the current low interest rate environment,based on the relative cost of debt and equity capital, and to address strategic borrowing advantages potentially available to us. Our borrowings on one or more individual properties may exceed 55% of their individual cost, so long as our overall leverage does not exceed 55% of the aggregate fair value of our tangible assets. We may exceed this limit only if any excess borrowing is approved by a majority ofreal estate properties, plus our conflicts committeecash and is disclosed to our stockholders in our next quarterly report, along with the justification
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for such excess. When calculating our use of leverage, we will not include borrowings relating to the initial acquisition of properties and that are outstanding under a revolving credit facility (or similar agreement).cash equivalents. There is no limitation on the amount we may borrow for the purchase of any single asset. As of September 30, 2020,2021, our leverage ratio was 48%40%.
We may borrow amounts from our affiliates including directors and executive officers if such loan is approved by a majority of our directors, including a majority of our conflicts committee,independent directors, not otherwise interested in the transaction, as being fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances. Any such loan will be included in determining whether we have complied with the borrowing limit in our charter. On March 2, 2020, we borrowed a total of $4,000,000, secured by mortgages on our two Chevron properties, from our Chairman, Mr. Wirta (see Notes 7 and 9 to our unaudited condensed consolidated financial statements). Our conflicts committee approved the terms of these mortgages, which bore interest at an annual rate of 8% and were scheduled to mature on June 2, 2020. On June 1, 2020, the maturity date of these mortgages was extended to September 1, 2020 on the same terms, along with an option for a further extension to November 30, 2020 at our election prior to August 18, 2020, which we elected not to exercise. On July 31, 2020 and August 28, 2020, the mortgages secured by the Chevron San Jose, CA property and Chevron Roseville, CA property, each for $2,000,000, were repaid along with all related accrued interest with a portion of the proceeds from the refinancing of the AvAir Chandler, Arizona property and sale of the Walgreens Stockbridge, Georgia property.
Debt financing for acquisitions and investments may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs.
On March 29, 2021, we entered into a new credit facility with Banc of California (the “Credit Facility”) for an aggregate line of credit of $22,000,000 with a maturity date of March 30, 2023 which replaced the prior $12,000,000 credit facility provided by PMB which had a balance outstanding of $6,000,000 as of December 31, 2020, which was repaid on March 31, 2021. We paid Banc of California origination fees of $77,000 in connection with the Credit Facility. Under the terms of the Credit Facility, we pay a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day shall not be less than 4.75% per annum. We will pay an unused commitment fee of 0.15% per annum of the unused portion of the Credit Facility, charged quarterly in arrears based on the average unused commitment available under the Credit Facility.
The Credit Facility is secured by substantially all of our tangible and intangible assets, including intellectual property. The Credit Facility requires us to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and minimum tangible NAV (as defined in the loan agreement) of $120,000,000, measured quarterly. Mr. Wirta, our Chairman, and the Wirta Family Trust guaranteed the $6,000,000 initial borrowing, which was due by September 30, 2021. This guarantee expired upon the full repayment of the $6,000,000 in August 2021. Mr. Wirta and the Wirta Family Trust also guaranteed the $5,000,000 revolving line of credit for working capital. On March 29, 2021, we entered into an updated indemnification agreement with Mr. Wirta and the Wirta Family Trust with respect to their guarantees of borrowings under the Credit Facility.
As of September 30, 2020,2021, the outstanding face valueprincipal balance of our mortgage notes payable on our operating properties and the unsecuredour revolving credit facility were $180,107,542$182,146,897 and $6,000,000,zero, respectively. On August 13, 2020, we amended the unsecured credit facility to extend the maturity date of $6,000,000 of outstanding borrowings under the unsecured credit facility to September 1, 2020 and the maturity date of the remaining $6,000,000 of outstanding borrowings under the unsecured credit facility to October 15, 2021. As of September 30, 2020,2021, our approximately 72.7% pro-rata share (approximately 72.7%) of the TIC Interest’s mortgage note payable was $9,975,781,$9,764,171, which is not included in our unaudited condensed consolidated balance sheets.
Pursuant to the Self-Management Transaction, we assumed short-term notes aggregating $4,800,000 with maturity dates during the first quarter of 2020. On March 4, 2020, the repayment schedule for $1,024,750 of these short-term notes was extended from March 9, 2020 to April 30, 2020 in exchange for payment of an extension fee of 2% of the outstanding principalRefinancing Transactions and accrued interest, or $24,845, and an increase in the interest rate from 8% to 10% per annum for the period of the extension. The maturity date for $490,000 of the extended short-term notes was subsequently accelerated to April 6, 2020 in exchange for a $10,000 reduction of the extension fee to $14,845. The remainder of these short-term notes was fully repaid on March 9, 2020 and the extended short-term notes were fully repaid on April 30, 2020.
Sale of Real Estate Investments and Refinancing Transactions
During the threenine months ended September 30, 2020,2021, we soldrefinanced the following real estate investments:mortgage notes:
PropertyLocationDisposition DateProperty TypeRentable Square FeetContract Sales PriceNet Proceeds After Debt Repayment
Rite AidLake Elsinore, CA8/3/2020Retail70,960 $7,250,000 $3,299,016 
Walgreens (1)Stockbridge, GA8/27/2020Retail15,120 5,538,462 5,296,356 
Island PacificElk Grove, CA9/16/2020Retail27,296 3,155,000 1,124,016 
113,376 $15,943,462 $9,719,388 
(1) The mortgage for this property was previously repaid on August 10, 2020 in connection with the refinancing of the Accredo property as discussed below and in Note7 to our unaudited condensed consolidated financial statements.
Subsequent to September 30, 2020, on October 28, 2020, we completed the sale of our Morgan Hill, CA industrial property which was previously leased to Dinan Cars for $6,100,000, which generated net proceeds of $3,811,580 after repayment of the existing mortgage, commissions and closing costs.
In addition, two additional properties (the Las Vegas property formerly leased to 24 Hour Fitness and the Bedford, TX property leased to Harley Davidson) are held for sale as of September 30, 2020 and we are working to complete sales for these properties during the fourth quarter of 2020 and early 2021, respectively.
December 31, 2020NewPriorNewOriginalNew
PropertiesPrincipal AmountPrincipal Amount Interest RateInterest RateMaturity DateMaturity Date
Levins$2,032,332 $2,700,000 3.74 %3.75 %3/5/20212/16/2026
Dollar General Bakersfield$2,268,922 $2,280,000 3.38 %3.65 %3/5/20212/16/2028
Labcorp$4,020,418 $5,400,000 3.38 %3.75 %3/5/20212/16/2026
GSA (MSHA)$1,752,092 $1,756,000 3.13 %3.65 %8/5/20212/16/2026
L3Harris$5,185,929 $6,300,000 4.69 %3.35 %4/1/20225/21/2031
Northrop Grumman$5,518,589 $7,000,000 4.40 %3.35 %7/2/20225/21/2031
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In July and August 2020,During the nine months ended September 30, 2021, we refinancedsold the following mortgage notes.retail real estate investments:
June 30, 2020New
PropertiesPrincipal AmountPrincipal AmountPrior Interest RateNew Interest RatePrior Maturity DateNew Maturity Date
Accredo/Walgreens properties$6,779,786 $8,538,000 3.95 %3.80 %2021-07-012025-08-01
AvAir property14,539,619 19,950,000 4.84 %3.80 %2028-03-272025-08-01
Walgreens property3,000,000 3,217,500 7.50 %4.25 %2020-08-062030-07-16
PropertyLocationDisposition DateRentable Square FeetContract Sale PriceNet ProceedsGain on Sale
Chevron Gas StationRoseville, CA1/7/20213,300 $4,050,000 $3,914,909 $228,769 
EcoThriftSacramento, CA1/29/202138,536 5,375,300 2,684,225 51,415 
Chevron Gas StationSan Jose, CA2/12/20211,060 4,288,888 4,054,327 9,458 
DanaCedar Park, TX7/7/202145,465 10,000,000 4,975,334 4,127,638 
Total88,361 $23,714,188 $15,628,795 $4,417,280 
AsOn September 24, 2021, we received a resultnotice of refund amounting to $115,133 related to the refinancings above, we generated total net proceedssale of $6,904,178,our Las Vegas, Nevada retail property on December 16, 2020, which was formerly leased to 24 Hour Fitness. The refund relates to a portion of a holdback from sales proceeds to cover expenses by the buyer to prepare the property for lease, including the payment of accrued interest, common area maintenance, taxes, insurance and other related expenses and building permits to begin construction of improvements on the property. The refund is an adjustment to the estimate of the amount which was usedexpected to repaybe received.
Sales Pursuant to Our Private Offering and Our Regulation A Offering
We commenced the Private Offering to accredited investors only under Regulation D promulgated under the Securities Act on February 1, 2021, and during the period from February 1, 2021 to August 11, 2021, we sold 36,207 shares of Class C common stock pursuant to the Private Offering for aggregate proceeds of $851,273. We terminated the Private Offering on August 12, 2021.
On June 29, 2021, we filed with the SEC a $2,000,000 mortgage noteRegulation A Offering Statement on oneForm 1-A, including our preliminary offering circular, for a $75,000,000 offering of our Chevron properties discussed above. We usedClass C common stock and filed an amended Form 1-A on August 13, 2021. The SEC qualified the balanceamended Regulation A Offering Statement on Form 1-A on August 16, 2021. The Reg A Offering allowed us to once again accept subscriptions from investors who are not accredited. During the period from August 16, 2021 to October 31, 2021, we sold 42,113 shares of theseClass C common stock pursuant to the Reg A Offering for aggregate proceeds of $1,097,029. On November 2, 2021, the Board reviewed and approved management’s recommendation to repay a portionterminate the Reg A Offering effective upon the close of our $6,000,000 in outstanding borrowings under the Unsecured Credit Facility which was due by September 1, 2020 as described above.business on November 24, 2021.
Underwritten Offering - Series A Preferred Stock
SeeOn September 14, 2021, we and the Operating Partnership entered into the Underwriting Agreement with B. Riley Securities, Inc., as the Underwriters, pursuant to which we agreed to issue and sell 1,800,000 shares of the Series A Preferred Stock in the Preferred Offering at a price per share of $25.00. In addition, we granted the Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Underwriters exercised in full on September 16, 2021. The issuance and sale of the shares of Series A Preferred Stock, including the issuance and sale of an additional 200,000 shares pursuant to the Underwriters’ full exercise of their option to purchase additional shares, closed on September 17, 2021. The gross proceeds from the Preferred Offering were $50,000,000 and the net proceeds were $47,570,374, after deducting the underwriting discount of $1,575,000 and other offering expenses of $854,626, which included the structuring fee of $250,000 (see Note 7 9to our accompanying unaudited condensed consolidated financial statements for additional information regarding our outstanding indebtedness.information).
Capital ResourcesShare Repurchases
Generally, our cash requirementsFor the three months ended September 30, 2021, we received share repurchase requests and repurchased shares as follows:
Value of Share Repurchase Requests ReceivedRepurchase DateValue of Shares Repurchased (1)
July 2021$4,481,177 August 4, 2021$1,058,285 
August 2021$5,928,373 September 3, 2021$1,775,082 
September 2021$6,560,652 October 5, 2021$1,348,912 
(1)    Including Extraordinary Circumstance Repurchases (as defined below) and after applicable administrative fees for property acquisitions, debt payments, capital expenditures, and other investments will be funded by the Offerings and borrowings from financial institutions and mortgage indebtedness on our properties, and to a lesser extent, by loans from affiliates or internally generated funds. Our cash requirementsshares held less than two years for operating and interest expenses and distributions will generally be funded by internally generated funds. Offering proceeds and debt financings may also be used to fund repurchases of common stock. If available, future sources of capital include proceeds from the Offerings, secured or unsecured borrowings from banks or other lenders and proceeds from the sale of properties, as well as any undistributed funds from operations.shares repurchased thereafter.
