KBS Real Estate Investment Trust 10K 2014 Annual report

KBS Real Estate Investment Trust Inactive 10-K2014 FY Annual report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

______________________________________________________

(Mark One)



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

For the fiscal year ended December 31, 2014



¨	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 000-52606

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KBS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

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Maryland		20-2985918
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
800 Newport Center Drive, Suite 700 Newport Beach, California		92660
(Address of Principal Executive Offices)		(Zip Code)

(949) 417-6500

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________

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



Title of Each Class		Name of Each Exchange on Which Registered
None		None

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

Common Stock, $0.01 par value per share

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 x No o

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

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

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

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

There is no established market for the Registrant’s shares of common stock. On December 18, 2013, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $4.45 based on the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities divided by the number of shares outstanding, as of September 30, 2013, with the exception of the Company’s appraised real estate properties, which were appraised as of November 30, 2013. For a full description of the methodologies used to value the Registrant’s assets and liabilities in connection with the calculation of the estimated value per share as of December 18, 2013, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013. On December 9, 2014, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $4.52 based on the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities divided by the number of shares outstanding, all as of September 30, 2014. For a full description of the methodologies used to value the Registrant’s assets and liabilities in connection with the calculation of the estimated value per share as of December 9, 2014, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.”

There were approximately 188,864,948 shares of common stock held by non-affiliates as of June 30, 2014, the last business day of the Registrant’s most recently completed second fiscal quarter.

As of March 3, 2015, there were 187,601,142 outstanding shares of common stock of the Registrant.

Documents Incorporated by Reference:

Registrant incorporates by reference in Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K portions of its Definitive Proxy Statement for its 2015 Annual Meeting of Stockholders.

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PART I			4
	ITEM 1.	BUSINESS	4
	ITEM 1A.	RISK FACTORS	12
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	39
	ITEM 2.	PROPERTIES	39
	ITEM 3.	LEGAL PROCEEDINGS	41
	ITEM 4.	MINE SAFETY DISCLOSURES	41
PART II			42
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	42
	ITEM 6.	SELECTED FINANCIAL DATA	54
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	55
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	77
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	78
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	78
	ITEM 9A.	CONTROLS AND PROCEDURES	78
	ITEM 9B.	OTHER INFORMATION	79
PART III			80
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	80
	ITEM 11.	EXECUTIVE COMPENSATION	80
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	80
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	80
	ITEM14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	80
PART IV			81
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	81

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1

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FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Real Estate Investment Trust, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:


•	We are the first publicly offered investment program sponsored by the affiliates of our external advisor, KBS Capital Advisors LLC, which makes our future performance difficult to predict. Our stockholders should not assume that our performance will be similar to the past performance of other real estate investment programs sponsored by affiliates of our advisor.

•

All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, the entity that acted as our dealer manager and/or other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-sponsored programs and KBS-advised investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions.


•	We pay substantial fees to and expenses of our advisor and its affiliates. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase the risk of loss to our stockholders.

•

We depend on tenants for the revenue generated by our real estate investments and, accordingly, the revenue generated by our real estate investments is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our debt service obligations and reducing our stockholders’ returns.


•	We may not be able to refinance some or all of our existing indebtedness or to obtain additional debt financing on attractive terms. If we are not able to refinance existing indebtedness on attractive terms at or prior to its maturity, we may be forced to dispose of our assets sooner than we otherwise would and/or our lenders may take action against us.

•

Our investments in real estate and real estate loans may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our real property investments could decrease, making it more difficult for us to meet our debt service obligations. Revenues from the properties and other assets directly or indirectly securing our loan investments could decrease, making it more difficult for the borrowers under those loans to meet their payment obligations to us. In addition, decreases in revenues from the properties directly or indirectly securing our loan investments could result in decreased valuations for those properties, which could make it difficult for our borrowers to repay or refinance their obligations to us. These factors could make it more difficult for us to meet our debt service obligations and could reduce our stockholders’ return.


•	Disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to meet our debt service obligations and cash needs, reducing the value of our stockholders’ investment in us.


•	Certain of our debt obligations have variable interest rates and related payments that vary with the movement of LIBOR or other indexes. Increases in these indexes could increase the amount of our debt payments and reduce our stockholders’ return.

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•

Our share redemption program provides only for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program and, together with redemptions in connection with a stockholder’s death, “special redemptions”). The dollar amounts available for such redemptions are determined by our board of directors and may be reviewed and adjusted from time to time. Additionally, redemptions are further subject to limitations described in our share redemption program. We currently do not expect to have funds available for ordinary redemptions in the future.

•

We may not be able to successfully operate and/or sell the GKK Properties (defined below) given current economic conditions and the concentration of the GKK Properties in the financial services sector, the significant debt obligations we have assumed with respect to such GKK Properties, and our advisor’s limited experience operating, managing and selling bank branch properties. Moreover, we depend upon GKK Realty Advisors LLC (the “Property Manager”), an affiliate of Gramercy (defined below), to manage and conduct the operations of the GKK Properties and any adverse changes in or the termination of our relationship with the Property Manager could hinder the performance of the GKK Properties and the return on our stockholders’ investment.


•	As a result of the transfer of the GKK Properties to us, a significant portion of our properties are leased to financial institutions, making us more economically vulnerable in the event of a downturn in the banking industry.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this Annual Report on Form 10-K.

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PART I


ITEM 1.	BUSINESS

Overview

KBS Real Estate Investment Trust, Inc. is a Maryland corporation that was formed on June 13, 2005 to invest in a diverse portfolio of real estate properties and real estate-related investments. We elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2006 and we intend to continue to operate in such a manner. As used herein, the terms “we,” “our” and “us” refer to the Company and as required by context, KBS Limited Partnership, a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their subsidiaries. We own substantially all of our assets and conduct our operations through our Operating Partnership, of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by KBS Capital Advisors LLC (“KBS Capital Advisors”), our external advisor, pursuant to an advisory agreement. Our advisor owns 20,000 shares of our common stock. We have no paid employees.

On January 27, 2006, we launched our initial public offering of up to 200,000,000 shares of common stock in our primary offering and 80,000,000 shares of common stock under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on May 30, 2008. We terminated our dividend reinvestment plan effective April 10, 2012. We sold 171,109,494 shares in our primary offering for gross offering proceeds of $1.7 billion and 28,306,086 shares under our dividend reinvestment plan for gross offering proceeds of $233.7 million.

As of December 31, 2014, we owned or, with respect to a limited number of properties, held a leasehold interest in, 401 real estate properties (of which two properties were held for sale), including the GKK Properties (defined below). In addition, as of December 31, 2014, we owned four real estate loans receivable, a participation interest with respect to a real estate joint venture and a 10-story condominium building with 62 condominium units acquired through foreclosure (the “Tribeca Building”), of which two condominium units were owned by us and were held for sale.

On September 1, 2011, we, through indirect wholly owned subsidiaries (collectively, “KBS”), entered into a Collateral Transfer and Settlement Agreement (the “Settlement Agreement”) with, among other parties, GKK Stars Acquisition LLC (“GKK Stars”), the wholly owned subsidiary of Gramercy Property Trust, Inc. (“Gramercy”) that indirectly owned the Gramercy real estate portfolio, to effect the orderly transfer of certain assets and liabilities of the Gramercy real estate portfolio to KBS in satisfaction of certain debt obligations under a mezzanine loan owed by wholly owned subsidiaries of Gramercy to KBS (the “GKK Mezzanine Loan”). The Settlement Agreement resulted in the transfer of the equity interests in certain subsidiaries of Gramercy (the “Equity Interests”) that indirectly owned or, with respect to a limited number of properties, held a leasehold interest in, 867 properties (the “GKK Properties”), consisting of 576 bank branch properties and 291 office buildings, operations centers and other properties. For a further discussion of the Settlement Agreement, the transfers of the GKK Properties and the debt related to these properties, see our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC.

Our focus in 2015 is to manage our existing investment portfolio, which includes strategically selling assets and exploring value-add opportunities for existing assets (primarily certain of the GKK Properties); refinancing upcoming maturities and paying down debt; and distributing available cash to stockholders.

Objectives and Strategies

Our primary investment objectives were:


•	to preserve and return our stockholders’ capital contributions; and


•	to manage our investments to allow our stockholders to realize a return on their investment.

We have sought and will seek to achieve these objectives by managing our portfolio of real estate and real estate-related investments, which we acquired using a combination of equity raised in our initial public offering, debt financing and joint ventures. We diversified our portfolio by investment type, geographic region, and tenant/borrower base.

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Our primary business objectives are: (i) to maintain and, if possible, improve the quality and income-producing ability of our investments; (ii) to position our investments to improve their value; and (iii) to manage our portfolio to remain compliant with REIT requirements under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). We intend to meet these objectives by utilizing the expertise of our advisor to diligently increase the occupancy of our real estate properties while structuring leases that enhance property operating performance. We will also, through our advisor, seek to improve the cash flows from our real estate-related investments, through continuing debt service, restructuring of terms and, if necessary, foreclosing on the collateral securing our real estate-related investments. All of our business activities are conducted with the intention of remaining compliant with REIT requirements; if we continue to qualify for taxation as a REIT, we will generally not be subject to federal corporate income taxes on our taxable income that is currently distributed to stockholders. This treatment substantially eliminates “double taxation” at the corporate and stockholder levels that usually results from investment in the stock of a corporation.

Our charter requires that we seek stockholder approval of our liquidation if our shares of common stock are not listed on a national securities exchange by November 2012, unless a majority of our independent directors determines that liquidation is not then in the best interest of our stockholders. Pursuant to our charter requirement, the conflicts committee assessed our portfolio of investments and related debt financings, including the assets and liabilities transferred to us under the Settlement Agreement in satisfaction of certain debt obligations owed to us by wholly owned subsidiaries of Gramercy. The conflicts committee also considered the prepayment penalties associated with certain debt obligations assumed by us under the Settlement Agreement. Taking into consideration our portfolio and current market conditions, in November 2012, November 2013 and November 2014, the conflicts committee unanimously determined that liquidation is not now in the best interests of our stockholders. Our charter requires that the conflicts committee revisit the issue of liquidation at least annually. Given the factors noted above, the conflicts committee believes it is likely it may reach the same conclusion next year.

Investment Portfolio

Real Estate Properties

We have made investments in core office and industrial properties, which are generally lower risk, existing properties with at least 80% occupancy and minimal near-term lease rollover. We also own other types of properties, including bank branches, transferred to us pursuant to the Settlement Agreement (discussed above under “Overview”) and properties transferred to us through foreclosures or deeds-in-lieu of foreclosures. These properties had originally secured certain of our investments in real estate loans receivable. All of our properties are located in the United States. As of December 31, 2014, we owned 399 real estate properties held for investment. We also owned two properties that were held for sale. The 399 real estate properties held for investment totaled 10.2 million rentable square feet and included the following:


•	Ten office buildings, three corporate research buildings, one distribution and office/warehouse property; and


•	GKK Properties consisting of 320 bank branch properties and 65 office buildings, operations centers and other properties.

We originally intended to hold our core properties for four to seven years. With respect to the GKK Properties, our management continues to evaluate which properties to hold and which properties to sell. During the year ended December 31, 2014, we sold, or otherwise disposed of, 16 properties (of which 11 were GKK Properties), transferred a portfolio of five properties to the lender in satisfaction of the debt and other obligations due under the mortgage loan, terminated the leasehold interest in three property and transfered two GKK Properties to the lenders in connection with foreclosure proceedings. We expect the average hold period of the GKK Properties to be significantly shorter than that of our core properties, though the hold period of certain GKK Properties will be affected by the underlying debt structure and related defeasance costs and prepayment penalties. However, economic and market conditions may influence us to hold our investments for different periods of time, and we currently expect our hold period may last for several more years.

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The following chart illustrates the composition of our real estate portfolio (excluding two properties that were held for sale) as of December 31, 2014 based on the carrying value of the investments:

As noted above, our real estate property investments (excluding two properties that were held for sale) are diversified by geographic location with properties in 31 states as shown in the charts below:

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*Other includes any state less than 3% of the total.

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of December 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

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One of our objectives is to maintain a stable and diversified tenant base and have long-term relationships with our tenants in order to limit our exposure to any one tenant or industry. However, as a result of the transfers of the GKK Properties, beginning in December 2011 and as of December 31, 2014, we had a concentration of credit risk related to Bank of America, N.A., which represented approximately 21.0% of our annualized base rent as of December 31, 2014 and reduced the diversity of our tenant base. Annualized base rent represents annualized contractual base rental income as of December 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. Also, as of December 31, 2014, we had a concentration of credit risk related to the finance industry, which represented approximately 47.1% of our annualized base rent. The finance industry concentration is due to the concentration in the GKK Properties. As of December 31, 2014, our real estate portfolio was 79% occupied (excluding properties that were held for sale). The chart below illustrates the diversity of tenant industries in our portfolio (excluding properties that were held for sale) based on total annualized base rent as of December 31, 2014:

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* All others includes any industry less than 2% of the total.