Effect
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Impact of the COVID-19 Pandemic on Our Capital Resources
Our tenantsUncertainties over the future utilization of office and operating partners, property locations and the economy as a whole are severely impacted by the current COVID-19 pandemic in the United States and globally. The magnitude and duration of the COVID-19 pandemic and its impact on our tenants, our cash flows and our future results of operations will largely depend on future developments,retail properties which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets. The U.S. and global economies entered into a recession during the first quarter of 2020. While the U.S. economy experienced a significant quarter over quarter increase in gross domestic product (“GDP”) during the third quarter of 2020, GDP was still below GDP for the third quarter of 2019. Weakness in the U.S. and global economies continues, the severity and duration of which are unpredictable but expected to be significant, particularly given the rising number of COVID-19 cases reported in the U.S. and the world. The prolonged duration and impact of the COVID-19 pandemic could continue to disrupt our business operations and impact our financial performance. Several tenants have requested rent abatements and one tenant (24 Hour Fitness) has not paid rent since March 2020 and provided formal notice that it has rejected the lease in connection with its Chapter 11 bankruptcy proceeding and the premises were surrendered to our subsidiary as further described below. We have collected approximately 95% of rents due during the third quarter of 2020 and for the month of October 2020; however, there can be no assurance that this rate of collections will continue. In certain cases, we have negotiated with tenants and lenders regarding the deferral or resumption of rent payments and the partial deferral of mortgage payments, as appropriate and further negotiations may occur.
As noted above, one of our existing properties, a 45,000-square-foot gym located in Las Vegas, Nevada, was formerly leased to 24 Hour Fitness. This property was purchased by our subsidiary approximately two years ago for $12,658,311 and secures a $6,241,355 mortgage as of September 30, 2020 which includes a mortgage repayment guarantee for 50% of the balance outstanding, or $3,120,678 as of September 30, 2020. In early 2018, before we purchased the property, 24 Hour Fitness negotiated a 12-year lease extension. The lease had just under 10 years of term remaining prior to being rejected by 24 Hour Fitness in connection with its bankruptcy proceeding.
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From the date of purchase until March 2020, we were collecting approximately $76,000 per month in rent from 24 Hour Fitness. At the end of March 2020, 24 Hour Fitness sent us written notice stating that it would not be paying rent due to government-mandated shutdownsarisen as a result of the COVID-19 pandemic. Duringpandemic, the first quarterresulting decrease in our NAV per share as of April 30, 2020 24 Hour Fitness engaged a third-party restructuring agent to handle negotiations with landlords and creditors, and our subsidiary began active negotiations with this restructuring agent in hopes that we might be able to retain 24 Hour Fitness as our tenant. However, on June 15, 2020, our subsidiary received written notice that the lease was formally rejected through 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the premises were surrendered toreduction in our subsidiary. Furthermore, the lender on this property did not agree to provide any substantial mortgage relief to us, but rather agreed to only temporarily reduce our $32,000 monthly mortgage payment by $8,000 for four monthly payments fromdistribution rate in May through August 2020.
On September 17, 2020 our special purpose subsidiary entered into a purchase and sale agreement to sell the property formerly leased to 24 Hour Fitness, subject to a number of contingencies including lender approval of the buyer’s assumption of the existing mortgage. There can be no assurances that all of the contingencies will be satisfied or that the transaction will close. If our special purpose subsidiary cannot complete this transaction, then it would consider allowing the lender to foreclose on, and take possession of, the property. The estimated liability of $3,120,678 under a loan guarantee related to the secured mortgage was accrued and included in liabilities related to real estate investments held for sale on the condensed consolidated balance sheet as of September 30, 2020.
The COVID-19 pandemic has alsohave severely impacted our ability to raise capital through our Offerings.common stock offerings. From January 2, 20201, 2021 through October 31, 2020,September 30, 2021, we raised approximately $16,200,000$6,300,000 through our Offerings,common stock offerings, including our distribution reinvestment plans, a 57%61% decrease compared with approximately $40,200,000$16,200,000 raised during the first tennine months of 2019.2020. In addition, share repurchases increased from approximately $12,146,000$13,200,000 during the tenfirst nine months of 20192020 to approximately $14,547,000$16,900,000 in the first tennine months of 2020,2021, and we were unabledecided not to repurchase an additional approximately $4,363,000$5,210,652 in repurchase requests received during October 2020.September 2021 in order to preserve liquidity.
A subsidiaryIn April 2020, one of oursour subsidiaries was successful in obtaining a $517,000 loan through the Small Business Administration’s Paycheck Protection Program (“PPP”), which was funded by Pacific Mercantile BankPMB on April 20, 2020. Recent modifications to the PPP by the U.S. Treasury and Congress have extended the time period for loan forgiveness beyond the original eight-week period, making it possible forIn December 2020, our subsidiary to applysubmitted its application for forgiveness of 100%the total amount of the loan to PMB. After PMB’s review, our subsidiary updated its forgiveness application on February 10, 2021. PMB submitted the application to the SBA on February 10, 2021, and on February 16, 2021, our subsidiary was notified by PMB that its application for forgiveness of the PPP loan.loan had been approved by the SBA in the full amount of $517,000. Accordingly, the forgiveness of the PPP loan is reflected in other income for the nine months ended September 30, 2021 in our accompanying unaudited condensed consolidated financial statements.
Cash Flow Summary
The following table summarizes our cash flow activity for the nine months ended September 30, 20202021 and 2019:2020:
Nine Months Ended September 30,
20202019
Net cash provided by operating activities$3,811,648 $4,563,195 
Net cash provided by (used in) investing activities$13,207,680 $(6,480,653)
Net cash (used in) provided by financing activities$(14,945,552)$5,454,232 
Nine Months Ended September 30,
20212020
Net cash provided by operating activities$6,312,683 $3,813,564 
Net cash provided by investing activities$20,293,056 $13,207,680 
Net cash provided by (used in) financing activities$19,727,618 $(14,947,468)
Cash Flows from Operating Activities
For the nine months ended September 30, 20202021 and 2019,2020, net cash provided by operating activities was $3,811,648$6,312,683 and $4,563,195,$3,813,564, respectively.
The cash provided by operating activities during the nine months ended September 30, 2021 primarily reflects adjustments to our net income of $1,742,964 for distributions from our investment in an unconsolidated entity of $247,929 and net other non-cash charges of $6,021,967 related to depreciation and amortization, stock compensation expense, amortization of deferred financing costs, amortization of deferred lease incentives and amortization of above market lease intangibles, which were partially offset by the gain on sale of real estate investments, amortization of below-market lease intangibles, amortization of deferred rents, unrealized gain on interest rate swap valuation, gain on forgiveness of economic relief note payable, reversal of impairment of real estate property and undistributed income from our investment in an unconsolidated entity. The cash provided by operations was also offset in part by cash used due to changes in operating assets and liabilities of $1,700,177 during the nine months ended September 30, 2021 primarily due to increases in notes receivable and prepaid and other assets and a decrease in accounts payable, accrued and other liabilities, partially offset by a decrease in tenant receivables.
The cash provided by operating activities during the nine months ended September 30, 2020 primarily reflects adjustments to our net loss of $52,097,300 for distributions from our investment in an unconsolidated entity of $542,140;$542,140 and net non-cash charges forof $55,899,848 primarily related to impairment of goodwill and intangible assets, depreciation and amortization, impairment of real estate investment property, aggregating $44,078,928 due to the COVID-19 pandemic; and net other non-cash charges of $11,820,920 related to depreciation and amortization, unrealized loss on interest rate swap valuation, stock compensation expense, amortization of deferred financing costs and above-market leases,stock compensation expense, which were partially offset by gain on sale of real estate investments, amortization of deferred rents, amortization of below-market leases, gain on sale of real estate investmentslease intangibles and undistributed income from our investment in an unconsolidated entity. In addition, the net non-cash charges were partially offset by a net use of cash due to changes in operating assets and liabilities of $533,040$531,124 during the nine months ended September 30, 2020 primarily due to increases in tenant receivables, and prepaid and other assets and decrease in due to affiliates, offset in part by an increasedecreases in accounts payable, accrued and other liabilities.
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The cash provided by operating activities during the nine months ended September 30, 2019 primarily reflects adjustments to our net loss of $2,973,765 for distributions from investment in unconsolidated entities of $716,215liabilities and net non-cash charges of $7,669,593 related to depreciation and amortization, unrealized loss on interest rate swap valuation, amortization of deferred financing costs and stock compensation expense, partially offset by amortization of deferred rents, amortization of below-market lease intangibles and income from investments in unconsolidated entities. In addition, the net non-cash charges were partially offset by a net use of cash due to changes in operating assets and liabilities of $848,848 during the nine months ended September 30, 2019 primarily due to increases in tenant receivables, prepaid and other assets and a decrease in due to affiliates, partially offset by an increase in accounts payable, accrued and other liabilities.affiliates.
We continue to expect that our cash flows from operating activities will be positive in the next twelve months as a result of a full year of operations for the properties which we acquired during 2019;months; however, there can be no assurance that this expectation will be realized given the uncertain impacts of the COVID-19 pandemic on our tenants and our operating results.realized.
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Cash Flows from Investing Activities
Net cash provided by investing activities was $20,293,056 for the nine months ended September 30, 2021 and consisted primarily of the following:
•$22,840,026 in proceeds from sale of real estate investments; and
•$1,824,383 from collection of a note receivable from sale of real estate property; partially offset by
•$3,644,221 for acquisition of a real estate investment;
•$531,382 of additions to existing real estate investments; and
•$195,750 of additions to intangible assets.
Net cash provided by investing activities was $13,207,680 for the nine months ended September 30, 2020 and consisted primarily of the following:
• $15,364,073 for$15,364,073 in proceeds from sale of real estate investments, partially offset by
•$600,291 forof additions to existing real estate properties, including transaction costs for assets acquired in the Merger;investments;
•$566,102 forof additions to intangible assets; and
•$990,000 for additions to lease incentives.
Net cash used in investing activities was $6,480,653 for the nine months ended September 30, 2019 and consisted primarily of the following:
•$3,387,699 payment of an obligation related to a previously recorded tenant improvement;
•$1,005,523 of costs related to pending acquisitions including the then-pending Merger;
•$2,000,000 for a refundable real estate purchase deposit; and
•$181,972 of additions to existing real estate investments; partially offset by
•$100,000 of refund of a real estate purchase deposit.
Cash Flows from Financing Activities
Net cash provided by financing activities was $19,727,618 for the nine months ended September 30, 2021 and consisted of the following:
•$47,570,374 in net proceeds from issuance of preferred stock;
•$2,911,744 in proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $946,914;
•$25,436,000 in proceeds from mortgage notes payable;
•$6,000,000 in proceeds from borrowings on our credit facility; and
•$18,804 of refundable loan deposits.
These proceeds were partially offset by:
•$29,434,396 of mortgage notes principal payments and deferred financing cost payments of $381,076 to third parties;
•$12,000,000 of repayments on our credit facilities;
•$16,881,466 used for repurchases of shares under the SRPs; and
•$2,565,452 of cash distributions paid to common stockholders.
Net cash used in financing activities was $14,945,552$14,947,468 for the nine months ended September 30, 2020 and consisted primarily of the following:
•$36,421,500 of mortgage notes principal payments and deferred financing cost payments of $389,662 to third parties;
•$6,000,000 of repayments on our credit facility;
•$4,800,000 of full principal repayments on our short-term notes;
•$13,154,123 used for repurchases of shares under the SRPs; and
•$4,071,697 of cash distributions paid to common stockholders.
These uses were partially offset by:
•$10,378,762 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $979,832;$981,748;
•$35,705,500 of proceeds from mortgage notes payable; partially offset by principal payments of $36,421,500 and deferred financing cost payments of $389,662 to third parties;
•$527,000 of proceeds from economic relief notes payable, more than offset by full repayments of principal of $4,800,000 on short-term notes payable; and
•$4,260,000 of proceeds from borrowings on our unsecuredprior credit facility;facility.