The carrying value of our real estate portfolio as of December 31, 2014 was $1.1 billion (including two properties that were held for sale).

Real Estate-Related Investments

We have also invested in real estate-related investments including: (i) mortgage loans; (ii) mezzanine loans; (iii) participations in mortgage and mezzanine loans; (iv) B-Notes; and (v) real estate-related debt securities, such as commercial mortgage-backed securities (“CMBS”). We generally intend to hold our real estate-related investments until maturity. However, economic and market conditions may influence us to hold our investments for different periods of time. We may sell an asset before the end of the expected holding period if we believe that market conditions and asset positioning have maximized its value to us or the sale of the asset would otherwise be in the best interests of our stockholders.

As of December 31, 2014, we owned one mortgage loan, one mezzanine loan and two B-Notes. The book value (net of asset specific reserves) of our real estate-related investments as of December 31, 2014 was $28.9 million. As of December 31, 2014, our real estate-related investments consisted of four fixed rate real estate loans receivable with a weighted average annualized effective interest rate of 9.5%.

Financing Objectives

We financed the majority of our real estate acquisitions with a combination of the proceeds we received from our initial public offering and debt. In addition, we purchased certain real estate-related investments with a combination of the proceeds we received from our initial public offering and repurchase financing. We used debt financing to increase the amount available for investment and to increase overall investment yields to us and our stockholders. As of December 31, 2014, the weighted-average interest rate on our debt was 4.6%.

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We borrow funds at a combination of fixed and variable rates. As of December 31, 2014, we had approximately $443.4 million and $221.2 million of fixed and variable rate debt outstanding, respectively. The weighted-average interest rates of our fixed rate debt and variable rate debt at December 31, 2014 were 5.9% and 2.2%, respectively.

Some of our debt allows us to extend the maturity dates, subject to certain conditions. Although we believe we will be permitted to extend the maturity dates of our current debt obligations, we can give no assurance in this regard. During the year ended December 31, 2014, we: entered into agreements for deed-in-lieu of foreclosure and transferred the GKK Properties that secured a mortgage loan we assumed pursuant to the Settlement Agreement with an outstanding principal balance of $6.1 million (the “BOA Windsor Mortgage Portfolio Loan”) to the lender in full satisfaction of the debt and other obligations due under the loan; transferred a GKK Property that secured a mortgage loan we assumed pursuant to the Settlement Agreement with an outstanding principal balance of $37.6 million (the “801 Market Street Mortgage Loan”) to the lender in connection with a foreclosure; and transferred a GKK Property that secured a mortgage loan we assumed pursuant to the Settlement Agreement with an outstanding principal balance of $14.6 million (the “Jenkins Court Mortgage Loan”) to the lender in connection with a foreclosure. See the discussions of the BOA Windsor Mortgage Portfolio Loan, the 801 Market Street Mortgage Loan and the Jenkins Court Mortgage Loan under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Commitments and Contingencies — Loan Maturities and Defaults” and the risks identified in Part I, Item 1A.

The following is a schedule of maturities, including principal amortization payments, for all of our notes payable outstanding as of December 31, 2014 (in thousands):



2015	$	15,651
2016	321,597
2017	159,175
2018	8,651
2019	126,044
Thereafter	33,510
	$	664,628

We limit our total liabilities to 75% of the cost (before deducting depreciation or other noncash reserves) of all of our tangible assets; however, we may exceed that limit if the majority of the conflicts committee approves each borrowing in excess of that limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of December 31, 2014, our borrowings and other liabilities were approximately 46% of both the cost (before deducting depreciation or other noncash reserves) and book value (before deducting depreciation) of our tangible assets, respectively.

Market Outlook – Real Estate and Real Estate Finance Markets

The following discussion is based on management’s beliefs, observations and expectations with respect to the real estate and real estate finance markets.

Current conditions in the global capital markets remain volatile as the world’s economic growth has been affected by geopolitical and economic events. Geopolitical events in Europe and the Middle East escalated throughout 2014, and into 2015. The rise of the Islamic State and the struggle between the Ukrainian government and pro-Russian rebels have kept the U.S. and its allies engaged in international military conflicts. The slowdown in global economic growth, and in particular the slowing of the Chinese economy, has had a ripple effect through the energy and commodity markets. Decreasing levels of demand for commodities, and in particular oil, have led to a steep price decline in most commodity market prices. In this type of economic environment the possibility of deflation is now a very real risk. While the U.S. economy has rebounded from the recent recession, the remainder of the world’s industrialized and emerging economies have struggled to maintain even low levels of economic growth.

Central bank interventions and the use of monetary policy to combat the lingering effects of the recent recession continue to dominate the performance of the global economy. In 2012, Japan embarked on a massive quantitative easing (“QE”) program designed to kick start the country’s economy. To date the program has led to lower Japanese interest rates, a run up in the Japanese stock markets and a devaluation of the yen. In Europe, the European Central Bank (ECB) announced its own QE program in January 2015. The long awaited announcement has led to lower European interest rates and a weakening of the Euro against other currencies.

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The Federal Reserve has maintained an accommodative monetary policy since the beginning of the recent financial crisis. Through a variety of monetary tools and programs, the Federal Reserve injected trillions of U.S. dollars into the global financial markets. The U.S. QE program focused on the purchase of U.S. treasury bonds and mortgage backed securities. Currently it is unclear what the final cost or impact of this program will be. In October of 2014, the Federal Reserve concluded the current phase of QE. The end of this program has shifted investor focus to the timing of an eventual interest rate increase by the Federal Reserve.

In the United States, recent economic data has been improving. Slow and steady growth in the labor markets has driven unemployment below 6%. The labor force participation rate continues to be low and personal income growth has remained muted. Consumer spending in the United States has increased, and is being driven by lower debt service burdens, record high stock market valuations, rebounding home prices and a dramatic decrease in the cost of gasoline. Consumer confidence levels are starting to reach levels last seen in the 1990’s. U.S. gross domestic product (“U.S. GDP”) has continued to grow at a moderate annualized rate. On an annual basis, U.S. GDP growth in 2014 was 2.4%, which was a slight improvement over 2013’s growth rate of 2.2%. In the second half of 2014, the U.S. dollar began to appreciate against the currencies of other nations. The effects of a strong dollar and weak international economic growth began to materialize in the form of reduced corporate earnings in the fourth quarter of 2014.

The U.S. dollar has remained a safe haven currency and the U.S. commercial real estate market has benefited from an inflow of foreign capital. Initially, gateway markets such as New York City and San Francisco benefited from a high demand for commercial properties. In 2014, the commercial real estate market recovery spread to secondary and tertiary markets, and most asset classes. The U.S. commercial real estate market has gained favor as an alternative investment class and capital flows continue to improve. Looking forward, however, the recovery in commercial real estate is expected to remain uneven across geographies and among property types.

As the dollar strengthens, the flow of capital into the United States could be curtailed. International demand for U.S. assets has been driven, in part, by the perception that U.S. real assets and the U.S. dollar are safe havens from some market risks. A decrease in flow of capital into the United States could lead to a decrease in the demand for U.S. commercial real estate assets, and result in a decline in commercial real estate valuations.

After several years of improving market conditions, the recovery in the U.S. residential real estate market recently began to slow. The initial recovery was driven by low interest rates, pent-up demand from the consumer sector and institutional investors in the form of buy-to-rent portfolios. In 2014, investor demand for homes slowed and stringent mortgage lending standards reduced demand in the residential markets. In addition, as referenced above, the Federal Reserve’s QE program, which peaked at $85 billion a month in purchases of long-term treasury bonds and mortgage backed securities, ended on October 31, 2014. This reduction in market support could cause the demand for residential real estate to decrease further.

Overall, despite indications of recovery in the United States, uncertainties abound. China’s export-based economy has slowed and the Japanese government continues to experiment with QE. The EU is faced with the economic collapse of Greece, another recession and an escalating military conflict in the Ukraine. In the United States, the Federal Reserve has completed the latest phase of QE and is now faced with the impact of a strong dollar and record low interest rates. In the short-term, we anticipate that market conditions will continue to remain volatile and, combined with a challenging global macro-economic environment, may interfere with the implementation of our business strategy and/or force us to modify it.

Impact on Our Real Estate Investments

The economic events that have occurred since the onset of the recession in 2008 have no precedent. While current forecasts for the U.S. economy are positive, there is a level of uncertainty inherent to this outlook. Currently, both the investing and leasing environments are highly competitive. While there has been an increase in the amount of capital flowing into U.S. real estate markets, which has resulted in an increase in real estate values in certain markets, the uncertainty regarding the economic environment has made businesses reluctant to make long-term commitments or changes in their business plans. Possible future declines in rental rates, slower or potentially negative net absorption of leased space 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, may result in decreases in cash flows. Historically low interest rates could help offset some of the impact of these potential decreases in operating cash flow for properties financed with variable rate mortgages; however, interest rates likely will not remain at these historically low levels for the remaining life of many of our investments. Interest rates have become more volatile as the global capital markets react to increasing economic and geopolitical risks.

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Impact on Our Real Estate-Related Investments

All of our real estate-related investments are directly secured by commercial real estate. As a result, our real estate-related investments, in general, have been and likely will continue to be impacted by the same factors impacting our real estate investments. The higher yields and the improving credit position of many U.S. tenants and borrowers have attracted global capital. However, the real estate and capital markets are fluid, and the positive trends can reverse quickly. Economic conditions remain relatively unstable and can have a negative impact on the performance of collateral securing our loan investments, and therefore may impact the ability of some borrowers under our loans to make contractual interest payments to us.

We have fixed rate real estate-related loan investments with a total book value (excluding asset-specific loan loss reserves) of $32.9 million. Assuming our real estate-related loans are fully extended under the terms of the respective loan agreements and excluding our loan investment with an asset-specific loan loss reserve, we have a real estate-related loan investment with a book value of $6.9 million maturing within one year from December 31, 2014. As of December 31, 2014, we had recorded $4.0 million of reserves for loan losses related to one of our real estate-related investments.

Impact on Our Financing Activities

In light of the risks associated with potentially volatile operating cash flows from some of our real estate properties, 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 existing indebtedness. Recent financial market conditions have improved from the bottom of the economic cycle, but material risks are still present. Market conditions can change quickly, potentially negatively impacting the value of our investments.

As of December 31, 2014, we had a total of $443.4 million of fixed rate notes payable and $221.2 million of variable rate notes payable. We have $15.7 million of debt maturing (including principal amortization payments) during the 12 months ending December 31, 2015.

Economic Dependency

We are dependent on our advisor for certain services that are essential to us, including the management of our real estate and real estate-related investment portfolio; the disposition of real estate and real estate-related investments; and other general and administrative responsibilities. In the event that KBS Capital Advisors is unable to provide these services, we will be required to obtain such services from other sources. We are also dependent on the Property Manager for asset management services including the operations, leasing and eventual dispositions of the GKK Properties.

Competitive Market Factors

The U.S. commercial real estate leasing markets remain competitive. We face competition from various entities for prospective tenants and to retain our current tenants, including other REITs, pension funds, insurance companies, investment funds and companies, partnerships and developers. Many of these entities have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a tenant. As a result of their greater resources, those entities may have more flexibility than we do in their ability to offer rental concessions to attract and retain tenants. This could put pressure on our ability to maintain or raise rents and could adversely affect our ability to attract or retain tenants. As a result, our financial condition, results of operations, cash flow, ability to satisfy our debt service obligations and ability to pay distributions to our stockholders have been adversely affected.

We also face competition from many of the types of entities referenced above regarding the disposition of properties. These entities may possess properties in similar locations and/or of the same property types as ours and may be attempting to dispose of these properties at the same time we are attempting to dispose of some of our properties, providing potential purchasers with a larger number of properties from which to choose and potentially decreasing the sales price for such properties. Additionally, these entities may be willing to accept a lower return on their individual investments, which could further reduce the sales price of such properties. This competition could decrease the sales proceeds we receive for properties that we sell, assuming we are able to sell such properties, which could adversely affect our cash flows and the overall return for our stockholders.

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Compliance with Federal, State and Local Environmental Law

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose liens on properties or restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances and governments may seek recovery for natural resource damage. The cost of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.

Except for the GKK Properties and other properties to which we took title to through foreclosure or deed-in-lieu of foreclosure, all of our direct real estate investments were subject to Phase I environmental assessments prior to the time they were acquired. Some of our properties are subject to potential environmental liabilities arising primarily from historic activities at or in the vicinity of the properties. Based on our environmental diligence and assessments of our properties and our purchase of pollution and remediation legal liability insurance with respect to some of our properties, we do not believe that environmental conditions at our properties are likely to have a material adverse effect on our operations.

We own one property that is subject to activity use limitations (“AULs”) whereby the government has placed limitations on redevelopment of the property for certain uses, particularly residential uses. AULs are typically imposed on a property that has environmental contamination in exchange for less stringent environmental clean-up standards. In view of the location of the affected property, the environmental characteristics of the contaminants and the characteristics of the neighborhood, we do not believe that these AULs have a material impact on our portfolio valuation, but they could result in the depression of the value of the property, should we resell it for uses different from its existing uses. The property subject to AULs is ADP Plaza, located in Portland, Oregon.

Some of the properties in our portfolio, particularly the warehouse and light industrial properties, had or have underground storage tanks either for space heating of the buildings, fueling motor vehicles, or industrial processes. Many of the underground storage tanks at the premises have been replaced over time. Given changing standards regarding closure of underground storage tanks and associated contamination, many of the tanks may not have been closed in compliance with current standards. Some of these properties likely have some residual petroleum or chemical contamination. Properties exhibiting these risks include 129 Concord Road, Billerica, Massachusetts (Rivertech) and ADP Plaza, Portland, Oregon.

Under the Settlement Agreement, we indirectly took title to or, with respect to a limited number of the GKK Properties, indirectly took a leasehold interest in, the GKK Properties on an “as is” basis. As such, we were not able to inspect the GKK Properties or conduct standard due diligence on certain of the GKK Properties before the transfers. Additionally, we did not receive representations, warranties and indemnities relating to the GKK Properties from Gramercy and/or its affiliates. Thus, the value of the GKK Properties may decline if we subsequently discover environmental problems with the GKK Properties.

Industry Segments

Our segments are based on our method of internal reporting which classifies our operations by investment type: (i) real estate, (ii) real estate-related and (iii) commercial properties primarily leased to financial institutions received under the Settlement Agreement. For financial data by segment, see Note 13, “Segment Information” in the notes to our consolidated financial statements filed herewith.

Employees

We have no paid employees. The employees of our advisor and its affiliates provide management, disposition, advisory and certain administrative services for us.

Principal Executive Office

Our principal executive offices are located at 800 Newport Center Drive, Suite 700, Newport Beach, California 92660. Our telephone number, general facsimile number and website address are (949) 417-6500, (949) 417-6501 and http://www.kbsreit.com, respectively.

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Available Information

Access to copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other filings with the SEC, including amendments to such filings, may be obtained free of charge from the following website, http://www.kbsreit.com, through a link to the SEC’s website, http://www.sec.gov. These filings are available promptly after we file them with, or furnish them to, the SEC.


ITEM 1A.	RISK FACTORS

The following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

Risks Related to an Investment in Us

Because no public trading market for our shares currently exists and because we have delayed the liquidation or the listing of our shares of common stock on a national securities exchange beyond 2014, our stockholders will not realize the cash value of their investment for an extended period.

There is no public market for our shares and we currently have no plans to list our shares on a national securities exchange. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. Any sale must also comply with applicable state and federal securities laws. In addition, our charter prohibits the ownership of more than 9.8% of our stock by any person, unless exempted by our board of directors, which may inhibit large investors from purchasing our shares. Our share redemption program only provides for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program document and together with redemptions sought in connection with stockholder’s death, “special redemptions”). Such special redemptions are subject to an annual dollar limitation, which was $10.0 million in the aggregate for the calendar year 2014, and further subject to the limitations described in the share redemption program document. On December 9, 2014, our board of directors approved the same annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by the board of directors), and further subject to the limitations described in the share redemption program document. Based on historical redemption activity, we believe the $10.0 million redemption limitation for the calendar year 2015 will be sufficient for these special redemptions. During each calendar year, the annual dollar limitation for the share redemption program will be reviewed and adjusted from time to time. We currently do not expect to have funds available to resume ordinary redemptions in the future. Therefore, until further notice, and except with respect to special redemptions, stockholders will not be able to sell any of their shares back to us pursuant to our share redemption program. In addition, even if we were to resume ordinary redemptions, our share redemption program includes numerous restrictions that would limit a stockholder’s ability to sell his or her shares. In its sole discretion, our board of directors may amend, suspend or terminate our share redemption program upon 30 days’ notice. Therefore, it will be difficult for our stockholders to sell their shares promptly or at all. If a stockholder is able to sell his or her shares, it would likely be at a substantial discount to the price at which we sold the shares in our public offering. It is also likely that our shares would not be accepted as the primary collateral for a loan.

Our charter requires that we seek stockholder approval of our liquidation if our shares of common stock are not listed on a national securities exchange by November 2012, unless a majority of our independent directors determines that liquidation is not then in the best interest of our stockholders. Pursuant to our charter requirement, the conflicts committee assessed our portfolio of investments and related debt financings, including the assets and liabilities transferred to us under the Settlement Agreement in satisfaction of certain debt obligations owed to us by wholly owned subsidiaries of Gramercy. The conflicts committee also considered the prepayment penalties associated with certain debt obligations assumed by us under the Settlement Agreement. Taking into consideration our portfolio and current market conditions, in November 2012, in November 2013 and in November 2014, the conflicts committee unanimously determined that liquidation is not now in the best interests of our stockholders. Our charter requires that the conflicts committee revisit the issue of liquidation at least annually. Given the factors noted above, the conflicts committee believes it is likely it may reach the same conclusion next year.

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Continued disruptions in the financial markets and uncertain economic conditions could adversely affect market rental rates, our ability to service our existing indebtedness, our ability to refinance or secure additional debt financing on attractive terms and the values of our investments

Currently, both the investing and leasing environments are highly competitive. While there has been an increase in the amount of capital flowing into the U.S. real estate markets, which resulted in an increase in real estate values in certain markets, the uncertainty regarding the economic environment has made businesses reluctant to make long-term commitments or changes in their business plans. Possible future declines in rental rates, slower or potentially negative net absorption of leased space 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, may result in decreases in cash flows. Historically low interest rates could help offset some of the impact of these potential decreases in operating cash flow for properties financed with variable rate mortgages; however, interest rates likely will not remain at these historically low levels for the remaining life of many of our investments. Recently, interest rates have become more volatile as the global capital markets react to increasing economic and geographical risks.

From a global standpoint, the U.S. economy is considered to be a bright spot. Recently the International Monetary Fund (“IMF”) lowered its global growth forecast from 3.7% to 3.3%. Lower than expected growth in the European Union (“EU”) and Chinese economies are the primary factors in the forecast change. Geopolitical events in the Ukraine and Middle East and the recent outbreak of the Ebola virus in Africa, and its possible spread to the rest of the world, have all been impediments to global economic growth.

We have relied on debt financing to finance our properties and real estate-related assets 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 existing indebtedness. If we are not able to refinance our existing indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. Recent financial market conditions have improved from the bottom of the economic cycle, but material risks are still present. Market conditions can change quickly, which could negatively impact the value of our assets.

Further disruptions in the financial markets and continued uncertain economic conditions could adversely affect the values of our investments. Lending activity only recently increased; however, it remains uncertain whether the capital markets can sustain the current transaction levels. Any disruption to the debt and capital markets could result in fewer buyers seeking to acquire commercial properties and possible increases in capitalization rates and lower property values. Furthermore, declining 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 and in the collateral securing our loan investments, 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;


•	the value of collateral securing our loan investments could decrease below the outstanding principal amounts of such loans;


•	revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to meet our debt service obligations on debt financing; and/or


•	revenues generated by the properties and other assets underlying our loan investments could decrease, making it more difficult for the borrowers to meet their payment obligations to us, which could in turn make it more difficult for us to meet our debt service obligations on debt financing.

All of these factors could reduce our stockholders’ return and decrease the value of an investment in us.

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Our stockholders should not assume that our performance will be similar to the performance of other real estate programs sponsored by affiliates of our advisor, which makes our future performance difficult to predict.

We are the first publicly offered investment program sponsored by the affiliates of our advisor, KBS Capital Advisors. Our stockholders should not assume that our performance will be similar to the past performance of other real estate investment programs sponsored by affiliates of our advisor. The private KBS-sponsored programs were not subject to the up-front commissions, fees and expenses associated with our initial public offering nor all of the laws and regulations that apply to us. For all of these reasons, our stockholders should be especially cautious when drawing conclusions about our future performance and our stockholders should not assume that it will be similar to the prior performance of other KBS-sponsored programs. The differences between us and the private KBS-sponsored programs significantly increase the risk and uncertainty our stockholders face.

Because we depend upon our advisor and its affiliates to conduct our operations, any adverse changes in the financial health of our advisor or its affiliates or our relationship with them could hinder our operating performance and the return on our stockholders’ investment.

We depend on our advisor to manage our operations and our portfolio of real estate and real estate-related assets. Our advisor depends upon the fees and other compensation that it receives from us and the other public KBS-sponsored programs in connection with the purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of KBS Capital Advisors or our relationship with KBS Capital Advisors could hinder its ability to successfully manage our operations and our portfolio of investments.

KBS Capital Advisors has limited experience operating, overseeing and selling bank branch properties, which could cause inefficiencies in the operation and sale of these properties, thereby reducing the value of our stockholders’ investment.

Our advisor has limited experience operating, overseeing and selling bank branch properties, which properties make up the majority of the GKK Properties. As such, and while we believe we have retained appropriate asset management by hiring the Property Manager to manage and provide certain other services related to the GKK Properties, we may not be able to operate, lease and/or sell these GKK Properties efficiently and effectively, which could prevent us from improving the value of our overall portfolio. Additionally, some of these bank branches are located outside of our target markets and our advisor has limited experience in these markets. For these reasons, there may be inefficiencies in the operation and sale of these GKK Properties, which may prevent us from recognizing the full potential value of these GKK Properties and may reduce the overall return to our stockholders.

Because of the Property Manager’s experience with managing the bank branch and bank-related properties that make up the majority of the GKK Properties, we depend upon the Property Manager to manage and conduct the operations of the GKK Properties and any adverse changes in or termination of our relationship with the Property Manager could hinder the performance of the GKK Properties and reduce the return on our stockholders’ investment.

Prior to the transfers of the GKK Properties to us under the Settlement Agreement, GKK Stars and its affiliates indirectly owned and managed the GKK Properties and thus have developed experience and expertise in the management and operations of bank branch and bank-related properties. As of the effective date of the Settlement Agreement, GKK Stars agreed to provide standard asset management services relating to the GKK Properties. On March 30, 2012, we, through an indirect wholly owned subsidiary (“KBS Acquisition Sub”), entered into an Asset Management Services Agreement (the “Services Agreement”) with the Property Manager with respect to the GKK Properties. Pursuant to the Services Agreement, the Property Manager agreed to provide, among other services: standard asset management services, assistance related to dispositions, accounting services and budgeting and business plans for the GKK Properties (collectively, the “Services”). On December 19, 2013, KBS Acquisition Sub entered into an amended and restated asset management services agreement (the “Amended Services Agreement”) with the Property Manager. The effective date of the Amended Services Agreement was December 1, 2013. Pursuant to the Amended Services Agreement, we made a payment in the amount of $12.0 million to the Property Manager in satisfaction of the profit participation provisions under the Services Agreement. In addition, as compensation for the Services, we agreed to pay the Property Manager: (i) an annual fee of $7.5 million plus all GKK Property-related expenses incurred by the Property Manager, (ii) subject to certain terms and conditions in the Amended Services Agreement, a profit participation interest based on a percentage (ranging from 10% to 30%) of the amount by which the gross fair market value or gross sales price of certain identified portfolios of GKK Properties exceeds the sum of (a) an agreed-upon baseline value for such GKK Property portfolios plus (b) new capital expended to increase the value of GKK Properties within the portfolios and expenditures made to pay for tenant improvements and leasing commissions related to these GKK Properties as of the measurement date, and (iii) a monthly construction oversight fee equal to a percentage of construction costs for certain construction projects at the GKK Properties overseen by the Property Manager.