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Funds from Operations and Adjusted Funds from Operations
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“Nareit”) promulgated a measure known as Funds from Operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations adjust for such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current Nareit definition or may interpret the current Nareit definition differently than we do, making comparisons less meaningful.
Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation, deferred rent, amortization of in-place lease valuation intangibles, acquisition-related costs, deferred financing fees, asset impairment write-downs, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-off transaction costs and other one-time transactions.
We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.
Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities.
For all of these proceeds werereasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than offset by $13,154,123 usedincome (loss) from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, Nareit, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or Nareit may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure. Furthermore, as described in Note 12 to our accompanying unaudited condensed consolidated financial statements, the conversion ratios for repurchasesunits of shares underClass M limited partnership interest in the share repurchase planOperating Partnership, units of Class P limited partnership interest in the Operating Partnership and $4,071,697units of distributions paid to common stockholders.Class R limited partnership interest (“Class R OP Units”) in the Operating Partnership can increase if the specified performance hurdles are achieved.
Net cash provided by financing activities was $5,454,232
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The following are the calculations of FFO and AFFO for the nine months ended September 30, 20192021 and consisted primarily of the following:2020:
•$34,559,949 of proceeds from issuance of common stock and investor deposits, partially offset by payments for offering costs and commissions of $1,207,562; and
Nine Months Ended September 30,
20212020
Net income (loss) attributable to common stockholders (in accordance with GAAP)$1,599,561 $(52,097,300)
FFO adjustments:
Add: Depreciation and amortization10,420,000 11,587,202 
Amortization of lease incentives192,235 45,903 
Depreciation and amortization for investment in the TIC Interest545,896 545,262 
Less: Gain on sale of real estate investments, net(4,532,413)(1,693,642)
FFO8,225,279 (41,612,575)
AFFO adjustments:
Add: Impairment of real estate investments(400,999)9,506,525 
Impairment of goodwill and intangible assets— 34,572,403 
Gain on forgiveness of economic relief note payable(517,000)— 
Amortization of corporate intangibles1,397,529 1,833,054 
Stock compensation2,115,341 522,183 
Amortization of deferred financing costs207,086 794,488 
Amortization of above-market intangible leases97,367 134,412 
Unrealized (gains) losses on interest rate swaps(684,057)1,019,840 
Acquisition fees and due diligence expenses, including abandoned pursuit costs712,925 116,809 
Reserve for loan guarantee— 3,120,678 
Less: Deferred rents(950,694)(1,027,863)
Amortization of below-market intangible leases(1,099,723)(1,157,951)
Other adjustments for unconsolidated entities(56,585)(67,751)
AFFO$9,046,469 $7,754,252 
Weighted average shares outstanding - basic7,575,013 8,019,742 
Weighted average shares outstanding - fully diluted8,763,112 9,209,706 
FFO Per Share:
Basic$1.09 $(5.19)
Fully Diluted$0.94 $(4.52)
AFFO Per Share:
Basic$1.19 $0.97 
Fully Diluted$1.03 $0.84 
•$6,350,000 of proceeds from mortgage notes payable, more than offset by principal payments of $14,557,433 and deferred financing cost payments of $175,311 to third parties and $63,500 to an affiliate; and
•$4,869,000 of proceeds from borrowings on our unsecured credit facility, more than offset by payments on our former unsecured credit facility of $13,869,000; these proceeds were also more than offset by $8,379,336 used for repurchases of shares under the share repurchase plan and $1,901,575 of distributions paid to stockholders.
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Results of Operations
As of September 30, 2020,2021, we owned (i) 3938 operating properties, including 17 operating properties which we acquired through the Merger with REIT I on December 31, 2019 and one property acquired on October 24, 2019, (ii) one parcel of land, which currently serves as an easement to one of our office properties, and (iii) an approximate 72.7% TIC Interest. We did not acquire any operatingacquired one retail property during the first nine of months 2021 compared to no real estate acquisitions during the first nine of months 2020. Four properties were sold during the first nine months of 2021 (three retail properties during the first quarter of 2021, which were classified as held for sale as of December 31, 2020, and one industrial property during the third quarter of 2021, which was classified as held for sale as of June 30, 2021). Three retail properties were sold during the first nine months of 2020, or 2019. We sold three properties during the third quarter of 2020 and havewhich were classified three properties as held for sale as of SeptemberJune 30, 2020. The operating results of the threesuch properties that were classified in the ordinary course of business as held for sale are included in our continuing results of operations.
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We expect that rental income, tenant reimbursements, depreciation and amortization expense, and interest expense will all increase indecrease for the remainderfull year of 20202021 as compared with 2019the full year of 2020 as a result of our nine dispositions from the December 31, 2019 acquisitions discussed above,third quarter of 2020 through the third quarter of 2021 (seven retail properties and two industrial properties), partially offset by the results from properties sold.our Raising Cane's retail property acquired on July 26, 2021. Our results of operations for the three and nine months ended September 30, 20202021 may not be indicative of those expected for the full year of 2021 or in future periods. However, dueDue to the currentcontinuing COVID-19 pandemic, including the recent spread of the Delta variant, in the United States and globally, our tenants and operating partners continue to be impacted. The continued impact of the COVID-19 pandemic and the Delta variant on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severityregarding mutations of the pandemic,COVID-19, the success of actionactions taken to contain or treat COVID-19, the effectiveness of the current vaccines to contain the COVID-19 variants including the Delta variant, and reactions by consumers, companies, governmental entities and capital markets.
Comparison of the Three Months Ended September 30, 20202021 to the Three Months Ended September 30, 20192020
Rental Income
Rental income, including tenant reimbursements, for the three months ended September 30, 2021 and 2020 was $10,307,683 and 2019 was $9,557,191, and $6,125,957, respectively. The significant increase of $3,431,234,$750,492, or 56%8%, quarter-over-quarter primarily reflects $1,528,484 of revenue from the early termination of a lease on the industrial property sold during the third quarter of 2021, net of reversal of deferred rents. Excluding the revenue from early termination of this lease, the quarter-over-quarter rental income fromdecreased by $777,992, or 8%, primarily reflecting the 20 operating properties acquired through the Merger with REIT I on December 31, 2019 (see Note 4reduction of rental income related to our unaudited condensed consolidated financial statements regarding the sale of three retail properties during the current yearthird quarter of 2020, as well as the effect of the subsequent sale of one tenant which filed for bankruptcyretail and one industrial property during the secondfourth quarter of 2020)2020 and three retail properties during the first quarter of 2021, compared to the sale of one additional operatingindustrial property during the third quarter of 2021, offset in part by the depreciation and amortization from the retail property acquired in October 2019.on July 26, 2021. Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The annualized base rental income of the operating properties owned as of September 30, 20202021 was $26,625,527 excluding annualized base rental income for real estate properties held for sale.$26,696,384.
Fees to AffiliatesGeneral and Administrative
Fees to affiliates, or asset management fees to affiliates,General and administrative expenses were $0$3,674,187 and $812,349, respectively,$2,522,719 for the three months ended September 30, 20202021 and 2019 for our investments in operating properties. The fee was equal to 0.1% of the total investment value of our properties on a monthly basis through December 31, 2019, when the Advisory Agreement was terminated in connection with the Self-Management Transaction. The fees for the three months ended September 30, 2019 correspond to the 24 operating properties owned during that quarter. In addition, we incurred asset management fees to the Former Advisor of $47,977 related to our approximate 72.7% TIC Interest during the three months ended September 30, 2019, which amounts are reflected as a reduction of income recognized from investments in unconsolidated entities. The Advisory Agreement with the entities that own the TIC Interest property was assigned to our taxable REIT subsidiary following the Self-Management Transaction and we earn a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a management fee of $65,993 for the three months ended September 30, 2020, of which our portion of expense relating to the TIC Interest was $47,984.
General and Administrative
General and administrative expenses were $2,522,719 and $918,636 for the three months ended September 30, 2020 and 2019, respectively. The significant increase of $1,604,083,$1,151,468, or 175%46%, quarter-over-quarter primarily reflects increases of $559,826 in stock compensation expense related to the costs of self-management of all 39 operating properties ownedClass R OP Units granted in January 2021 (discussed in detail in Note 12 to our accompanying unaudited condensed consolidated financial statements), legal and three properties held for sale duringinsurance expenses in the current year quarter including personnel, occupancy and technology services costs, compared with the costs of the Advisory Agreement for the 24 operating properties owned duringto the prior year quarter, along with increases in directors and officers insurance, and post-closing accounting fees related to the Self-Management Transaction.
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quarter.
Depreciation and Amortization
Depreciation and amortization expense was $4,304,470$3,814,503 and $2,393,725$4,304,470 for the three months ended September 30, 20202021 and 2019,2020, respectively. The purchase price of properties acquired including properties acquired in the Merger, is allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The significant increasedecrease of $1,910,745,$489,967, or 80%11%, quarter-over-quarter primarily reflects the reduction of depreciation and amortization expenses related to the sale of all 39 operatingfour retail properties owned and three properties held for saleone industrial property during the current yearsecond half of 2020, three retail properties during the first quarter including 17 of 2021 and one industrial property during the 20 operating propertiesthird quarter of 2021, offset in part by the depreciation and amortization from the retail property acquired on December 31, 2019 in the Merger, and the amortization of intangibles primarily acquired in the Self-Management Transaction of $458,371, as compared with expenses for the 24 operating properties owned during the prior year quarter.July 26, 2021.
Interest Expense
Interest expense was $2,732,528$1,831,545 and $1,738,791$2,732,528 for the three months ended September 30, 20202021 and 2019,2020, respectively (see Note 7 to our accompanying unaudited condensed consolidated financial statements for the detail of the components of interest expense). The significant increasedecrease of $993,737,$900,983, or 57%33%, quarter-over-quarter was primarily due to the increase in thereduced outstanding borrowings for both our mortgage notes payable and our credit facilities and reduced amortization of loan fees. The average principal balance of our mortgage notes payable fromwas reduced to approximately $116,974,000$182,453,000 during the third quarter of 2019 to2021 from approximately $196,378,000 during the third quarter of 2020. Average unsecuredIn addition, average credit facility borrowings were approximately $1,500,000 during the third quarter of 2021 compared to approximately $9,065,000 during the third quarter of 2020 compared to zero unsecured credit facility borrowings during the third quarter of 2019.2020.
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Property Expenses
Property expenses were $1,677,055$1,658,437 and $1,362,661$1,677,055 for the three months ended September 30, 20202021 and 2019,2020, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses.expenses, the majority of which are reimbursed by tenants. The significant increasedecrease of $314,394,$18,618, or 23%1%, quarter-over-quarter primarily reflects the reduction in property expenses of all 39 operating properties owned, three properties sold and three properties held for sale during the current year quarter, including 17 of the 20 operating properties acquired on December 31, 2019 in the Merger, as compared with expenses for the 24 operating properties owned during the prior year quarter.
Expenses Reimbursed by Former Sponsor or Affiliates
Expenses reimbursed by our Former Sponsor or affiliates thereof were $0 and $96,104 for the three months ended September 30, 2020 and 2019, respectively. For the quarter ended September 30, 2019, the amounts reimbursed by the Former Sponsor were for investor relations payroll costs. Concurrent with the closing of the Self-Management Transaction on December 31, 2019, the Advisory Agreement was terminated.
Gain on Sale of Real Estate Investments
The gain on sale of investments of $1,693,642 for the three months ended September 30, 2020 relatesrelated to the sale of three retail properties during the current year quarter (see Note 4 to our unaudited condensed consolidated financial statements for more details).
Other (Expense) Income, Net
The lease termination expense of $(1,175,192) for the three months ended September 30, 2020 reflects the fee for early termination of our Costa Mesa office lease following the surrender of the leased premises to the lessor during the secondthird quarter of 2020, (see Note 10 to our unaudited condensed consolidated financial statements for more details).
Interest income was $51as well as the effect of the subsequent sale of one retail and $45,940 forone industrial property during the three months ended September 30,fourth quarter of 2020 and 2019, respectively.