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The Amended Services Agreement will terminate on December 31, 2016, with a one-year extension option at our option, subject to certain terms and conditions contained in the Amended Services Agreement. The Amended Services Agreement supersedes and replaces all prior agreements related to the Services among us and our affiliates and the Property Manager and its affiliates.

We depend on the Property Manager to efficiently conduct the management and operations of the GKK Properties. If the Amended Services Agreement is terminated, we would be required to obtain such management services for the GKK Properties from other sources, which sources may not have the experience or capabilities of the Property Manager or its affiliates. Additionally, as our advisor has limited experience operating bank branch properties, should the Property Manager or an affiliate cease managing the GKK Properties, our ability to efficiently and effectively manage the GKK Properties would be affected, and as a result, the value of our stockholders’ investment could decline.

To the extent distributions exceed current and accumulated earnings and profits, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain.

Our organizational documents permit us, to the extent permitted by Maryland law, to pay distributions from any source. We have paid distributions with proceeds from asset sales, loan repayments, financings, a loan from our advisor (which our advisor forgave without repayment) and our cash flow from operations. If we fund distributions from financings or sources other than cash flow from operations, the overall return to our stockholders may be reduced. On March 20, 2012, our board of directors approved the suspension of monthly distribution payments in order to manage our reduced cash flow from operations and to redirect available funds to reduce our debt. Our primary focus was the repayment of certain debt obligations. Our focus in 2015 is to manage our existing investment portfolio, which includes strategically selling assets and exploring value-add opportunities for existing assets (primarily the GKK Properties), refinancing upcoming maturities and paying down debt and distributing available cash to stockholders. Reducing our debt will allow us to hold certain assets in our portfolio with a goal of improving their value and the returns to our stockholders. We plan to continue to make strategic asset sales and, from time to time, may declare special distributions to our stockholders that would be funded with the net proceeds from those asset sales or from cash flow from other sources. We will continue our existing strategy of selling assets when we believe the assets have reached the stage that disposition will assist in improving returns to our investors. In addition, to the extent that we have excess operating cash flows, from time to time our board of directors may declare distributions in future periods based on cash flow generated by our real estate and real estate-related investments. We intend to maintain adequate cash reserves for liquidity, capital expenditures, debt repayments, future special redemptions under our share redemption program and other future capital needs. To the extent distributions in excess of current and accumulated earnings and profits (i) do not exceed a stockholder’s adjusted basis in our stock, such distributions will not be taxable to a stockholder, but rather a stockholder’s adjusted basis in our stock will be reduced; and, (ii) exceed a stockholder’s adjusted basis in our stock, such distributions will be included in income as long-term capital gain if the stockholder has held its shares for more than one year and otherwise as short-term capital gain.

We may not have sufficient liquidity to fund our future capital needs. If we are unable to repay indebtedness or to fund future contractual commitments or required capital expenditures on our real estate investments, lenders or tenants may take legal action against us, which could have a material adverse effect on us and our stockholders’ return.

We cannot be certain that our business will generate sufficient cash flow from operations or from the sales of some of our real estate assets, that we will be able to raise funds in the capital markets or that future financing or refinancing will be available to us in an amount sufficient, if at all, to enable to us to fund our liquidity needs. If we are unable to repay indebtedness or to fund future contractual commitments or necessary capital expenditures on our real estate investments, our lenders or tenants may take legal action against us, which could have a material adverse effect on us and our stockholders’ return.

Economic conditions have had a significant impact on our real estate and real estate-related properties. In addition, these conditions have impacted the businesses of our tenants as well as the tenants in buildings securing our real estate-related investments. As a result of a decline in cash flows and projected future declines, on March 20, 2012, our board of directors approved the suspension of monthly distribution payments in order to manage our reduced cash flow from operations and to redirect available funds to reduce our debt. Our primary focus was the repayment of certain debt obligations. We expect to continue to use available funds to reduce and manage certain other debt obligations and fund cash flow needs. We plan to continue to make strategic asset sales and, from time to time, may declare special distributions to our stockholders that would be funded with the net proceeds from those asset sales or from cash flow from other sources.

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Possible future declines in rental rates, slower or potentially negative net absorption of leasable space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to sign new tenants, may result in additional decreases in cash flows from our properties. As a result of these same factors, the borrowers under our real estate-related investments have experienced a reduction in cash flows that has made it difficult for them to pay us debt service in some instances. Additionally, these reduced and potentially decreasing cash flows have had a negative impact on the valuation of the collateral directly or indirectly securing our real estate-related investments and as a result the borrowers may not be able to refinance their debt to us or sell the collateral at a price sufficient to repay our note balances in full when they come due. Further, we depend on the cash flow from our real estate and real estate-related investments to meet the debt service obligations under our financing arrangements, and we will depend on the proceeds from the sale of real estate and proceeds from the repayment of our real estate-related investments in order to repay our outstanding debt obligations.

All of these factors could limit our liquidity and impact our ability to properly maintain or make improvements to our real estate properties. If we are unable to meet future funding commitments or fund required capital expenditures, our borrowers or tenants may take legal action against us. This, in turn, could result in reductions in the value of our investments and therefore a reduction in the value of an investment in us.

We may not generate sufficient operating cash flow on a quarterly basis to fund our operations, which would reduce the value of an investment in us.

As a result of general economic conditions over the last several years, our portfolio has experienced declines in cash flow from a number of our investments. Economic conditions have impacted our real estate investments, resulting in a general decline in the occupancy of our portfolio, an important element to the continued growth of our portfolio, that has resulted in lower current cash flow. Tenant-specific issues, including bankruptcy and downsizing, have resulted in decreases in our operating cash flow because these tenants have terminated their leases early, not renewed their leases or have not paid their contractual rent to us. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of increases in future rental concessions, including three or more months of free rent to retain tenants who are up for renewal or to sign new tenants, may result in additional decreases in cash flow. In addition, we have experienced a decline in cash flow from our real estate-related investments, as current economic conditions have impacted the ability of some borrowers under our loans to make contractual interest payments to us. In particular, our investments in mezzanine and mortgage loans have been impacted as the operating performance and values of buildings directly or indirectly securing our investment positions have decreased from the date of our acquisition or origination of these investments. In such instances, some of the borrowers have not been able to refinance their debt owed to us or sell the collateral at a price sufficient to repay our note balances in full when they become due. Asset sales in 2012, 2013 and 2014 have resulted in, and expected future asset sales will result in, further decreases in operating cash flow.

Due to these factors, we may not generate sufficient operating cash flow on a quarterly basis to fund our operations. Our projected cash flow from operations may not be sufficient to cover our capital expenditures, amortization payment requirements on our debt obligations and principal pay-down requirements for our debt obligations at maturity or to allow us to meet the conditions for extension of our loans, which may require us to sell assets in order to meet our capital requirements. If our cash flow from operations deteriorates, we will be more dependent on asset sales to fund our operations and for our liquidity needs. Moreover, we may be unable to meet financial and operating covenants in our debt obligations, and our lenders may take action against us, including commencing foreclosure actions. If we are unable to meet future funding commitments or fund required capital expenditures, our borrowers or tenants may take legal action against us. This, in turn, could result in reductions in the value of our investments and therefore a reduction in the value of an investment in us. These factors could also have a material adverse effect on us and our stockholders’ return.

If we are unable to obtain funding for future capital needs, the value of our investments and our stockholders’ return could decline.

When tenants do not renew their leases or otherwise vacate their space, we will often need to expend substantial funds for improvements to the vacated space in order to attract replacement tenants. Even when tenants do renew their leases we may agree to make improvements to their space as part of our negotiations. If we need additional capital in the future to improve or maintain our properties or for any other reason, we may have to obtain funding from sources other than our cash flow from operations, such as borrowings, asset sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both, which would reduce the value of our stockholders’ investment.

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The loss of or the inability to retain or obtain key real estate and debt finance professionals at our advisor could delay or hinder implementation of our investment management and disposition strategies, which could decrease the value of an investment in our shares.

Our success depends to a significant degree upon the contributions of Peter M. Bren, Keith D. Hall, Peter McMillan III, and Charles J. Schreiber, Jr., each of whom would be difficult to replace. Neither we nor our advisor nor its affiliates have employment agreements with these individuals and they may not remain associated with us, our advisor or its affiliates. If any of these persons were to cease their association with us, our advisor or its affiliates, we may be unable to find suitable replacements and our operating results could suffer as a result. We do not intend to maintain key person life insurance on any person. We believe that our future success depends, in large part, upon our advisor’s and its affiliates’ ability to attract and retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense, and our advisor and its affiliates may be unsuccessful in attracting and retaining such skilled individuals. Further, we have established strategic relationships with firms that have special expertise in certain services or detailed knowledge regarding real properties in certain geographic regions. Maintaining such relationships will be important for us to effectively compete with other investors for tenants in such regions. We may be unsuccessful in retaining such relationships. If we lose or are unable to obtain the services of highly skilled professionals or do not establish or maintain appropriate strategic relationships, our ability to implement our investment management and disposition strategies could be delayed or hindered, and the value of our stockholders’ investments may decline.

Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce our stockholders’ and our recovery against our independent directors if they negligently cause us to incur losses.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the company and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that no independent director shall be liable to us or our stockholders for monetary damages and that we will generally indemnify them for losses unless they are grossly negligent or engage in willful misconduct. As a result, our stockholders and we may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce our stockholders’ and our recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees (if we ever have employees) and agents) in some cases, which would decrease the return to our stockholders.

Risks Related to Conflicts of Interest

KBS Capital Advisors and its affiliates, including all of our executive officers and some of our directors and other key real estate and debt finance professionals, face conflicts of interest caused by their compensation arrangements with us and with other KBS-sponsored programs, which could result in actions that are not in the long-term best interests of our stockholders.

All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, KBS Capital Markets Group LLC, the entity that acted as our dealer manager, and/or other KBS-affiliated entities. KBS Capital Advisors and its affiliates receive substantial fees from us. These fees could influence our advisor’s advice to us as well as the judgment of its affiliates. Among other matters, these compensation arrangements could affect their judgment with respect to:


•	the continuation, renewal or enforcement of our agreements with KBS Capital Advisors and its affiliates, including the advisory agreement;


•	public offerings of equity by us, which would entitle our dealer manager to dealer-manager fees and may entitle KBS Capital Advisors to increased acquisition, origination and asset-management fees;


•	sales of properties and other investments, which may entitle KBS Capital Advisors to disposition fees and possible subordinated incentive fees;

•

whether and when we seek to list our common stock on a national securities exchange, which listing (i) may make it more likely for us to become self-managed or internalize our management or (ii) could entitle our advisor to a subordinated incentive listing fee, and which could also adversely affect the sales efforts for other KBS-sponsored programs, depending on the price at which our shares trade; and


•	whether and when we seek to sell the company or its assets, which sale could entitle KBS Capital Advisors to a subordinated incentive fee and terminate the asset management fee.

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In addition, the fees our advisor receives in connection with the management of our assets are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us.

KBS Capital Advisors faces conflicts of interest relating to the leasing of properties and such conflicts may not be resolved in our favor, meaning that we may obtain less creditworthy or desirable tenants, which could reduce our stockholders’ overall investment return.

We and other KBS-sponsored programs and KBS-advised investors rely on the same group of key real estate professionals at our advisor, including Messrs. Bren, Hall, McMillan and Schreiber, to supervise the property management and leasing of properties. If the KBS team of real estate professionals directs creditworthy prospective tenants to properties owned by another KBS-sponsored program or KBS-advised investor when they could direct such tenants to our properties, our tenant base may have more inherent risk and our properties’ occupancy may be lower than might otherwise be the case. Further, Messrs. Bren, Hall, McMillan and Schreiber and existing and future KBS-sponsored programs and KBS-advised investors are generally not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments.

Our sponsors, our officers, our advisor and the real estate, debt finance, management and accounting professionals assembled by our advisor face competing demands on their time and this may cause our operations and our stockholders’ investment in us to suffer.