Income from investments in unconsolidated entities was $92,617 and $37,570 forthree retail properties during the three months ended September 30, 2020 and 2019, respectively. This represents our approximate 72.7% TIC Interest infirst quarter of 2021, compared to the Santa Clara property's resultssale of operations forone industrial property during the third quarter of 2020 and 2019, respectively, and includes the results of our approximate 4.8% interest2021, offset in REIT I's results of operations for the third quarter of 2019. We acquired REIT I in the Merger on December 31, 2019.
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Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019
Rental Income
Rental income, including tenant reimbursements, for the nine months ended September 30, 2020 and 2019 was $29,888,620 and $17,907,668, respectively. The significant increase of $11,980,952, or 67%, period-over-period primarily reflects rental incomepart by property expenses from the 20 operating properties acquired through the Merger with REIT I on December 31, 2019 and one additional operatingretail property acquired in October 2019. Three of the operating properties acquired through the Merger were sold during the current year quarter. No rental income was recorded for one tenant, which filed for bankruptcy, for the period since April 1, 2020 (see Note 4 to our unaudited condensed consolidated financial statements for more details). Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The annualized base rental income of the operating properties owned as of September 30, 2020 was $26,625,527, excluding annualized base rental income for real estate properties held for sale.
Fees to Affiliates
Fees to affiliates, or asset management fees to affiliates, were $0 and $2,436,386, respectively, for the nine months ended September 30, 2020 and 2019 for our investments in operating properties. The fee was equal to 0.1% of the total investment value of our properties on a monthly basis through December 31, 2019, when the Advisory Agreement was terminated in connection with the Self-Management Transaction. The fees for the nine months ended September 30, 2019 correspond to the 24 operating properties owned during that period. In addition, we incurred asset management fees to the Former Advisor of $143,951 related to our approximate 72.7% TIC Interest during the nine months ended September 30, 2019, which amounts are reflected as a reduction of income recognized from investments in unconsolidated entities. The Advisory Agreement with the entities that own the TIC Interest property was assigned to our taxable REIT subsidiary following the Self-Management Transaction and we earn a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a management fee of $197,979 for the nine months ended September 30, 2020, of which our portion of expense relating to the TIC Interest was $143,951.
General and Administrative
General and administrative expenses were $7,447,082 and $2,312,081 for the nine months ended September 30, 2020 and 2019, respectively. The significant increase of $5,135,001, or 222%, period-over-period primarily reflects the costs of self-management of all 39 operating properties owned and three properties held for sale during the current year period, including personnel, occupancy and technology services costs, compared with the costs of the Advisory Agreement for the 24 operating properties owned during the prior year period, along with increases in directors and officers insurance, audit fees, third party consulting costs and post-closing legal costs related to the Self-Management Transaction of $201,920.
Depreciation and Amortization
Depreciation and amortization expense was $13,420,256 and $7,176,716 for the nine months ended September 30, 2020 and 2019, respectively. The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The significant increase of $6,243,540, or 87%, period-over-period primarily reflects the expenses of all 39 operating properties owned, three properties sold and three properties held for sale during the current year period, including the 20 operating properties acquired on December 31, 2019 in the Merger, and the amortization of intangibles primarily acquired in the Self-Management Transaction of $1,372,910, as compared with expenses for the 24 operating properties owned during the prior year period.
Interest Expense
Interest expense was $9,196,061 and $5,975,866 for the nine months ended September 30, 2020 and 2019, respectively (see Note 7 to our unaudited condensed consolidated financial statements for the detail of the components of interest expense). The significant increase of $3,220,195, or 54%, period-over-period was primarily due to the increase in the average principal balance of mortgage notes payable from approximately $118,483,000 during the first nine months of 2019 to approximately $197,182,000 during the first nine months of 2020. Average unsecured credit facility borrowings were approximately $2,856,000 during the first nine months of 2019 and increased to an average of $10,290,000 during the first nine months of 2020.
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Property Expenses
Property expenses were $5,480,411 and $3,537,249 for the nine months ended September 30, 2020 and 2019, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses. The significant increase of $1,943,162, or 55%, period-over-period primarily reflects the expenses of all 39 operating properties owned, three properties sold and three properties held for sale during the current year period, including the 20 operating properties acquired on December 31, 2019 in the Merger, as compared with expenses for the 24 operating properties owned during the prior year period.
Impairment of Investments in Real Estate Properties
Impairment charges aggregating $9,506,525 recorded in the first nine months of 2020, which were approximately 2% of our total investments in real estate property, relates to the impairments of the three vacant properties located in Las Vegas, Nevada, Morgan Hill, California and Cedar Park, Texas and the sale of our property in Lake Elsinore, California. These impairment charges are due to the negative impacts of the COVID-19 pandemic including the government mandated closure of the 24 Hour Fitness store in Las Vegas, Nevada and the subsequent receipt on June 15, 2020 of written notice that the lease was formally rejected in connection with 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the surrender of the premises to our subsidiary, as well as uncertainty regarding our ability to re-lease the other two vacant properties on the same or better terms, or at all (see Note 4 to our unaudited condensed consolidated financial statements for impairment details). The Lake Elsinore property was sold on August 3, 2020 and the Morgan Hill property was sold on October 28, 2020. We have negotiated an early termination of the Dana lease in Cedar Park, Texas as discussed in Note 4 to our unaudited condensed consolidated financial statements and have engaged brokers to identify a potential new tenant for the property.
Impairment of Goodwill and Intangible Assets
Impairment charges of $34,572,403 recorded in the first nine months of 2020 consisted of goodwill impairment of $33,267,143 (approximates 66% of goodwill) and intangible assets impairment of $1,305,260 (approximates 16% of intangible assets) related to our investor list. These impairments were recorded in the first quarter of 2020 and reflect the negative impacts of the COVID-19 pandemic to the carrying values of goodwill and intangible assets (see Note 3 to our unaudited condensed consolidated financial statements for impairment details).July 26, 2021.
Reserve for Loan Guarantee
The credit to our reserve for our estimated liability under a loan guarantee amounted to $3,120,678$4,359 for the ninethree months ended September 30, 2020. This representsrepresented the change in the estimated liability for a loan guarantee related to our subsidiary's secured mortgage for the Las Vegas, Nevada property, as a result of the evaluation of the impact of the COVID-19 pandemic on the tenant's business and the risk that the lender could foreclose on the property (see “Effect of the COVID-19 Pandemic on Our Capital Resources”above and Note 6 to our unaudited condensed consolidated financial statements).
On September 17, 2020 our special purpose subsidiary entered into a purchase and sale agreement to sell theproperty. The Las Vegas, Nevada property subject towas sold on December 15, 2020 and the reserve was reversed as a number of contingencies including lender approvalresult of the buyer’sbuyer's assumption of the existing mortgage. There can be no assurances that all of the contingencies will be satisfied or that the transaction will close. If our special purpose subsidiary cannot complete this transaction, then it would consider allowing the lender to foreclose on, and take possession of, the property.
Expenses Reimbursed by Former Sponsor or Affiliates
Expenses reimbursed by our Former Sponsor or affiliates were $0 and $332,336 for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2019, the amounts reimbursed by the Former Sponsor for investor relations payroll costs of $332,336 reflect $373,251 of costs, partially offset by a $40,915 refund to the Former Sponsor of employment related legal fees. Concurrent with the closing of the Self-Management Transaction on December 31, 2019, the Advisory Agreement was terminated.mortgage note payable.
Gain on Sale of Real Estate Investments
The gain on sale of real estate investments of $4,242,771 and $1,693,642 for the nine months ended September 30, 2021 and 2020 reflectsrelates primarily to the gain on sale of one industrial property during the current year quarter and three retail properties during the current periodprior year quarter, respectively (see Note 43 to our accompanying unaudited condensed consolidated financial statements for more details).
Other Income (Loss)
The lease termination expense of $1,175,192 for the three months ended September 30, 2020 reflects the fee for early termination of our Costa Mesa office lease following the surrender of the leased premises to the lessor during the second quarter of 2020.
Interest income was $1,270 and $51 for the three months ended September 30, 2021 and 2020, respectively.
Income from investment in unconsolidated entity was $75,403 and $92,617 for the three months ended September 30, 2021 and 2020, respectively. This represents our approximate 72.7% TIC Interest in the Santa Clara property's results of operations for the third quarters of 2021 and 2020, respectively.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
Rental Income
Rental income, including tenant reimbursements, for the nine months ended September 30, 2021 and 2020 was $28,521,546 and $29,888,620, respectively. Rental income during the current year period included $1,528,484 of revenue from the early termination of lease related to the industrial property sold during the third quarter of 2021. The decrease of $1,367,074, or 5%, period-over-period primarily reflects the reduction of rental income from the nine properties (seven retail properties and two industrial properties) sold during the second half of 2020 and the first and third quarters of 2021, offset in part by rental income from the retail property acquired on July 26, 2021. Excluding the effect of the revenue from early termination of the lease on the industrial property sold in July 2021, the period-over-period rental income decreased by $2,895,558, or 10%. Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The annualized base rental income of the operating properties owned as of September 30, 2021 was $26,696,384.
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Other (Expense) Income, NetGeneral and Administrative
General and administrative expenses were $9,832,940 and $7,447,082 for the nine months ended September 30, 2021 and 2020, respectively. The increase of $2,385,858, or 32%, period-over-period primarily reflects $1,573,991 of stock compensation expense related to the Class R OP Units granted in January 2021 (discussed in Note 12 to our accompanying unaudited condensed consolidated financial statements) along with other compensation, legal and insurance expenses in the current year period compared to the prior year period.
Depreciation and Amortization
Depreciation and amortization expense was $11,817,529 and $13,420,256 for the nine months ended September 30, 2021 and 2020, respectively. The purchase price of properties acquired is allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The decrease of $1,602,727, or 12%, period-over-period primarily reflects the reduction of depreciation and amortization expenses related to the nine properties (seven retail properties and two industrial properties) sold during the second half of 2020 and the first and third quarters of 2021, offset in part by depreciation and amortization from the retail property acquired on July 26, 2021.
Interest Expense
Interest expense was $5,711,330 and $9,196,061 for the nine months ended September 30, 2021 and 2020, respectively (see Note 7 to our accompanying unaudited condensed consolidated financial statements for the detail of the components of interest expense). The decrease of $3,484,731, or 38%, period-over-period was primarily due to our gain on interest rate swaps of $586,782 during the nine months ended September 30, 2021, compared to a loss on interest rate swaps of $1,164,490 during the nine months ended September 30, 2020. In addition, the decrease was due to reduced outstanding borrowings for both our mortgage notes payable and our credit facilities and reduced amortization of loan fees. There was also a decrease in the average principal balance of our mortgage notes payable from approximately $197,182,000 during the first nine months of 2020 to approximately $180,266,000 during the first nine months of 2021 and average credit facility borrowings were approximately $10,290,000 during the first nine months of 2020, compared to $4,000,000 during the first nine months of 2021.
Property Expenses
Property expenses were $5,111,270 and $5,480,411 for the nine months ended September 30, 2021 and 2020, respectively. These expenses primarily relate to property taxes and repairs and maintenance expense, the majority of which are reimbursed by tenants. The decrease of $369,141, or 7%, period-over-period primarily reflects the reduction in expenses related to the nine properties (seven retail properties and two industrial properties) sold during the second half of 2020 and the first and third quarters of 2021.
Impairment of Real Estate Investment Properties
Impairment of real estate investment properties was a credit of $400,999 for the nine months ended September 30, 2021 and a charge of $9,506,525 for the nine months ended September 30, 2020. The current year period's credit resulted from an adjustment to reduce the impairment charge recorded in December 2020 for the property located in Bedford, Texas due to its reclassification from held for sale to held for use in June 2021 (see Note 3 to our accompanying unaudited condensed consolidated financial statements for a detailed discussion of the adjustment). The impairment charge recorded in the nine months ended September 30, 2020 relates to the impairments of four properties formerly leased to Rite Aid, 24 Hour Fitness, Dinan Cars and Dana due to the negative impacts of the COVID-19 pandemic. These properties were specifically affected due to the forced closure of the 24 Hour Fitness in Las Vegas, Nevada, and the uncertainty regarding our ability to re-lease the Dinan Cars and Dana vacant properties on the same or better terms, or at all (see Note 3 to our accompanying unaudited condensed consolidated financial statements for impairment details). The properties formerly leased by Rite Aid, 24 Hour Fitness, Dinan Cars and Dana were sold in August, October and December 2020 and July 2021, respectively.