We rely on our sponsors, our officers, our advisor and the real estate, debt finance, management and accounting professionals that our advisor retains, including Messrs. Bren, Hall, McMillan, Schreiber and David E. Snyder and Ms. Stacie K. Yamane, to provide services to us for the day-to-day operation of our business. KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Strategic Opportunity REIT, Inc. (“KBS Strategic Opportunity REIT”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”) and KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) are also advised by KBS Capital Advisors and rely on our sponsors and many of the same real estate, debt finance, management and accounting professionals, as will future KBS-sponsored programs and KBS-advised investors, including KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”), a new REIT that is expected to engage our advisor. Further, our officers and directors are also officers and/or directors of some or all of the other public KBS-sponsored programs. Messrs. Bren, Hall, McMillan, Schreiber and Snyder and Ms. Yamane are also executive officers of KBS REIT II, KBS REIT III and KBS Growth & Income REIT. Messrs. Hall, McMillan and Snyder and Ms. Yamane are executive officers of KBS Strategic Opportunity REIT and KBS Strategic Opportunity REIT II, and Messrs. Bren, McMillan and Snyder and Ms. Yamane are executive officers of KBS Legacy Partners Apartment REIT. In addition, Messrs. Bren and Schreiber and Ms. Yamane are executive officers of KBS Realty Advisors and its affiliates, the advisors of private KBS-sponsored programs and the investment advisors to KBS-advised investors. As a result of their interests in other KBS-sponsored programs, their obligations to KBS-advised investors and the fact that they engage in and will continue to engage in other business activities, on behalf of themselves and others, Messrs. Bren, Hall, McMillan, Schreiber and Snyder and Ms. Yamane face conflicts of interest in allocating their time among us, KBS REIT II, KBS Strategic Opportunity REIT, KBS Legacy Partners Apartment REIT, KBS REIT III, KBS Strategic Opportunity REIT II, KBS Growth & Income REIT, KBS Capital Advisors, other KBS-sponsored programs and other KBS-advised investors, as well as other business activities in which they are involved. In addition, our advisor and KBS Realty Advisors and their affiliates share many of the same key real estate, management and accounting professionals. During times of intense activity in other programs and ventures, these individuals may devote less time and fewer resources to our business than are necessary or appropriate to manage our business. Furthermore, some or all of these individuals may become employees of another KBS-sponsored program in an internalization transaction or, if we internalize our advisor, may not become our employees as a result of their relationship with other KBS-sponsored programs. If these events occur, the returns on our investments and the value of our stockholders’ investment in us may decline.

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All of our executive officers, some of our directors and the key real estate and debt finance professionals assembled by our advisor face conflicts of interest related to their positions and/or interests in KBS Capital Advisors and its affiliates, which could hinder our ability to implement our business strategy and to generate returns to our stockholders.

All of our executive officers and some of our directors and the key real estate and debt finance professionals assembled by our advisor are also executive officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor and other KBS-affiliated entities. Through KBS-affiliated entities, some of these persons also serve as the investment advisors to KBS-advised investors and through KBS Capital Advisors and KBS Realty Advisors these persons serve or will serve as the advisor to KBS REIT II, KBS Strategic Opportunity REIT, KBS Legacy Partners Apartment REIT, KBS REIT III, KBS Strategic Opportunity REIT II, KBS Growth & Income REIT and other KBS-sponsored programs. As a result, they owe fiduciary duties to each of these entities, their members and limited partners and their investors, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our leasing opportunities. Further, Messrs. Bren, Hall, McMillan and Schreiber and existing and future KBS-sponsored programs and KBS-advised investors generally are not and will not be prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments. If we do not successfully implement our business strategy, we may be unable to maintain or increase the value of our assets, which would reduce the returns to our stockholders.

Our board of directors’ loyalties to KBS REIT II, KBS REIT III, KBS Strategic Opportunity REIT, KBS Strategic Opportunity REIT II, KBS Growth & Income REIT and possibly to future KBS-sponsored programs could influence its judgment, resulting in actions that may not be in our stockholders’ best interest or that result in a disproportionate benefit to another KBS-sponsored program at our expense.

All of our directors are also directors of KBS REIT II and KBS REIT III and two of our directors are also directors of KBS Growth & Income REIT. One of our directors is also a director of KBS Strategic Opportunity REIT and KBS Strategic Opportunity REIT II. The loyalties of our directors serving on the boards of directors of KBS REIT II, KBS REIT III, KBS Strategic Opportunity REIT, KBS Strategic Opportunity REIT II, KBS Growth & Income REIT, or possibly on the boards of directors of future KBS-sponsored programs, may influence the judgment of our board of directors when considering issues for us that also may affect other KBS-sponsored programs, such as the following:

•

We could enter into transactions with other KBS-sponsored programs, such as property sales or financing arrangements. Such transactions might entitle our advisor or its affiliates to fees and other compensation from both parties to the transaction. For example, property sales to other KBS-sponsored programs might entitle our advisor or its affiliates to acquisition fees in connection with its services to the purchaser in addition to disposition and other fees that we might pay to our advisor in connection with such transaction. Decisions of our board or the conflicts committee regarding the terms of those transactions may be influenced by our board’s or committee’s loyalties to such other KBS-sponsored programs.


•	A decision of our board or the conflicts committee regarding the timing of a debt or equity offering could be influenced by concerns that the offering would compete with an offering of other KBS-sponsored programs.


•	A decision of our board or the conflicts committee regarding the timing of property sales could be influenced by concerns that the sales would compete with those of other KBS-sponsored programs.


•	A decision of our board or the conflicts committee regarding whether or when we seek to list our common stock on a national securities exchange could be influenced by concerns that such listing could adversely affect the sales efforts of other KBS-sponsored programs, depending on the price at which our shares trade.

Because our independent directors are also independent directors of KBS REIT II and KBS REIT III, they receive compensation for service on the board of directors of KBS REIT II and KBS REIT III. Like us, KBS REIT II and KBS REIT III each pays each independent director an annual retainer of $40,000 as well as compensation for attending meetings as follows: (i) $2,500 for each board meeting attended, (ii) $2,500 for each conflicts or audit committee meeting attended (except that the committee chairman is paid $3,000 for each conflicts or audit committee meeting attended), (iii) $2,000 for each teleconference board meeting attended, and (iv) $2,000 for each teleconference conflicts or audit committee meeting attended (except that the committee chairman is paid $3,000 for each teleconference conflicts or audit committee meeting attended). KBS REIT II also pays each independent director compensation for attending other committee meetings as follows: (i) $2,000 for each committee meeting attended (except that the meeting chairman is paid $3,000 for each committee meeting attended), and (ii) $2,000 for each teleconference committee meeting attended (except that the meeting chairman is paid $3,000 for each teleconference committee meeting attended). In addition, like us, KBS REIT II and KBS REIT III each reimburses directors for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of their boards of directors.

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Risks Related to Our Corporate Structure

Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.

In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, and some entities such as private foundations. To preserve our REIT qualification, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value of our capital stock. This ownership limitation could have the effect of delaying, deferring or preventing a takeover or other transaction including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets), in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.

Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.

Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.

Our stockholders’ investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we or our subsidiaries become an unregistered investment company, we could not continue our business.

Neither we nor any of our subsidiaries intend to register as an investment company under the Investment Company Act. If we or our subsidiaries were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:


•	limitations on capital structure;


•	restrictions on specified investments;


•	prohibitions on transactions with affiliates; and


•	compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:


•	is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities (the “primarily engaged test”); or

•

is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).

We believe that neither we nor our Operating Partnership will be required to register as an investment company based on the following analysis. With respect to the 40% test, most of the entities through which we and our Operating Partnership own our assets are majority-owned subsidiaries that are not themselves investment companies and are not relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7).

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With respect to the primarily engaged test, we and our Operating Partnership are holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our Operating Partnership, we and our Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.

We believe that most of the subsidiaries of our Operating Partnership may rely on Section 3(c)(5)(C) of the Investment Company Act for an exception from the definition of an investment company. (Any other subsidiaries of our Operating Partnership should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act.) As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate,” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that each of the subsidiaries of our Operating Partnership relying on Section 3(c)(5)(C) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. We expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

To maintain compliance with the Investment Company Act, our subsidiaries may be unable to sell assets we would otherwise want them to sell and may need to sell assets we would otherwise wish them to retain. In addition, our subsidiaries may have to acquire additional assets that they might not otherwise have acquired or may have to forego opportunities to make investments that we would otherwise want them to make and would be important to our investment strategy. Moreover, the SEC or its staff may issue interpretations with respect to various types of assets that are contrary to our views and current SEC staff interpretations are subject to change, which increases the risk of non-compliance and the risk that we may be forced to make adverse changes to our portfolio. In this regard, we note that in 2011 the SEC issued a concept release indicating that the SEC and its staff were reviewing interpretive issues relating to Section 3(c)(5)(C) and soliciting views on the application of Section 3(c)(5)(C) to companies engaged in the business of acquiring mortgages and mortgage-related instruments. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement and a court could appoint a receiver to take control of us and liquidate our business.

Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exception from the definition of an investment company under the Investment Company Act.

If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, we may need to modify our investment portfolio in order to maintain our REIT qualification or exception from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.

Our stockholders will have limited control over changes in our policies and operations, which increases the uncertainty and risks our stockholders face.

Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks our stockholders face.

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We have not had funds available for ordinary redemptions under our share redemption program since the April 2009 redemption date, and our share redemption program provides only for special redemptions. We currently do not expect to have funds available to resume ordinary redemptions in the future.

We have not had funds available for ordinary redemptions since the April 2009 redemption date, and our share redemption program provides only for special redemptions. Such redemptions are subject to an annual dollar limitation, which was $10.0 million in the aggregate for the calendar year 2014, and further subject to the limitations described in the share redemption program document. On December 9, 2014, our board of directors approved the same annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by the board of directors), and further subject to the limitations described in the share redemption program document. Based on historical redemption activity, we believe the $10.0 million redemption limitation for our calendar year 2015 will be sufficient for these special redemptions. During each calendar year, the annual dollar limitation for the share redemption program will be reviewed and adjusted from time to time. We currently do not expect to have funds available to resume ordinary redemptions in the future. Therefore, until further notice, and except with respect to special redemptions, stockholders will not be able to sell any of their shares back to us pursuant to our share redemption program. Even if we were to resume ordinary redemptions, our share redemption program includes numerous restrictions that would limit a stockholder’s ability to sell his or her shares. Further, we have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. Our board may amend, suspend or terminate our share redemption program upon 30 days’ notice.

Pursuant to our share redemption program, once we have established an estimated value per share of our common stock, the redemption price per share for eligible redemptions is equal to the estimated value per share. On December 9, 2014, our board of directors approved an estimated value per share of our common stock of $4.52 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2014. Therefore, effective commencing with the December 31, 2014 redemption date, the redemption price for all shares eligible for redemption is $4.52 per share. For a full description of the methodologies and assumptions used to value our assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Market Information.” The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to fluctuations in the real estate and finance markets. As such, the estimated value per share does not take into account developments in our portfolio since December 9, 2014. We currently expect to utilize our advisor and/or an independent valuation firm to update the estimated value per share in December of each year, in accordance with Practice Guideline 2013-01, Valuations of Publicly Registered, Non-Listed REITs, issued by the Investment Program Association (“IPA”) in April 2013 (the “IPA Valuation Guidelines”). If stockholders are able to sell their shares under our share redemption program, they may not recover the amount of their investment in us.

The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.

On December 9, 2014, our board of directors approved an estimated value per share of our common stock of $4.52 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2014. We provided this estimated value per share to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligations pursuant to applicable Financial Industry Regulatory Authority (“FINRA”) and National Association of Securities Dealers (“NASD”) Conduct Rules. This valuation was performed in accordance with the provisions of and also to comply with the IPA Valuation Guidelines. The estimated value per share was based on the recommendation and valuation performed by our advisor, using the methodologies and assumptions described in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Market Information.” We engaged Duff & Phelps, LLC (“Duff & Phelps”), an independent, third-party real estate valuation firm, to provide appraisals for the majority of our real estate properties.

As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets less the fair value of our liabilities according to U.S. generally accepted accounting principles (“GAAP”), nor does it represent a liquidation value of our assets and liabilities or the price at which our shares of common stock would trade on a national securities exchange. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not under contract to sell, debt prepayment penalties or defeasance costs that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt.

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Accordingly, with respect to the estimated value per share, we can give no assurance that:


•	a stockholder would be able to resell his or her shares at this estimated value;


•	a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the company;


•	our shares of common stock would trade at the estimated value per share on a national securities exchange;


•	an independent third-party appraiser or other third-party valuation firm would agree with our estimated value per share; or


•	the methodology used to calculate our estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.

We currently expect to utilize our advisor and or an independent valuation firm to update the estimated value per share in December of each year.

The estimated value per share of our common stock does not take into account how developments subsequent to the valuation date related to individual assets, the financial or real estate markets or other events may have increased or decreased the value of our portfolio.