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Impairment of Goodwill and Intangible Assets
Impairment charges of $34,572,403 recorded during the nine months ended September 30, 2020 consisted of goodwill impairment of $33,267,143 (approximated 66% of goodwill) and intangible assets impairment of $1,305,260 (approximated 16% of intangible assets) related to our investor list. These impairments reflected the negative impacts of the COVID-19 pandemic to the carrying values of goodwill and intangible assets (see Note 5 to our accompanying unaudited condensed consolidated financial statements for impairment details).
Reserve for Loan Guarantee
The reserve for estimated liability under a loan guarantee amounted to $3,120,678 for the nine months ended September 30, 2020. This represented the estimated liability for a loan guarantee related to our subsidiary's secured mortgage for the Las Vegas, Nevada property, as a result of the evaluation of the impact of the COVID-19 pandemic on the tenant's business and the risk that the lender could foreclose on the property. The Las Vegas, Nevada property was sold on December 15, 2020 and the reserve was reversed as a result of the buyer's assumption of the related mortgage note payable.
Gain on Sale of Real Estate Investments
The gain on sale of investments of $4,532,413 and $1,693,642 for the nine months ended September 30, 2021 and 2020, respectively, relates primarily to the sale of four properties (three retail and one industrial) during the current year period and three retail properties during the prior year period, respectively (see Note 3 to our accompanying unaudited condensed consolidated financial statements for more details).
Other Income (Loss)
The lease termination expense of $(1,175,192)$1,175,192 for the nine months ended September 30, 2020 reflects the fee for early termination of our Costa Mesa office lease following the surrender of the leased premises to the lessor during the second quarter of 2020 (see Note 10 to our unaudited condensed consolidated financial statements for more details).2020.
Interest income was $4,873$1,370 and $56,971$4,873 for the nine months ended September 30, 2021 and 2020, respectively.
Income from investment in unconsolidated entity was $222,705 and 2019, respectively, and other expense was $4,855$239,028 for the nine months ended September 30, 2020.
Income from investments in unconsolidated entities was $239,0282021 and $167,558 for the nine months ended September 30, 2020, and 2019, respectively. This represents our approximate 72.7% TIC Interest in the Santa Clara property's results of operations for the first nine months of 2021 and 2020, and 2019, respectively, andrespectively.
Other income for the nine months ended September 30, 2021 also includes the resultsSBA’s forgiveness in February 2021 of our approximate 4.8% interesteconomic relief note payable of $517,000 obtained in REIT I's resultsApril 2020 under the terms of operations for the first nine months of September 30, 2019. We acquired REIT I in the Merger on December 31, 2019.PPP.
Organizational and Offering Costs
OfferingOrganizational and offering costs include all expenses incurred in connection with the Offerings, including investor relationsrelations' payroll expenses. Other organizationalexpenses and offering costs include allother expenses incurred in connection with our formation,Offerings, including, but not limited to legal fees, federal and state filing fees, and other costs to incorporate. Our organizational and offering costs were paid by our Former Sponsor on our behalf through September 30, 2019, after which we agreed to pay all future organization and offering costs pursuant to an amendment to the Advisory Agreement in October 2019 and to no longer be reimbursed by our Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for our Former Sponsor's agreement to terminate its right to receive 3% of gross offering proceeds as reimbursement for organization and offering costs paid by our Former Sponsor. Prior to September 30, 2019, we were obligated to reimburse our Former Sponsor for organizational and offering costs related to the Offerings paid by it on our behalf, provided such reimbursement did not exceed 3% of gross offering proceeds raised in the Offerings as of the date of the reimbursement. We recorded $5,429,105 of organizational and offering costs paid to our Former Sponsor or affiliates through September 30, 2019. See Note 9 to our unaudited condensed consolidated financial statements for additional information. Through September 30, 2019, our Former Sponsor had incurred organizational and offering costs on our behalf in connection with the Offerings in excess of 3.0% of the gross offering proceeds received by us. From October 1, 2019 through December 31, 2019, we incurred $509,739 of direct organizational and offering costs related to the Offerings.
costs. For the nine months ended September 30, 2021 and September 30, 2020, we incurred organizational and offering costs including primarily legal fees, FINRA, SECaggregating $946,914 and blue sky filing costs and personnel costs for investor relations personnel of $981,748, related to the Offerings,respectively, which are recorded in our financial statements as of September 30, 2020 as an offset to equity. As of September 30, 2020,2021, we had recorded cumulative organizational and offering costs of $8,091,076, including $5,429,105 paid to our Former Sponsorformer sponsor or affiliates and $1,491,487 which we incurred directly, for an aggregate of $6,920,592 of organizational and offering costs.affiliates.
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Distributions
We intend to pay distributions on a monthly basis, and we paid our first distribution on July 11, 2016. The rate is determined by our board of directorsthe Board based on our financial condition and such other factors as our board of directorsthe Board deems relevant. Our board of directorsThe Board has not pre-established a percentage range of return for distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders other than as necessary to meet REIT qualification requirements.
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Distributions declared, distributions paid and cash flows provided by operating activities were as follows:
Total DistributionsDistributions DeclaredDistributions PaidCash Flows Provided by Operating
Period (1)DeclaredPer ShareCashReinvestedActivities
First Quarter 2020 (2)$4,189,102 $0.175875 $1,379,751 $2,360,514 $1,947,505 *
Second Quarter 2020 (3)3,270,291 0.136000 1,710,514 2,304,199 (774,533)*
Third Quarter 2020 (4)2,135,815 0.136000 981,432 1,150,452 2,638,676 
2020 Totals$9,595,208 $0.447875 $4,071,697 $5,815,165 $3,811,648 
First Quarter 2019 (5)$2,388,694 $0.175875 $552,134 $1,763,630 $773,736 
Second Quarter 2019 (6)2,605,268 0.175875 630,184 1,900,893 2,112,395 
Third Quarter 2019 (7)2,784,235 0.175875 719,257 2,020,768 1,677,064 *
Fourth Quarter 2019 (8)2,807,322 0.175875 2,116,411 667,391 185,709 *
2019 Totals$10,585,519 $0.703500 $4,017,986 $6,352,682 $4,748,904 *
Total DistributionsDistributions DeclaredDistributions PaidCash Flows Provided by (Used in) Operating
Period (1)DeclaredPer ShareCashReinvestedActivities
2021
First Quarter 2021 (2)$1,991,676 $0.258903 $891,202 $1,130,949 $102,091 
Second Quarter 2021 (3)1,976,511 0.261780 835,381 1,131,281 2,981,262 
Third Quarter 2021 (4)198,172 0.264656 838,868 1,137,501 3,229,330 
$4,166,359 $0.785339 $2,565,451 $3,399,731 $6,312,683 
2020
First Quarter 2020 (5)$4,189,102 $0.523018 $1,379,751 $2,360,514 $1,947,505 *
Second Quarter 2020 (6)3,270,291 0.407691 1,710,514 2,304,199 (774,533)*
Third Quarter 2020 (7)2,135,815 0.264656 981,432 1,150,452 2,638,676 
Fourth Quarter 2020 (8)2,106,620 0.264656 947,519 1,143,369 1,765,192 
2020 Totals$11,701,828 $1.460021 $5,019,216 $6,958,534 $5,576,840 *
*    Includes non-recurring Merger costs of $201,920 during the nine monthsyear ended September 30,December 31, 2020 ($193,460 during the quarter ended March 31, 2020 and $8,460 during the quarter ended June 30, 2020) and $1,468,913 for the year ended December 31, 2019 ($800,359 during the quarter ended September 30, 2019 and $668,554 during the quarter ended December 31, 2019).
(1)The distributiondistributions paid per share of Class S common stock isare net of deferred selling commissions.
(2)The distribution of $675,221 for the month of March 2021 was declared in January 2021 and paid on April 26, 2021. The amount was recorded as a liability as of March 31, 2021.
(3)The distribution of $650,167 for the month of June 2021 was declared in March 2021 and paid on July 26, 2021. The amount was recorded as a liability as of June 30, 2021.
(4)The distribution of $643,025 for the month of September 2021 was declared in June 2021 and paid on October 25, 2021. The amount was recorded as a liability as of September 30, 2021 in the accompanying unaudited condensed consolidated balance sheets.
(5)The distribution of $1,415,328 for the month of March 2020 was declared in January 2020 and paid on April 27, 2020. The amount was recorded as a liability as of March 31, 2020.
(3)(6)The distribution of $691,443 for the month of June 2020 was declared in May 2020 and paid on July 27, 2020. The amount was recorded as a liability as of June 30, 2020.
(4)(7)The distribution of $674,837 for the month of September 2020 was declared in May 2020 and paid on October 26, 2020. The amount was recorded as a liability as of September 30, 2020 in the accompanying unaudited condensed consolidated balance sheets.
(5)The distribution of $821,300 for the month of March 2019 was declared in February 2019 and paid on April 25, 2019. The amount was recorded as a liability as of March 31, 2019.
(6)The distribution of $896,291 for the month of June 2019 was declared in February 2019 and paid on July 25, 2019. The amount was recorded as a liability as of June 30, 2019.
(7)The distribution of $937,863 for the month of September 2019 was declared in August 30, 2019 and paid on October 25, 2019. The amount was recorded as a liability as of September 30, 2019.2020.
(8)The distribution of $966,491$699,997 for the month of December 20192020 was declared in August 30, 2019September 2020 and paid on January 25, 2020.22, 2021. The amount was recorded as a liability as of December 31, 2019 in the accompanying consolidated balance sheets.2020.
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Our sources of distribution payments were as follows:
PeriodNet
Rental
Income
Received		Waived
Advisor
Asset
Management
Fees		Deferred
Advisor
Asset
Management
Fees		Offering
Proceeds (1)
2020
First Quarter 2020$4,189,102 (2)(2)$— 
Second Quarter 20203,270,291 (2)(2)— 
Third Quarter 20202,135,815 (2)(2)— 
2020 Totals$9,595,208 $— 
2019
First Quarter 2019$2,388,694 $— $— $— 
Second Quarter 20192,605,268 — — — 
Third Quarter 20192,784,235 — — — 
Fourth Quarter 20192,807,322 — — — 
2019 Totals$10,585,519 $— $— $— 
(1)In connection with the acquisition of some properties, we may negotiate a reduced purchase price for the acquired property in an amount that equals an agreed-upon rent abatement. During the period of any rent abatement on properties that we acquire, we may be unable to fully fund our distributions from net rental income received. In connection with the extension of the lease term of some existing properties, we may agree to pay a lease extension fee. In those events, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price or the amounts extend a lease term by payment of an extension fee.
(2)Subsequent to the Self-Management Transaction on December 31, 2019, asset management fees are not applicable.
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PeriodNet
Rental
Income
Received		Offering
Proceeds
2021
First Quarter 2021$1,991,676 $— 
Second Quarter 20211,976,511 — 
Third Quarter 2021198,172 — 
2021 Totals$4,166,359 $— 
2020
First Quarter 2020$4,189,102 $— 
Second Quarter 20203,270,291 — 
Third Quarter 20202,135,815 — 
Fourth Quarter 20202,106,620 — 
2020 Totals$11,701,828 $— 
Distributions to stockholders were declared and paid based on daily record dates at rates per share per day. The distribution details are as follows:
Distribution PeriodDistribution PeriodRate Per Share Per Day (1)Declaration DatePayment DateDistribution PeriodRate Per Share Per Day (1)Declaration DatePayment Date
20212021
January 1-31January 1-31$0.00287670 December 9, 2020February 25, 2021
February 1-28February 1-28$0.00287670 January 27, 2021March 25, 2021
March 1-31March 1-31$0.00287670 January 27, 2021April 26, 2021
April 1-30April 1-30$0.00287670 March 25, 2021May 25, 2021
May 1-31May 1-31$0.00287670 March 25, 2021June 25, 2021
June 1-30June 1-30$0.00287670 March 25, 2021July 26, 2021
July 1-31July 1-31$0.00287670 June 16, 2021August 25, 2021
August 1-31August 1-31$0.00287670 June 16, 2021September 27, 2021
September 1-30September 1-30$0.00287670 June 16, 2021October 25, 2021
October 1-31October 1-31$0.00315070 August 12, 2021(3)
November 1-30November 1-30$0.00315070 August 12, 2021(3)
December 1-31December 1-31$0.00315070 August 12, 2021(3)
202020202020
January 1-31January 1-31$0.00192210 December 18, 2019February 25, 2020January 1-31$0.00576630 December 18, 2019February 25, 2020
February 1-29February 1-29$0.00191257 January 24, 2020March 25, 2020February 1-29$0.00573771 January 24, 2020March 25, 2020
March 1-31March 1-31$0.00191257 January 24, 2020April 27, 2020March 1-31$0.00573771 January 24, 2020April 27, 2020
April 1-30April 1-30$0.00191257 January 24, 2020May 26, 2020April 1-30$0.00573771 January 24, 2020May 26, 2020
May 1-31May 1-31$0.00160493 (2)May 20, 2020June 25, 2020May 1-31$0.00481479 (2)May 20, 2020June 25, 2020
June 1-30June 1-30$0.00095890 May 20, 2020July 27, 2020June 1-30$0.00287670 May 20, 2020July 27, 2020
July 1-31July 1-31$0.00095890 May 20, 2020August 26, 2020July 1-31$0.00287670 May 20, 2020August 26, 2020
August 1-31August 1-31$0.00095890 May 20, 2020September 28, 2020August 1-31$0.00287670 May 20, 2020September 28, 2020
September 1-30September 1-30$0.00095890 May 20, 2020October 26, 2020September 1-30$0.00287670 May 20, 2020October 26, 2020
October 1-31October 1-31$0.00095890 September 30, 2020(3)October 1-31$0.00287670 September 30, 2020November 25, 2020
November 1-30November 1-30$0.00095890 September 30, 2020(3)November 1-30$0.00287670 September 30, 2020December 28, 2020
December 1-31December 1-31$0.00095890 September 30, 2020(3)December 1-31$0.00287670 September 30, 2020January 22, 2021
2019   
January 1-31$0.00191183 December 26, 2018February 25, 2019
February 1-28$0.00209375 January 31, 2019March 25, 2019
March 1-31$0.00192740 February 28, 2019April 25, 2019
April 1-30$0.00192740 February 28, 2019May 28, 2019
May 1-31$0.00192740 February 28, 2019June 25, 2019
June 1-30$0.00192740 February 28, 2019July 25, 2019
July 1-31$0.00189113 June 25, 2019August 26, 2019
August 1-31$0.00189113 July 31, 2019September 25, 2019
September 1-30$0.00192740 August 30, 2019October 25, 2019
October 1-31$0.00192740 August 30, 2019November 25, 2019
November 1-30$0.00192740 August 30, 2019December 26, 2019
December 1-31$0.00192740 August 30, 2019January 25, 2020
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(1)    Distributions paid per share of Class S common stock are net of deferred selling commissions.
(2)    Rate per share per day reflects $0.00191257$0.00573771 per day through May 21, 2020 and $0.00095890$0.0028767 per day thereafter.thereafter, after adjustment for the 1:3 reverse stock split.
(3)    Distribution has not been paid as of the filing date of this Quarterly Report on Form 10-Q.
Going forward,Commencing January 2022, since we are terminating our Reg A Offering effective November 24, 2021, we expect our board of directors to continue to declare cash distributions based on daily record dates and to pay these distributions on a monthly basis, and after the completion of our Offerings to continueBoard to declare distributions based on a single record date as of the end of the month, and to pay these distributions on a monthly basis. Cash distributions will be determined by our board of directorsthe Board based on our financial condition, projected cash flows and such other factors as our board of directorsthe Board deems relevant. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders other than as necessary to meet REIT qualification requirements.
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Properties
Portfolio Information
Our wholly-owned investments in real estate properties as of September 30, 2020,2021, December 31, 20192020 and September 30, 20192020, including four and three assets held for sale as of December 31, 2020 and September 30, 2020, respectively, and the 91,740 square foot industrial property underlying the TIC Interest for all balance sheet dates presented were as follows:
As ofAs of
September 30,
2020		December 31, 2019September 30,
2019		September 30,
2021		December 31, 2020September 30,
2020
Number of properties:Number of properties:(1)(2)(2)Number of properties:(1)(2)
RetailRetail1419 9 Retail1315 16 
OfficeOffice1414 10 Office1414 14 
IndustrialIndustrial1112 5 Industrial1112 13 
Total operating properties and properties held for saleTotal operating properties and properties held for sale3945 24 Total operating properties and properties held for sale3841 43 
LandLand11 1 Land11 1 
Total propertiesTotal properties404625Total properties394244
Leasable square feet:Leasable square feet:Leasable square feet:
RetailRetail200,449 362,764 185,384 Retail295,366 220,553 362,764 
OfficeOffice904,499 904,499 616,284 Office853,963 853,963 904,499 
IndustrialIndustrial1,066,243 1,093,539 735,016 Industrial1,100,054 1,145,519 1,185,279 
TotalTotal2,171,191 2,360,802 1,536,684 Total2,249,383 2,220,035 2,452,542 
(1)    Excludes twoIncludes four retail properties held for sale as of December 31, 2020, three of which were sold during the first quarter of 2021 and one industrialretail property was put back into operating properties and reclassified as real estate investment held for investment and use during the second quarter of 2021.
(2)    Includes three properties held for sale as of September 30, 2020 and three(two retail properties thatand one industrial property), one retail and one industrial property of which were sold during the thirdfourth quarter of 2020.
(2)    Includes 17 and 20 properties for September 30, 2020 and December 31, 2019, respectively, acquired throughone retail property was reclassified as real estate investment held for investment and use during the Merger with REIT I on December 31, 2019 as follows: (i) 11 retail properties with an aggregate leasable square feetsecond quarter of 177,380; (ii) six office properties with an aggregate leasable square feet of 183,752 and (iii) three industrial properties with an aggregate leasable square feet of 246,259.
The above table does not include an approximate 72.7% TIC interest in a 91,740 square feet office property located in Santa Clara, California.2021.
We have a limited operating history. As of September 30, 2020, we have acquired: (i) 45 operating properties; (ii) one parcel of land, which currently serves as an easement to one of our office properties; and (iii) the TIC Interest. In evaluating thesethe above properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions.
During December 2019 and January 2020, we amended lease agreements to extend the lease terms for three of our properties. In December 2019, the lease for the Walgreens property in Stockbridge, GA was extended for 10 years to February 28, 2031 in exchange for an incentive payment of $500,000 payable in four installments of $125,000 each, commencing January 10, 2020 with the final installment paid April 1, 2020. In January 2020, the lease for the Walgreens property in Santa Maria, CA was extended for 10 years to March 31, 2032 in exchange for an incentive payment of $490,000 payable in four installments of $122,500 each, commencing January 15, 2020 with the final installment paid April 1, 2020. In January 2020, the lease for the Accredo property in Orlando, FL was extended for 3 1/2 years to December 31, 2024 and we paid a leasing commission of $215,713 to the tenant’s broker in February 2020. In October 2020, the lease for the Wood Group (f/k/a AMEC Foster Wheeler) property in Carlsbad, CA was extended for five years to February 28, 2026 and we agreed to repair and replace the existing heating, air conditioning and ventilation systems and will pay a leasing commission of $146,680 to the tenant’s broker in two equal installments of $73,340 due in December 2020 and April 2021. We are continuing to explore potential lease extensions for many of our properties.
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Effective August 1, 2020, we executed an amendment for the early termination of the Dana lease from July 31, 2024 to July 31, 2022 in exchange for an early termination payment of $1,381,767 due on July 31, 2022 and continued rent payments of $65,000 per month from August 1, 2020 through July 1, 2022. In the event that we are able to re-lease or sell the Dana property prior to July 31, 2022, Dana would be obligated to continue paying rent of $65,000 per month through July 1, 2022 or may elect to pay a cash lump sum payment to us equal to the net present value of the remaining rent payments.
On August 3, 2020, weWe completed the sale of our Lake Elsinore retail property which was leased to Rite Aid for $6,100,000, which generated net proceedsfour and three properties during the first nine months of $3,299,016 after payment of the existing mortgage, commissions2021 and closing costs.2020, respectively, as follows:
On August 27, 2020, we completed the sale of our Stockbridge, GA retail property which was leased to Walgreens for $5,538,462, which generated net proceeds of $5,296,356 after repayment
PropertyLocationProperty TypeDisposition DateContract Sales PriceNet Proceeds (1)
2021
Chevron Gas StationRoseville, CARetail1/7/2021$4,050,000 $3,914,909 
EcoThriftSacramento, CARetail1/29/20215,375,300 2,684,225 
Chevron Gas StationSan Jose, CARetail2/12/20214,288,888 4,054,327 
DanaCedar Park, TXIndustrial7/7/202110,000,000 4,975,334 
$23,714,188 $15,628,795 
2020
Rite AidLake Elsinore, CARetail8/3/2020$7,250,000 $3,299,016 
WalgreensStockbridge, GARetail8/27/20205,538,462 5,296,356 
Island PacificElk Grove, CARetail9/16/20203,155,000 1,124,016 
$15,943,462 $9,719,388 
(1)    Net of commissions, and closing costs. The mortgage for this property was previously repaid on August 10, 2020 in connection with the refinancing of the Accredo property as discussed above in “Liquiditycosts paid and Capital Resources” and in Note 7 to our unaudited condensed consolidated financial statements.
On September 16, 2020, we completed the sale of our Elk Grove, CA retail property which was leased to Island Pacific for $3,155,000, which generated net proceeds of $1,124,016 after repayment of the existing mortgage, commissions and closing costs.
On October 28, 2020, we completedoutstanding mortgages, except there were no outstanding mortgages on the sale of our Morgan Hill, CA industrial property which was previously leased to Dinan Cars for $6,100,000, which generated net proceeds of $3,811,580 after repayment of the existing mortgage, commissions and closing costs. In addition, the property in Las Vegas, Nevada formerly leased to 24 Hour Fitnesstwo Chevron properties and the Walgreens property leased to Harley Davidson through April 12, 2032 located in Bedford, Texas are held forat the time of sale.
Other than as discussed below, we do not have other plans to incur any significant costs to renovate, improve or develop the properties. We believe that the properties are adequately insured. We have one tenanttwo tenants with a leaseleases that providesprovide for a tenant improvement allowanceallowances which hashave a remaining aggregate balance of $60,598 that$189,136, the majority of which will be funded from operatingrestricted cash flow or proceeds from our Offerings.on deposit at Banc of California. Additional funds included in restricted cash will fund building improvements. We expect that the related improvements will be completed duringwithin the 2020 calendar year. As of September 30, 2020, there is a restricted cash deposit of $92,684 that is available to be used to pay for a portion of other improvements.next 12 months.
In addition, we have identified approximately $1,188,000$3,700,000 of roof replacement, exterior painting and sealing and parking lot repairs/restriping that are expected to be completed in the next 12 months.months, including approximately $1,500,000 of building improvements at the Northrop Grumman and Wood properties which we have agreed to complete in a timely manner. The improvements at the Northrup Grumman property will be funded from restricted cash on deposit at Banc of California of $1,271,462. Approximately $867,000$1,300,000 of these improvements are expected to be recoverable from the tenant through operating expense reimbursements. There are no restricted cash deposits that are available to be used to pay for these improvements. We will be requiredhave to pay for the improvements, and the reimbursements from tenantsrecoveries will be billed over an extended period of time peraccording to the terms of the leases. The remaining costs of approximately $321,000$900,000 are not recoverable from tenants. These improvements will be funded from operating cash flows, debt financings or proceeds from the Offerings.sale of shares of our common and preferred stock.