•	asset sales and potential future asset sales at values different from those determined in our valuation as well as any impairment charges related to these or other assets as a result of changes in the expected hold period, or the estimated cash flows for or future expenses related to these assets;


•	any impairments we may recognize with respect to certain of our real estate-related investments;


•	any increases or decreases in value of any of our real estate or real estate-related investments;


•	any disruptions in the real estate and financial markets or general economic conditions;


•	any inability to successfully operate and/or sell the GKK Properties or a downturn in the banking industry, given current economic conditions and the concentration of the GKK Properties in the financial services sector; or


•	any inability to meet our existing debt service obligations, or to repay or refinance such obligations on attractive terms or at all at or prior to maturity.

Our stockholders’ interest in us will be diluted if we issue additional shares, which could reduce the overall value of their investment.

Our common stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 1,010,000,000 shares of capital stock, of which 1,000,000,000 shares are designated as common stock and 10,000,000 shares are designated as preferred stock. Our board of directors may increase the number of authorized shares of capital stock without stockholder approval. Our board may elect to (i) sell additional shares in future public offerings, (ii) issue equity interests in private offerings, or (iii) issue shares to our advisor, or its successors or assigns, in payment of an outstanding obligation. To the extent we issue additional equity interests, our stockholders’ percentage ownership interest in us will be diluted. In addition, depending upon the terms, the use of proceeds and pricing of any additional offerings and the value of our real estate investments, our stockholders may also experience dilution in the book value and fair value of their shares.

Payment of fees to KBS Capital Advisors and its affiliates increases the risk that our stockholders will not be able to recover the amount of their investment in our shares.

KBS Capital Advisors and its affiliates performed services for us in connection with the selection and acquisition or origination of our investments and continue to perform services for us in connection with the management, leasing and disposition of our properties and the management, structuring, administration and disposition of our other investments. We pay them substantial fees for these services, which results in immediate dilution of the value of our stockholders’ investment and reduces our stockholders’ return on their investment in us.

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We may also pay significant fees during our listing/liquidation stage. Although most of the fees expected to be paid during our listing/liquidation stage are contingent on our stockholders first receiving agreed-upon investment returns, the investment-return thresholds may be reduced subject to the approval of our conflicts committee and the other limitations in our charter.

Therefore, these fees increase the risk that the cash available for distribution to common stockholders upon a liquidation of our portfolio would be less than stockholders paid for our shares. These substantial fees and other payments also increase the risk that our stockholders will not be able to resell their shares at a profit, even if our shares are listed on a national securities exchange.

Our stockholders may be more likely to sustain a loss on their investment because our sponsors do not have as strong an economic incentive to avoid losses as do sponsors who have made significant equity investments in their companies.

Our sponsors have only invested $200,000 in us through the purchase of 20,000 shares of our common stock at $10.00 per share. Our sponsors will have little exposure to loss in the value of our shares. Without this exposure, our stockholders may be at a greater risk of loss because our sponsors do not have as much to lose from a decrease in the value of our shares as do those sponsors who make more significant equity investments in their companies.

General Risks Related to Investments in Real Estate

Economic, market and regulatory changes that impact the real estate market generally may decrease the value of our investments and weaken our operating results.

Our operating results and the performance of our properties are subject to the risks typically associated with real estate, any of which could decrease the value of our investments and could weaken our operating results, including:


•	downturns in national, regional and local economic conditions;


•	competition from other office, industrial and bank branch buildings;


•	adverse local conditions, such as oversupply or reduction in demand for office, industrial and bank branch buildings and changes in real estate zoning laws that may reduce the desirability of real estate in an area;


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


•	changes in interest rates and the availability of permanent mortgage financing, which may render the sale of a property or loan difficult or unattractive;


•	changes in tax (including real and personal property tax), real estate, environmental and zoning laws;


•	the potential for uninsured or underinsured property losses; and


•	periods of high interest rates and tight money supply.

Any of the above factors, or a combination thereof, could result in a decrease in our cash flow from operations and a decrease in the value of our investments, which would have an adverse effect on our operations and on the value of our stockholders’ investment.

Since the acquisition of our real estate and real estate-related investments, downturns in national, regional and local economic conditions have impacted our properties’ operating performance and the operating performance of properties securing our real estate-related investments, which will reduce the overall return to our stockholders.

As a result of general economic conditions over the last several years, our portfolio experienced declines in cash flow from a number of our investments. Economic conditions have impacted our real estate investments, resulting in a general decline in the occupancy of our portfolio, an important element to the continued growth of the value of our portfolio, that has resulted in lower current cash flow. Tenant-specific issues, including bankruptcy and downsizing, have resulted in decreases in our operating cash flow because these tenants have terminated their leases early, not renewed their leases or have not paid their contractual rent to us. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of increases in future rental concessions, including three or more months of free rent to retain tenants who are up for renewal or to sign new tenants, may result in additional decreases in cash flow. In addition, we have experienced a decline in cash flow from our real estate-related investments, as current economic conditions have impacted the ability of some borrowers under our loans to make contractual interest payments to us. In particular, our investments in mezzanine and mortgage loans have been impacted as the operating performance and values of buildings directly or indirectly securing our investment positions have decreased from the date of our acquisition or origination of these investments. In such instances, some of the borrowers have not been able to refinance their debt owed to us or sell the collateral at a price sufficient to repay our note balances in full when they become due.

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Because of the concentration of a significant portion of our assets in North Carolina, any adverse economic, real estate or business conditions in North Carolina could adversely affect our operating results and stockholders’ return.

As of December 31, 2014, our real estate investments in North Carolina, excluding properties held for sale, represented 14% of our total annualized base rent. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse economic developments in North Carolina’s real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office or bank space resulting from the local business climate, could adversely affect our operating results and our stockholders’ return.

Properties that have significant vacancies could be difficult to sell, which could diminish the return on these properties and adversely affect our cash flows and our stockholders’ overall return.

A property may incur vacancies either by the expiration and non-renewal of tenant leases or the continued default of tenants under their leases. If vacancies continue for a long period of time, we may suffer reduced revenues, which would adversely affect our cash flows. In addition, the resale value of the property could be diminished because the market value of a particular property depends principally upon the value of the cash flow generated by the leases associated with that property. Such a reduction in the resale value of a property could also reduce the value of our stockholders’ investment. As of December 31, 2014, our portfolio (excluding properties that were held for sale, consisted of approximately 10.2 million rentable square feet, was 79% occupied and our bad debt reserve for our properties was less than 1% of annualized base rent. Included among these properties are 45 properties containing 1.9 million rentable square feet that were less than 70% occupied. As of December 31, 2014, excluding real estate held for sale, 11 of our properties containing 0.5 million rentable square feet were 100% vacant.

We depend on tenants for our revenue generated by our real estate investments and, accordingly, our stockholders’ overall return is partially dependent upon the success and economic viability of our tenants and our ability to retain and attract tenants. Non-renewals, terminations or lease defaults could reduce our net income and reduce our stockholders’ overall return.

The success of our real estate investments materially depends upon the financial stability of the tenants leasing the properties we own. The inability of a single major tenant or a significant number of smaller tenants to meet their rental obligations would lower our net income. A non-renewal after the expiration of a lease term, termination or default by a tenant on its lease payments to us would cause us to lose the revenue associated with such lease and require us to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord of a property and may incur substantial costs in protecting our investment and re-leasing the property. Tenants may have the right to terminate their leases upon the occurrence of certain customary events of default and, in other circumstances, may not renew their leases or, because of market conditions, may only be able to renew their leases on terms that are less favorable to us than the terms of their initial leases. When tenants exercise early termination rights, our cash flow and earnings will be adversely affected to the extent that we are unable to generate an equivalent amount of net rental income by leasing the vacated space to new third party tenants. Certain leases to tenants of the GKK Properties permit such tenants to terminate their leases, in whole or in part, prior to their stated lease expiration dates, frequently with little or no termination fee being paid to us.

Further, some of our properties may be outfitted to suit the particular needs of the tenants. We may have difficulty replacing the tenants of these properties if the outfitted space limits the types of businesses that could lease that space without major renovation. If a tenant does not renew, or terminates or defaults on a lease, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss as described above. See also “ — General Risks Related to Investments in Real Estate — Bank branches are specialty-use properties and therefore may be more difficult to lease or sell to non-banks.”

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We may be required to reimburse tenants for overpayments of estimated operating expenses.

Under certain of our leases, tenants reimburse us for their proportionate share of the costs we incur to manage, operate and maintain the buildings and properties where they rent space. These leases often limit the types and amounts of expenses we can pass through to our tenants and allow the tenants to audit and contest our determination of the operating expenses they are required to pay. Given the complexity of certain operating expense reimbursement calculations, tenant audit rights under large portfolio leases can remain unresolved for several years. For example, Bank of America, a tenant that leases a significant amount of space in our real estate portfolio, is still auditing certain categories of operating expenses for the 2007 and subsequent lease years. If, as a result of a tenant audit, it is determined that we have been reimbursed more than we were permitted to collect under a lease, we must refund the excess amount back to the tenant and, sometimes, also reimburse the tenant for its audit costs. Additionally, because we acquired the GKK Properties pursuant to the Settlement Agreement, we were not able to perform standard diligence on the properties and as such, we may not be aware of possible excess reimbursements made to the prior owners. Any unexpected refund payments could materially adversely affect our financial condition and results of operations.

The bankruptcy or insolvency of our tenants or delays by our tenants in making rental payments could seriously harm our operating results and financial condition.

Any bankruptcy filing by or relating to a tenant could bar us from collecting pre-bankruptcy debts from that tenant, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.

Many tenants in the GKK Properties are banks that are not eligible to be debtors under the federal bankruptcy code, but would be subject to the liquidation and insolvency provisions of applicable banking laws and regulations. If the FDIC were appointed as receiver of a banking tenant because of that tenant’s insolvency, we would become an unsecured creditor of the tenant and only be entitled to share with the other unsecured non-depositor creditors in the tenant’s assets on an equal basis after payment to the depositors of their claims. The FDIC has broad powers to reject any contract (including a lease) of a failed depository institution that the FDIC deems burdensome if the FDIC determines that such rejection is necessary to promise the orderly administration of the institution’s affairs. By federal statute, a landlord under a lease rejected by the FDIC is not entitled to claim any damages with respect to the disaffirmation, other than rent through the effective date of the disaffirmation. The amount paid on claims with respect to the lease would depend on, among other factors, the amount of assets of the insolvent tenant available for unsecured claims. We may recover substantially less than the full value of any unsecured claims, which could have a material adverse effect on our operating results and financial condition, as well as the returns to our stockholders.

The GKK Properties were transferred to us on an “as is” basis and, therefore, the value of the GKK Properties may decline if we subsequently discover problems with them.

Since, under the Settlement Agreement, the GKK Properties were transferred to us on an “as is” basis, we were not able to inspect or conduct standard due diligence on certain of the GKK Properties before their transfer to us. We did not receive representations, warranties and indemnities relating to the GKK Properties from Gramercy and/or its affiliates and, in certain cases, pursuant to the terms of the Settlement Agreement, certain of our indirect wholly-owned subsidiaries are required to indemnify Gramercy and/or its affiliates for certain matters, including environmental matters, in connection with the transfer of such GKK Properties. If we discover issues or problems related to the physical condition of a GKK Property, issues or problems related to zoning or compliance with ordinances and regulations with a GKK Property or other significant problems with a GKK Property, we will have no recourse against Gramercy and its affiliates and the value of the GKK Property may be less than our estimated value of the GKK Property. We may incur substantial costs in remediating or repairing a GKK Property or in ensuring its compliance with governmental regulations. If we choose to and are able to make such capital expenditures, they would reduce returns to our stockholders. In addition, we may be unable to rent these GKK Properties on terms favorable to us, or at all, which could also reduce the returns to our stockholders.

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We were not able to conduct standard due diligence on or receive customary tenant estoppel certificates with respect to the GKK Properties. Because we did not receive tenant estoppel certificates or other assurances from the tenants of the GKK Properties, we may be subject to unknown liabilities relating to our leases with those tenants. Thus, the value of the GKK Properties may decline if we subsequently become subject to such liabilities pursuant to the leases related to the GKK Properties.

Under the Settlement Agreement, we indirectly took title to or, with respect to a limited number of the GKK Properties, indirectly took a leasehold interest in, the GKK Properties on an “as is” basis. We were not able to conduct standard due diligence on the GKK Properties nor were we able to receive tenant estoppel certificates or other assurances from the tenants of the GKK Properties before the transfers. Additionally, we did not receive representations, warranties and indemnities relating to the GKK Properties from Gramercy and/or its affiliates. As part of our standard diligence for real estate property acquisitions, we generally require the seller of a property we acquire to have the tenants of the property make certain certifications relating to their leases in an estoppel certificate. The topics covered generally include: (i) whether the lease is in full force and effect and has not been assigned, modified, supplemented or amended; (ii) whether the seller has satisfied all of the conditions required to be performed by it under the lease; (iii) whether any required payments or reimbursements by the seller to the tenant as a result of any tenant improvements have been received by the tenant; (iv) whether there are any existing claims, defenses or offsets that the tenant has against the enforcement of the lease by the seller; (v) whether any rent or related payment obligation has been paid more than one month in advance; and (vi) whether any security has been deposited with the seller.

Because we did not receive estoppel certificates or other similar certifications from the tenants of the GKK Properties covering these and other issues, we may be subject to unknown liabilities relating to the tenants’ leases. We could be subject to liability relating to, among other items, (i) payments owed by us, as landlord, to tenants under the leases, (ii) uncured defaults in the performance of landlord’s obligations under the tenants’ leases including, without limitation, maintenance on a property that has not been performed and should have been performed under the terms of the leases, (iii) rights of a tenant to extend its lease term, acquire additional space, or exercise rights of first refusal or other purchase options relating to certain GKK Properties that were agreed upon by and between Gramercy and/or its affiliates and a tenant, which may be evidenced by an agreement that we did not receive, and (iv) certain other causes of action by a tenant against us. Defending against or settling such liabilities, should they arise, could be costly and have an adverse effect on our stockholders’ investment.

Bank branches are specialty-use properties and therefore may be more difficult to lease or sell to non-banks.

Some of the GKK Properties are vacant and some of the bank branch tenants in these GKK Properties may not renew their leases or may terminate them before their expiration. Bank branches are specialty-use properties that are outfitted with vaults, teller counters and other customary installations and equipment specific to bank branches that require significant capital expenditures. Our revenue from and the value of these bank branches may be affected by a number of factors, including:


•	demand from financial institutions to lease or purchase properties that are configured to operate as bank branches;


•	the requirements by non-banking institutions for us to make significant capital expenditures to modify these specialty-use GKK Properties to suit their needs before these institutions will lease or purchase such GKK Properties;


•	a downturn in the banking industry generally and, in particular, among smaller community banks;


•	tenants exercising shedding rights;


•	bank branches with unfavorable lease terms; and


•	mergers among financial institutions resulting in the consolidation of properties and a reduction in the number of bank branches or other facilities needed by such institutions.

Further, if financial institutions do not increase the number of bank branches they operate, do not find the locations of our bank branches desirable, do not renew or extend their leases of our bank branches, or if they elect to make capital expenditures to materially modify other, non-bank branch properties rather than pay higher lease or acquisition prices for those of our GKK Properties that already are configured as bank branches, then our operating results and financial condition, as well as the returns to our stockholders, may suffer. Additionally, the sale or lease of these GKK Properties to entities other than financial institutions may be difficult due to the added cost and time of refitting the GKK Properties, which we do not expect to undertake.

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Certain of the GKK Properties, including some bank branches, are located in unattractive locations and are properties that we otherwise would not have elected to add to our portfolio, which could have an adverse effect on our operating results and financial condition, as well as the returns to our stockholders.

Certain of the GKK Properties are surplus bank branches that certain financial institutions owned before they were sold to Gramercy or were subsequently vacated by the financial institution. Were we not required to accept these properties as part of the Settlement Agreement, we otherwise likely would not have elected to add these GKK Properties to our portfolio. The characteristics of these bank branches, including the following, may make it difficult for us to lease or sell these GKK Properties and could have an adverse effect on our operating results and financial condition, as well as the returns to our stockholders. Some of these bank branches:


•	are in locations that overlap with other bank branches of the same financial institution, accumulated in connection with mergers and acquisitions with other financial institutions;


•	have low deposit levels as compared to other bank branches of the same financial institution;


•	are vacant; or


•	are located in unattractive areas.

The terms of the Settlement Agreement required us to take ownership of certain leasehold interests in various GKK Properties under which the amount of rent we pay to the property owner may exceed the rental income we receive from tenants.

Under the Settlement Agreement, we were required to assume leasehold interests that we otherwise likely would not have elected to assume. Such leasehold interests relate to properties we do not own, but under which we lease space from the property owner and then sub-lease this space to various tenants. In certain cases the rent that we are required to pay to the owner of the property exceeds the rental income that we receive from the various tenants. Such negative cash flow may continue throughout the life of the lease and may also have an adverse effect on our operating results and financial condition, as well as the returns to our stockholders.

Our inability to sell a property at the time and on the terms we want could limit the returns to our stockholders.

Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and reduce the value of our stockholders’ investment.

As a result of the transfers of the GKK Properties, a significant portion of our properties are leased to financial institutions, making us more economically vulnerable in the event of a downturn in the banking industry.

Because of the transfers of the GKK Properties, a significant portion of our revenue is derived from leases to financial institutions and as such, our portfolio has become less diversified. As of December 31, 2014, 47.1% of our annualized base rent was generated by leases to financial institutions. Individual banks, as well as the banking industry in general, may be adversely affected by negative economic and market conditions throughout the United States or in the local economies in which regional or community banks operate. Acquisitions of regional or community banks by larger financial institutions could lead to the closure of some of the bank branches formerly occupied by these regional or community banks. In addition, changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, may have an adverse impact on banks’ loan portfolios and allowances for loan losses. As a result, we may experience higher rates of lease default or terminations in the event of a downturn in the banking industry than we would if our tenant base were more diversified.

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Because of the transfers of the GKK Properties, Bank of America, N.A. represents a significant portion of the revenue generated by our real estate portfolio and the failure of this tenant to perform its obligations to us or to renew its leases upon expiration may adversely affect our cash flow and the returns to our stockholders.

Because of the transfers of the GKK Properties, as of December 31, 2014, Bank of America, N.A. represented approximately 21.0% of our real estate portfolio’s base rental income and occupied approximately 30.4% of our total rentable square feet. The default, financial distress or insolvency of Bank of America, N.A., or its failure to renew its leases with us upon expiration, could cause interruptions in the receipt of lease revenue from this tenant and the properties that it occupies and/or result in vacancies, which would reduce our revenue and increase operating costs until the affected properties are leased, and could decrease the ultimate value of the affected properties upon sale. We may be unable to lease the vacant properties at a comparable lease rate or at all, which could affect our operating results and financial condition as well as the returns to our stockholders. See Note 3, “Real Estate Held for Investment — Operating Leases” in the notes to our consolidated financial statements filed herewith.

Should GKK Stars or any of its affiliates declare bankruptcy or otherwise become the subject of an involuntary bankruptcy proceeding, our ability to indirectly retain title to or, with respect to a limited number of GKK Properties, indirectly retain a leasehold interest in, the GKK Properties would be threatened.

Any voluntary or involuntary bankruptcy filing by GKK Stars or any of its affiliates could have an adverse effect on our ability to indirectly retain title to or, with respect to a limited number of GKK Properties, indirectly retain a leasehold interest in, the GKK Properties, including the following:


•	Any transfers to us of equity interests in the entities owning the GKK Properties made within up to six years prior to a filing under some state bankruptcy codes potentially could be voided by a bankruptcy court as fraudulent transfers. If any such transfers are voided, it is possible that our liens on the GKK Properties subject to those transfers may not reattach with their existing priority.


•	A bankruptcy court could reject the Settlement Agreement, which could release GKK Stars from having to satisfy any of its remaining obligations under the Settlement Agreement.

•

The automatic stay imposed in certain bankruptcy actions would limit our, among other parties to the Settlement Agreement, ability to enforce the terms of the Settlement Agreement against parties with respect to whom there has been a bankruptcy filing, including preventing the exercise of remedies under the Settlement Agreement without prior bankruptcy court approval following notice and a hearing.

Costs imposed pursuant to laws and governmental regulations may reduce our net income and the overall return to our stockholders.

Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials, and other health and safety-related concerns.

Some of these laws and regulations may impose joint and several liability on the tenants, owners or operators of real property for the costs to investigate or remediate contaminated properties, regardless of fault, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. Our tenants’ operations, the condition of properties at the time we buy them, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties.

The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Any material expenditures, fines, penalties, or damages we must pay will reduce the value of our stockholders’ investment.

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The cost of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury or other damage claims could reduce the value of our stockholders’ investment.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances and governments may seek recovery for natural resource damage. The cost of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.

Except for GKK Properties and other properties to which we took title to through foreclosure or deed-in-lieu of foreclosure, all of our direct real estate investments were subject to Phase I environmental assessments at the time they were acquired. Some of the properties we have acquired are subject to potential environmental liabilities arising primarily from historic activities at or in the vicinity of the properties.

We own one property that is subject to activity use limitations (“AULs”) whereby the government has placed limitations on redevelopment of the property for certain uses, particularly residential uses. AULs are typically imposed on a property that has environmental contamination in exchange for less stringent environmental clean-up standards. In view of the location of the affected property, the environmental characteristics of the contaminants and the characteristics of the neighborhood, we do not believe that these AULs have a material impact on our portfolio valuation, but they could result in a depression of the value of the property, should we resell the property for uses different from its existing uses. The property subject to AULs is ADP Plaza, located in Portland, Oregon.

Under the Settlement Agreement, we indirectly took title to or, with respect to a limited number of the GKK Properties, indirectly took a leasehold interest in, the GKK Properties on an “as is” basis. As such, we were not able to inspect the GKK Properties or conduct standard due diligence on certain of the GKK Properties before the transfers. Additionally, we did not receive representations, warranties and indemnities relating to the GKK Properties from Gramercy and/or its affiliates. Thus, the value of the GKK Properties may decline if we subsequently discover environmental problems with the GKK Properties.

Costs associated with complying with the Americans with Disabilities Act may decrease the returns to our stockholders.

Our properties may be subject to the Americans with Disabilities Act of 1990, as amended (the “Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. Any funds used for Disabilities Act compliance will reduce our net income and the returns to our stockholders.

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Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows and the return on our stockholders’ investment.

There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase coverage against terrorism as a condition to providing mortgage loans. Such insurance policies may not be available at reasonable costs, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investment. In addition, other than any working capital reserve or other reserves we may establish, we have extremely limited sources of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower returns to stockholders.

Terrorist attacks and other acts of violence or war may affect the markets in which we operate, which could delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.

Terrorist attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. We have invested in and expect that we will continue to invest in major metropolitan markets. We may not be able to obtain insurance against the risk of terrorism because it may not be available or may not be available on terms that are economically feasible. The terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. The inability to obtain sufficient terrorism insurance or any terrorism insurance at all could limit our investment options as some mortgage lenders have begun to insist that specific coverage against terrorism be purchased by commercial owners as a condition of providing loans.

Risks Related to Real Estate-Related Investments

Our real estate-related investments are subject to the risks typically associated with real estate.

Our investments in mortgage and mezzanine loans and B-Notes are directly or indirectly secured by a lien on real property (or the equity interests in an entity that owns real property) that, upon the occurrence of a default on the loan, could result in our taking ownership of the property. The values of these properties may change after we acquire or originate the loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans. In this manner, real estate values could impact the values of our loan investments. Therefore, our real estate-related investments are subject to the risks typically associated with real estate, which are described above under the heading “— General Risks Related to Investments in Real Estate.”

Our investments in real estate-related loans are subject to interest rate fluctuations that affect our returns as compared to market interest rates; accordingly, the value of our stockholders’ investment in us is subject to fluctuations in interest rates.

With respect to our fixed rate, long-term loans, if interest rates rise, the loans could yield a return that is lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that loans are prepaid because we no longer receive the revenue generated by those loans and may not be able to reinvest the proceeds at as high of an interest rate. For these reasons, our returns on these loans and the value of our stockholders’ investment in us are subject to fluctuations in interest rates.

Our mortgage and mezzanine loan and B-Note investments are subject to delinquency, foreclosure and loss, which could result in losses to us.

Commercial real estate loans generally are secured by commercial real estate properties and are subject to risks of delinquency and foreclosure. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, occupancy rates, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies (including environmental legislation), natural disasters, terrorism, social unrest and civil disturbances.

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In the event of any default under a mortgage loan held by us, we will bear a risk of loss of principal and accrued interest to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. Foreclosure on a property securing a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the investment. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

If there is a default under a mortgage loan investment, we may not be able to repossess and sell the underlying property quickly. The resulting time delay could reduce the value of our investment in the defaulted mortgage loan. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the borrower raises defenses or counterclaims. In the event of default by a borrower, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.

Our mezzanine loan investment involves greater risks of loss than senior loans secured by the same properties.