Recent Market Conditions
We continue to face significant uncertainties due to the COVID-19 pandemic, as described above in “Liquidityincluding the Delta variant, although their impact on the economy appears to have diminished and Capital Resources -Effect of the COVID-19 Pandemic on Our Capital Resources.”general commercial real estate market appears to be recovering. Both the investing and leasing environments are highly competitive. Even before the COVID-19 pandemic, uncertainty regarding the economic and political environment had made businesses reluctant to make long-term commitments or changes in their business plans. The COVID-19 pandemic has resulted in significant disruptions in financial markets, business shutdownsutilization of office and retail properties and uncertainty aboutover how the U.S. and global economytenants will perform over the next several months. The ongoing trade war between the U.S. and China has also increased the level of uncertainty and resulted in reductions in business investments.respond when their leases are scheduled to expire.
Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or rent abatements for tenants severely impacted by the COVID-19 pandemic, may result in decreases in cash flows from investment properties. We have two leasesone office and one industrial lease scheduled to expire during 2021 for onein 2022 and four leases (three office property and one retail property,industrial) scheduled to expire in 2023, which comprise an aggregate of 157,419303,743 leasable square feet and represent approximately 7.5%13.0% of projected 20202022 net operating income from properties. The tenants for both of these properties could reevaluate their use of such properties in light of the impacts of the COVID-19 pandemic, including their ability to have workers succeed fromin working at home, and determine not to renew these leases or to seek rent or other concessions as a condition of renewing their leases. We have eight other leases scheduled to expire in either 2022 or 2023.
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Potential future declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to make distributions or meet our debt service obligations. However, we have successfully negotiated lease extensions for four properties (two Dollar Generals in Ohio, Northrop Grumman in Melbourne, Florida and PreK in San Antonio, Texas) over the last nine months, and negotiated lease extensions for L3Harris in Carlsbad, California and 3M Company in Dekalb, Illinois during October of 2021. We are in the process of negotiating potential lease extensions with several other tenants.
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UncertaintiesThe debt market remains sensitive to the macro environment, such as impacts of the COVID-19 pandemic, Federal Reserve policy, market sentiment or regulatory factors affecting the banking and commercial mortgage-backed securities industries. While we have had success during 2020 and the first nine months of 2021 with refinancing nine of our properties, any future uncertainties in the capital markets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. ManagementWe continuously reviewsreview our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.
We plan to rely on debt financing to finance our real estate properties and we may have difficulty refinancing some of our debt obligations prior to or at maturity, or we may not be able to refinance these obligations at terms as favorable as the terms of our initial indebtedness and we also may be unable to obtain additional debt financing on attractive terms or at all. If we are not able to refinance our initial indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets.
The debt market remains sensitive to the macro environment, such as impacts of the COVID-19 pandemic, Federal Reserve policy, market sentiment or regulatory factors affecting the banking and commercial mortgage-backed securities industries. While we have been able to successfully refinance three of our properties as described above, economic conditions have deteriorated rapidly during the last eight months as a result of the COVID-19 pandemic and we may experience more stringent lending criteria in the future, which may affect our ability to finance certain property acquisitions or refinance any debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. We expect to manage the current mortgage lending environment by considering alternative lending sources, including securitized debt, fixed rate loans, seeking a new line of credit, short-term variable rate loans, securitized debt, or any combination of the foregoing.
Election as a REIT
We elected to be taxed as a REIT for federal income tax purposes under the Internal Revenue Code of 1986, as amended, beginning with the taxable year ended December 31, 2016. We believe we will continue to qualify as a REIT. To qualify and maintain status as a REIT, we must meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally would not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the distributions paid deduction and excluding net capital gains).
If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT. We also will be disqualified for the four taxable years following the year during which qualification is lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to continue to qualify for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our unaudited condensed consolidated financial statements. We will be subject to certain state and local taxes related to the operations of properties in certain locations. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our unaudited condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included under “Critical Accounting Policies” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K, filed with the SEC on April 6, 2020.March 31, 2021. There have been no significant changes to our policies during the threenine months ended September 30, 2020.2021.
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Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain transactions (see Note 1011 to our accompanying unaudited condensed consolidated financial statements for discussion of commitment and contingencies).
Related-Party Transactions and Agreements
Through December 31, 2019, we had contracted for advisory services through an Advisory Agreementadvisory agreement with our Former Advisorformer advisor whereby we paid certain fees to, or reimbursed certain expenses of, our Former Advisorformer advisor or affiliates, such as acquisition fees and expenses, organization and offering costs, asset management fees, and reimbursement of certain operating costs (see Note 910 to our accompanying unaudited condensed consolidated financial statements for additional details of the various related-party transactions and agreements).
Subsequent Events
See Note 1113 to our accompanying unaudited condensed consolidated financial statements for events that occurred subsequent to September 30, 20202021 through the filing date of this report.
Recent Accounting Pronouncements
See Note 2 to our accompanying unaudited condensed consolidated financial statements for recent accounting pronouncements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that had or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, or capital resources as of September 30, 2020.2021.
Item 3.  Quantitative and Qualitative Disclosure aboutAbout Market Risk
Not applicable as we are a smaller reporting company.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2019September 30, 2021 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2020,2021, were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the three months ended September 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Most of our employees are working remotely due to the COVID-19 pandemic. However, we have not experienced any changes to our internal control arising from the COVID-19 pandemic that have materially affected or that are reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring and assessing the COVID-19 pandemic and the impact it may have on our operations, including our internal control.
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Table of Contents
PART II – OTHER INFORMATION
Item 1.  Legal Proceedings
The information disclosed under Legal Matters in Note 1011 to our accompanying unaudited condensed consolidated financial statements is incorporated herein by reference.
Item 1A.  Risk Factors
Other thanExcept as disclosednoted below, there have been no material changes to the risk factors set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2019, as filed with the SEC on April 6, 2020 and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 as filed with the SEC on June 24, 2020 and August 14, 2020, respectively.March 31, 2021.
Risks RelatedChanges in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These reforms may cause such “benchmarks” to perform differently than in the past, or have other consequences which cannot be predicted. As published by the Federal Reserve Bank of New York, it currently appears that, over time, United States dollar LIBOR may be replaced by the Secured Overnight Financing Rate (“SOFR”). In March 2021, the Financial Conduct Authority confirmed its intention to cease publishing one-week and two-month LIBOR after December 31, 2021 and all remaining LIBOR after June 30, 2023. At this time, it is not known whether or when SOFR or other alternative reference rates will attain market traction as replacements for LIBOR. Market participants are still considering how various types of financial instruments and securitization vehicles should react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, or to the Impactsame alternative reference rate, in each case increasing the difficulty of hedging. The process of transition involves operational risks. It is also possible that no transition will occur for many financial instruments. At this time, it is not possible to predict the COVID-19 Pandemic on Our Business
The recent outbreakeffect of COVID-19 has andany such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may continuebe implemented. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our business and/or operations, our tenants’overall financial condition and the profitability of our retail properties.
Our business and/or operations and the businesses of our tenants have been, and may continue to be, materially and adversely affected by the risks, or the public perception of the risks, related to the recent outbreak of COVID-19. The profitability of our retail properties depends, in part, on the willingness of customers to visit our tenants’ businesses. The risk, or public perception of the risk, of COVID-19 has caused, and could continue to cause, employees or customers to avoid our properties, which adversely affects foot traffic to our tenants’ businesses and our tenants’ ability to adequately staff their businesses. Most of the states where we operate issued orders to close fitness centers and other retail establishments for a period of time and have put restrictions on the ability to re-open those businesses. Such events have adversely impacted tenants’ sales and/or caused the temporary closure or slowdown of our tenants’ businesses, which has severely disrupted their operations and could continue to have a material adverse effect on our business, financial condition and results of operations. Similarly,More generally, any of the potential effects of quarantined employees of office tenants may adversely impact their businesses and affect their abilityabove changes or any other consequential changes to pay rent on a timely basis.
Measures intended to prevent the spread of COVID-19 have disrupted our ability to operate our business.
In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, most of our employees are working remotely. If our employees are unable to work effectivelyLIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives, or any further uncertainty in relation to the COVID-19 pandemic, including becausetiming and manner of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the riskimplementation of cybersecurity incidents, data breaches or cyber-attacks, whichsuch changes, could have a material adverse effect on our businessthe value of financial assets and results of operations, dueliabilities based on or linked to among other things, the loss of proprietary data, interruptions or delays in the operation of our business, damage to our reputation and any government imposed penalty.a “benchmark.”
The current COVID-19 pandemic,Company’s operations and any future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
The COVID-19 pandemic has had, and any other pandemics in the future could have, repercussions across regional,performance depend significantly on national and global economiesregional economic conditions, and financial markets. The outbreak of COVID-19 inadverse economic conditions can materially adversely affect the United States and in many countries has adversely impacted global economic activity and has contributed to significant volatility and negative pressure in the financial markets. The impact of the COVID-19 outbreak has been rapidly evolving and has continued to affect more countries. Many countries, including the United States, have responded by instituting quarantines for some period of time, mandatingCompany’s business, and school closures and restrictions on their re-openings, banning group gatherings and restricting travel, among others.
Certain states and cities, including where we own properties, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules and restrictions to only essential businesses that may continue to operate. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the real estate industry in which we and our tenants operate.
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Many of our tenants have announced temporary closures of their stores or facilities and various tenants have requested rent deferral or rent abatement during this pandemic. In addition, in response to state and local government orders, all of our company personnel are currently working remotely. The effects of the state and local government orders, including an extended period of remote work arrangements, could strain our business continuity plans, introduce operational risk and impair our ability to manage our business. The COVID-19 pandemic may have a material adverse effect on our financial position, results of operations and cash flows,financial condition.
Adverse macroeconomic conditions, including among other factors:
•a partialinflation, may affect (i) existing or complete closure of, or other operational issues at, some or all of our properties resulting from government or tenant action;
•reduced economic activity severely impacts our tenants' business operations, financial conditionprospective lessees' businesses and liquiditytheir demand for space, and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
•reduced economic activity could result in a prolonged recession, which could negatively impact consumer discretionary spending and in return could severely impact our tenants' business operations, financial condition and liquidity;
•difficulty accessing debt and equity on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability(ii) conditions in the global financialreal estate and mortgage markets, or deteriorations in credit and financing conditions may affect our access to capital necessary to fund our business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us;
•the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our mortgage notes payable and credit facilities and could result in a default or potential acceleration of payment of our debt obligations, which non-compliance could negatively impact our ability to make additional future borrowings;
•significant impairment in the value of our intangible assets as a result of weaker economic conditions;
•general decline in business activity and demand for real estate transactions has adversely affected our ability to grow our portfolio of properties;
•broad acceptance and success of working from home could negatively impact the demand for office space;
•the deteriorationdeclines in our or our tenants' ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed for our or our tenants' efficient operations has adversely affected our operationsincome and those of our tenants; and
•potential negative impact on the health of our personnel and staff, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.
The extent to which the COVID-19 pandemic impacts our business operations and those of our tenants 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 success of actions or measures taken to contain or treat COVID-19, or mitigate its impact; and the direct and indirect economic effects of the pandemic, among others. Extended closures by our tenants of their stores and any early terminations by our tenants of their leases could reduce our cash flows, which could impact our ability to continue paying distributions to our stockholders at expected levels, or at all.
The rapid development and fluidity of the COVID-19 pandemic precludes us from making any prediction as to the full adverse impact of the pandemic. Nevertheless, the pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 and additional filings with the SEC should be interpreted with heightened caution as a result of the impact of and uncertainty surrounding the COVID-19 pandemic.asset values.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the three months ended September 30, 2020,2021, we issued a total of 26,2503,647 shares of Class C common stock to five non-employee members of the board of directorsBoard for their service as boardBoard members during the second and third quartersquarter of 2020.2021. Such issuances were made in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
During the three months ended September 30, 2020,2021, we also issued 776217 shares of Class S common stock in the Class S Offering for aggregate gross offering proceeds of $5,669.$5,562. Such issuances were made pursuant to the distribution reinvestment plan applicable to our Class S common stock in reliance on an exemption from the registration requirements of the Securities Act under and in accordance with Regulation S of the Securities Act.
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UseSales Pursuant to Our Private Offering and Our Reg A Offering
On February 1, 2021, we commenced the Private Offering of ProceedsClass C common stock to accredited investors only under Regulation D promulgated under the Securities Act. Shares of Class C common stock were sold at a per share offering price equal to the most recently published NAV per share determined by the Board. We primarily used the net proceeds from Salesthe Private Offering to invest in a diversified portfolio of Registered Securitiesreal estate and real estate-related investments, or to re-lease and reposition our properties in accordance with our investment strategy and policies, including commissions and costs associated with such investments. We also used a portion of the proceeds of the Private Offering for general corporate purposes, including capital expenditures, tenant improvement costs and leasing costs related to our real estate investments; reserves required by financings of our real estate investments; the repayment of debt; the funding of stockholder distributions; and provided liquidity to our stockholders pursuant to our share repurchase program. We terminated the Private Offering on August 12, 2021. During the period from February 1, 2021 to August 11, 2021, we sold 36,207 shares of Class C common stock pursuant to the Private Offering for aggregate proceeds of $851,273.
On June 1, 2016, the Registered Offering (SEC Registration No. 333-205684) was declared effective by29, 2021, we filed with the SEC anda Regulation A Offering Statement on July 20, 2016, we beganForm 1-A, including our preliminary offering shares of common stock to the public. Pursuant to the Registered Offering, we sold sharescircular, for a $75,000,000 offering of our Class C common stock directlyand filed an amended Form 1-A on August 13, 2021. The SEC qualified the amended Regulation A Offering Statement on Form 1-A on August 16, 2021. The Reg A Offering allowed us to investors. Commencing inonce again accept subscriptions from investors who are not accredited. During the period from August 2017,16, 2021 to October 31, 2021, we began sellingsold 42,113 shares of Class C common stock pursuant to U.S. persons only, as defined under the Securities Act, as a result of the commencement of the Class S Offering to non-U.S. Persons. Under applicable SEC rules, the registration statement for the Registered Offering was scheduled to terminate on June 1, 2019, but remained effective because we filed a new registration statement on Form S-11 for the Follow-on Offering with the SEC on May 24, 2019 (SEC Registration No. 333-231724) to extend the Registered Offering in accordance with Rule 415 under the Securities Act. Our initial registration statement on Form S-11 terminated when the Follow-on Offering was declared effective by the SEC on December 23, 2019. As required by some states, we are also required to renew the registration statement for the Registered Offering annually. We may terminate the Follow-on Offering at any time. Our board of directors will adjust the offering price of the shares of Class C common stock sold in the Follow-on Offering and the Registered DRP Offering annually in the first quarter of each year during the course of the Follow-on Offering in connection with updated determinations of our NAV per share by our board of directors.
Through September 30, 2020, we had sold an aggregate of 19,645,508 shares of Class C common stock in the Registered Offerings, including 2,208,870 shares of Class C common stock sold under our Registered DRPReg A Offering for aggregate gross offering proceeds of $195,859,756.
Through September 30, 2020, we paid $6,920,592 for organizational and offering costs related to our Registered Offerings, including $5,429,105 to our Former Sponsor as reimbursement through September 30, 2019, which reimbursement was subject to a 3% of gross offering proceeds limitation.
From the commencement of the Registered Offering through September 30, 2020, the net offering proceeds to us, after deducting the reimbursable organizational and offering expenses incurred as described above, were approximately $187,069,811, including net offering proceeds from our Registered DRP Offering of $20,385,113. Substantially all of these proceeds, along with proceeds from the Class S Offering and debt financing, were used to make approximately $287,732,000 of investments in real estate properties, including the purchase price of our investments, deposits paid for future acquisitions, acquisition fees and expenses, and costs of leveraging each real estate investment. Of the use of the offering proceeds described in the prior statement, $7,666,690 and $696,150 were used to pay acquisition fees and financing coordination fees to our Former Advisor, respectively. Our Former Sponsor was reimbursed for $5,429,105 of organizational and offering costs in connection with the Offerings (see Note 9 to our unaudited condensed consolidated financial statements for details regarding fees paid to affiliates through December 31, 2019). In addition, we incurred $1,491,487 of organization and offering costs directly. For the three months ended September 30, 2020, no proceeds from the Offerings were used to fund stockholder distributions in connection with rent abatements as described above. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Distributions for a description of the sources that have been used to fund our distributions.$1,097,029.
Issuer Redemptions of Equity Securities
We have adopted a share repurchase program that enables qualifying stockholders to sell their stock to us in limited circumstances. The maximum amount of common stock that may be repurchased per month is limited to no more than 2% of our most recently determined aggregate NAV. Repurchases for any calendar quarter are limited to no more than 5% of our most recently determined aggregate NAV. The foregoing repurchase limitations are based on “net repurchases” during a quarter or month, as applicable. Thus, for any given calendar quarter or month, the maximum amount of repurchases during that quarter or month will be equal to (1) 5% or 2% (as applicable) of our most recently determined aggregate NAV, plus (2) proceeds from sales of new shares in the Registered Offerings and Class S Offering (including purchases pursuant to our Registered DRP Offering) since the beginning of a current calendar quarter or month, less (3) repurchase proceeds paid since the beginning of the current calendar quarter or month.
We have the discretion to repurchase fewer shares than have been requested to be repurchased in a particular month or quarter, or to repurchase no shares at all, in the event that we lack readily available funds to do so due to market conditions beyond our control, our need to maintain liquidity for our operations or because we determine that investing in real property or other illiquid investments is a better use of our capital than repurchasing our shares. In the event that we repurchase some but not all of the shares submitted for repurchase in a given period, shares submitted for repurchase during such period will be repurchased on a pro-rata basis, subject to any Extraordinary Circumstance Repurchase.
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Repurchase (as defined below).
We have the discretion, but not the obligation, under extraordinary market or economic circumstances, to make a special repurchase in equal, nominal quantities of shares from all stockholders who have submitted share repurchase requests during the period.period (“Extraordinary Circumstance Repurchases”). These Extraordinary Circumstance Repurchases will precede any pro rata share repurchases that may be made during the period.
DuringFor the period July 2020 to October 2020,three months ended September 30, 2021, we received share repurchase requests that resulted in share repurchases as follows:
Value of Share Repurchase Requests ReceivedRepurchase DateValue of Shares Repurchased (1)
July 2020$8,359,586 August 5, 2020$995,028 
August 2020$8,002,288 September 3, 2020$1,420,636 
September 2020$6,747,834 October 5, 2020$1,393,275 
October 2020$5,907,195 November 4, 2020$1,537,198 
Value of Share Repurchase Requests ReceivedRepurchase DateValue of Shares Repurchased (1)
July 2021$4,481,177 August 4, 2021$1,058,285 
August 2021$5,928,373 September 3, 2021$1,775,082 
September 2021$6,560,652 October 5, 2021$1,348,912 
(1)    IncludedIncluding Extraordinary Circumstance Repurchases and after applicable administrative fees for shares held less than three years.two years for shares repurchased thereafter.
Our board
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The Board may amend, suspend or terminate our Class C share repurchase program or Class S share repurchase program upon 10 days’ notice to Class C stockholders or Class S stockholders, respectively, if the boardBoard believes such action is in our and such stockholders’ best interests, including because share repurchases place an undue burden on our liquidity, adversely affect our operations, adversely affect stockholders whose shares are not repurchased, or if the boardBoard determines that the funds otherwise available to fund our share repurchases are needed for other purposes. Our boardThe Board may also amend, suspend or terminate our Class C share repurchase program or Class S share repurchase program due to changes in law or regulation, or if the boardBoard becomes aware of undisclosed material information that it believes should be publicly disclosed before shares are repurchased. On November 5, 2021, we announced that the Board reviewed and approved management’s recommendation to terminate our SRPs and we are no longer accepting share repurchase requests.
The following table summarizes our repurchase activity under our share repurchase program for our Class C common stock for the three months ended September 30, 2020.2021. For the three months ended September 30, 2020,2021, no shares of our Class S common stock were repurchased.
 Total Number of
Shares
Repurchased
During the
Quarter (1)		Average Price Paid Per Share (2)Total Number of Shares Purchased As Part of Publicly Announced Plan or ProgramDollar Value of
Shares Available
That May
Be Repurchased
Under the
Program
July 1-31, 2020 (1)107,853 $6.96 107,853 (3)
August 1-31, 2020142,857 $6.97 142,857 (3)
September 1-30, 2020203,990 $6.96 203,990 (3)
Total454,700 454,700 
 Total Number of
Shares
Repurchased
During the
Quarter		Average Price Paid Per ShareTotal Number of Shares Purchased As Part of Publicly Announced Plan or ProgramDollar Value of
Shares Available
That May
Be Repurchased
Under the
Program
July 1-31, 202143,069 $24.57 43,069 (1)
August 1-31, 202168,202 $26.03 68,202 (1)
September 1-30, 202151,823 $26.03 51,823 (1)
Total163,094 163,094 
(1)We generally repurchase shares approximately three business days following the end of the applicable month in which requests were received.
(2)Following our calculation of our estimated NAV per share of $7.00 (unaudited), which our board of directors approved on May 20, 2020 and calculated as of April 30, 2020, any future share repurchases will be based on the estimated NAV per share of $7.00 (unaudited).
(3)A description of the maximum number of shares that may be purchased under our share repurchase program is included in the narrative preceding this table.
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Item 6.  Exhibits
The exhibits listed on the Exhibit Index below are included herewith or incorporated herein by reference.
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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 20202021 (and are numbered in accordance with Item 601 of Regulation S-K).
ExhibitDescription
2.1
2.2
3.1
3.2
4.13.3
4.24.1
4.3
4.44.2
4.54.3
4.64.4
Amended and Restated Share Repurchase Program (Class S common stock) (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K (File No. 000-55776) filed with the Securities and Exchange Commission on April 20, 2020)February 1, 2021)
4.710.1
10.110.2*
10.3
Underwriting Agreement, dated September 14, 2021, by and among Modiv Inc., RW Holdings NNN REITModiv Operating Partnership, LP Rich Uncles NNN LP, LLC, Katana Merger Sub, LP, BrixInvest, LLC and modiv, LLC(incorporatedB. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (incorporated by reference to Exhibit 10.11.1 to our QuarterlyCurrent Report on Form 10-Q8-K (File No. 000-55776)001-40814) filed with the Securities and Exchange Commission on August 14, 2020)September 17, 2021)
10.4
31.1*
31.2*
32.1**
101.INS101.INS*INLINE XBRL INSTANCE DOCUMENT
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101.SCH101.SCH*INLINE XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL101.CAL*INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF101.DEF*INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB101.LAB*INLINE XBRL TAXONOMY EXTENSION LABELS LINKBASE
101.PRE101.PRE*INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
104*COVER PAGE INTERACTIVE DATA FILE (FORMATTED AS INLINE XBRL AND CONTAINED IN EXHIBIT 101)
*Filed herewith.
**In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
RW Holdings NNN REIT,Modiv Inc.
(Registrant)
By:/s/ AARON S. HALFACRE
Name:Aaron S. Halfacre
Title:Chief Executive Officer (principal executive officer)
By:/s/ RAYMOND J. PACINI
Name:Raymond J. Pacini
Title:Chief Financial Officer (principal financial officer)
Date: November 13, 202012, 2021
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