Our mezzanine loan investment takes the form of a subordinated loan secured by a pledge of the ownership interests of the entity owning (directly or indirectly) the real property. These types of investments may involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.

Our investments in B-Notes may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.

We own two B-Notes. A B-Note is a mortgage loan typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders. Since each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks including, for example, the rights of holders of B-Notes to control the process following a borrower default may be limited.

Our investments in subordinated loans may be subject to losses.

We have invested in subordinated loans, such as mezzanine loans and B-Notes. In the event a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill periods”), and control decisions made in bankruptcy proceedings relating to borrowers.

Risks of cost overruns and non-completion of the renovation of the properties underlying loans we make or acquire may materially adversely affect our investments.

The renovation, refurbishment or expansion by a borrower under a mortgaged or leveraged property involves risks of cost overruns and non-completion. Costs of improvements to bring a property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Other risks may include: environmental risks and the risk that the construction, rehabilitation and subsequent leasing of the property is not completed on schedule. If such renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments on our investment and we may not recover some or all of our investment.

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A portion of our investments in loans may be illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.

The mezzanine loan we own is particularly illiquid due to its short life, its unsuitability for securitization and the greater difficulty of recoupment in the event of the borrower’s default. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited.

We depend on borrowers for the revenue generated by our real estate-related investments and, accordingly, such revenue and the returns to our stockholders are partially dependent upon the success and economic viability of such borrowers.

The success of our real estate-related investments materially depends on the financial stability of the borrowers under such investments. The inability of a single major borrower or a number of smaller borrowers to meet their payment obligations could result in reduced revenue or losses for us. In the event of a borrower default or bankruptcy, we may experience delays in enforcing our rights as a creditor, and such rights may be subordinated to the rights of other creditors. These events could negatively affect the returns to our stockholders and the value of our stockholders’ investment.

Prepayments can adversely affect the yields on our debt investments.

The yields on our debt investments may be affected by the rate of prepayments differing from our projections. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If such prepayments occur, the yield on our portfolio may decline. In addition, if our debt assets are not repaid when expected, our anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain debt investments.

Declines in the market values of our investments may adversely affect periodic reported results of operations and credit availability, which may reduce earnings and, in turn, the returns to our stockholders.

A portion of our assets may be classified for accounting purposes as “available-for-sale.” These investments are carried at estimated fair value and temporary changes in the market values of those assets will be directly charged or credited to stockholders’ equity without impacting net income on our income statement. Moreover, if we determine that a decline in the estimated fair value of an available-for-sale security below its amortized value is other-than-temporary, we will recognize a loss on that security on our income statement, which will reduce our earnings in the period recognized.

A decline in the market value of our assets may adversely affect us, particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we may have to sell assets at a time when we might not otherwise have chosen to do so. A reduction in credit available may reduce our earnings and, in turn, the returns to our stockholders.

Further, credit facility providers have required and in the future may require us to maintain a certain amount of cash reserves or to set aside unleveraged assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. In the event that we are unable to meet these contractual obligations, our financial condition could deteriorate rapidly.

Market values of our investments may decline for a number of reasons, such as changes in prevailing market rates, increases in defaults, increases in voluntary prepayments for our investments that are subject to prepayment risk, widening of credit spreads and downgrades of ratings of the securities by ratings agencies.

Our asset-specific loan loss reserve may not be sufficient to cover losses on loans we consider to be impaired.

Our asset-specific loan loss reserve relates to reserves for losses on loans considered impaired. We consider a loan to be impaired when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement or other documents relating to the loan. We also consider a loan to be impaired if we grant the borrower a concession through a modification of the loan terms or if we expect to receive assets (including equity interests in the borrower) in partial satisfaction of the loan. A reserve is established when the present value of payments expected to be received, observable market prices, the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) or amounts expected to be received in partial satisfaction of an impaired loan are lower than the carrying value of that loan. A portfolio-based loan loss reserve is a reserve against all of the loans in our portfolio that are not specifically reserved. It is based on estimated probabilities of both term and maturity default and estimated loss severities for the portfolio. Our provision for loan losses of $4.0 million, all of which related to asset-specific loan loss reserves as of December 31, 2014, may not be sufficient to cover losses on these loans.

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Risks Associated with Debt Financing

We incur and assume mortgage indebtedness, lines of credit and other borrowings, which increases our risk of loss due to potential foreclosure.

We obtain lines of credit and obtain or assume long-term financing that may be secured by our properties and other assets. We have acquired many of our real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt, or by taking title to properties that already had been pledged as security for debt we assumed in connection with taking title to such properties. We may also incur mortgage debt on properties that we already own in order to obtain capital to fund property improvements and other capital expenditures, and for other purposes. In addition, we may be forced to try to borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the dividends-paid deduction and excluding net capital gain). However, we can give our stockholders no assurance that we will be able to obtain such borrowings on satisfactory terms or at all.

Mortgage debt or the assumption of mortgage debt as part of taking title to a property increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of our stockholders’ investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We have given and may give full or partial guarantees to lenders of mortgage or other debt on behalf of the entities that own our properties. When we give a guarantee on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of all or a part of the debt or other amounts related to the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a mortgage secured by a single property could affect mortgages secured by other properties.

High mortgage rates or changes in underwriting standards may make it difficult for us to refinance properties, which could reduce our cash flow from operations and reduce the returns to our stockholders.

If mortgage debt is unavailable at reasonable rates, we run the risk of being unable to refinance part or all of our assets subject to such mortgage debt when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance properties, our income could be reduced. We may be unable to refinance or may only be able to partly refinance properties if underwriting standards, including loan to value ratios and yield requirements, among other requirements, are more strict than when we originally financed the properties. If any of these events occurs, our cash flow could be reduced and/or we might have to pay down existing mortgages. This, in turn, could cause us to require additional capital and may hinder our ability to raise capital by issuing more stock or by borrowing more money, reducing our stockholders’ overall returns.

Lenders have required and may continue to require us to enter into restrictive covenants relating to our operations, which could reduce the returns to our stockholders.

When providing financing, lenders have imposed, and in connection with future financings, may impose, restrictions on us that may reduce the returns to our stockholders and may affect our operating policies and our ability to incur additional debt. Loan agreements into which we enter may contain covenants that limit our ability to further mortgage a property or otherwise incur additional debt, or that prohibit us from discontinuing insurance coverage or replacing KBS Capital Advisors as our advisor. These or other limitations would decrease our operating flexibility and our ability to achieve our operating objectives.

Non-compliance with the financial covenants included in the documents evidencing our outstanding debt obligations may result in the lender imposing additional restrictions on our operations or constitute an event of default under such documents. Such events would harm our financial condition, results of operations and the return on our stockholders’ investment in us.

The documents evidencing our outstanding debt obligations typically include restrictive financial covenants, including that specified loan-to-value and debt service coverage ratios be maintained with respect to our financed properties before we can exercise certain rights under the documents relating to such properties. A breach of the financial covenants in these documents may result in the lender imposing additional restrictions on our operations, such as our ability to incur additional debt, or may allow the lender to impose cash traps with respect to cash flow from the property securing the loan. In addition, such a breach may constitute an event of default and the lender could require us to repay the debt immediately. If we fail to make such repayment in a timely manner, the lender may be entitled to take possession of any property securing the loan.

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Certain of the mortgage loans that we assumed in connection with the transfers of the GKK Properties could impose “cash traps”, which could adversely affect our financial condition and operating results.

Certain mortgage loans that we assumed in connection with the transfers of the GKK Properties could impose “cash traps” when the financial performance of the GKK Properties securing such loans fails to meet certain financial metrics. If enforced, these “cash traps” could adversely affect our financial condition and operating results. If the provisions relating to “cash traps” in these mortgage loan documents are triggered, we may be required to fund excess cash flow into reserve accounts with our mortgage lenders until compliance with the required metrics is achieved. In such event, our liquidity will be negatively impacted, which could have an adverse effect on our results of operations and financial condition.

Because of the long-term maturities, prepayment and defeasance penalties and fees and other restrictions of certain of our outstanding debt obligations secured by some of our real estate properties, including the GKK Properties, we may not be able to sell these real estate properties at the times and upon the terms that would maximize the proceeds generated by such sales to us, which could reduce our stockholders’ overall return.

As a result of the terms and conditions and, most significantly, the prepayment and defeasance penalties and fees, relating to certain of our debt obligations secured by our real estate properties, including some of the GKK Properties, we may be unable to sell such properties at the time or upon the terms we would prefer. Were we to sell any of these properties, the prepayment and defeasance penalties and fees could result in a significant reduction in net proceeds to us from the sale of the property. Thus, we may be forced to extend our hold period for these properties longer than we otherwise would in order to sell them after the expiration of these penalties and fees. Our inability to sell properties at the time and on the terms we want could reduce the value of our stockholders’ investment.

Increases in interest rates would increase the amount of our debt payments and reduce the returns to our stockholders.

We have incurred variable rate debt and expect that we will incur additional debt in the future. Increases in interest rates will increase the cost of that debt, which could reduce our cash flow from operations and the returns to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments.

We have broad authority to incur debt and high debt levels could decrease the value of our stockholders’ investment.

We limit our total liabilities to 75% of the cost (before deducting depreciation or other noncash reserves) of our tangible assets (although restrictive covenants contained in certain loan documents related to debt we have incurred may not allow us to borrow up to this amount), and we may exceed this limit if the majority of the conflicts committee approves each borrowing in excess of that limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of December 31, 2014, our borrowings and other liabilities were approximately 46% of both the cost (before deducting depreciation or other noncash reserves) and book value (before deducting depreciation) of our tangible assets, respectively. High debt levels would cause us to incur higher interest charges and higher debt service payments and may also be accompanied by restrictive covenants. These factors could result in a decline in the value of our stockholders’ investment.

Federal Income Tax Risks

Failure to qualify as a REIT would reduce our net earnings available for distribution.

Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Internal Revenue Code. If we fail to qualify as a REIT for any taxable year after electing REIT status, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year in which we lost our REIT status. Losing our REIT status would reduce our net earnings available for distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends-paid deduction and we would no longer be required to pay distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.

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Failure to qualify as a REIT would subject us to federal income tax, which would reduce the cash available for distribution to our stockholders.

We expect to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.

Our stockholders may have current tax liability on distributions they elected to reinvest in our common stock.

If our stockholders participated in our dividend reinvestment plan (which was terminated effective April 10, 2012), they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares were purchased at a discount to fair market value, if any. As a result, unless our stockholders are tax-exempt entities, they may have to use funds from other sources to pay their tax liability on the value of the shares of common stock received.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:

•

In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (which is determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income.


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

•

If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate. We elected foreclosure property status for the GKK Properties but do not believe such GKK Properties will be disposed of in a manner that results in this tax.


•	If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by one of our taxable REIT subsidiaries.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.

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From time to time, we may generate taxable income greater than our income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirements and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.

To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and reduce the value of our stockholders’ investment.

Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.

If (i) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (ii) we are a “pension-held REIT,” (iii) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or (iv) the residual Real Estate Mortgage Investment Conduit interests, or REMICs, we buy (if any) generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (iii), gains realized on the sale of common stock by such tax-exempt stockholder may be subject to federal income tax as unrelated business taxable income under the Internal Revenue Code.

If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.

In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our annual REIT taxable income (excluding net capital gain), determined without regard to the deduction for dividends paid. In order for a distribution to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distribution must not be “preferential dividend.” A distribution is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. There is no de minimis exception with respect to preferential dividends; therefore, if the IRS were to take the position that we paid a preferential dividend, we may be deemed to have failed the 90% distribution test, and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure.

The tax on prohibited transactions will limit our ability to engage in transactions that would be treated as sales for federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of assets, other than foreclosure property, deemed held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to dispose of loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level, even though the sales might otherwise be beneficial to us.

It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through taxable REIT subsidiaries. However, to the extent that we engage in such activities through taxable REIT subsidiaries, the income associated with such activities may be subject to full corporate income tax.

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Complying with REIT requirements may force us to liquidate otherwise attractive investments.

To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and residential and commercial mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Liquidation of assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (i) interest rate risk on liabilities incurred to carry or acquire real estate or (ii) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

We may be subject to adverse legislative or regulatory tax changes.

At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

Dividends payable by REITs do not qualify for the reduced tax rates.

The maximum tax rate for dividends payable to certain stockholders who are domestic individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates. While this tax treatment does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts or estates to perceive investments in REITs to be relatively less attractive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

The IRS has issued Revenue Procedure 2003-65, which provides a safe harbor pursuant to which a mezzanine loan that is secured by interests in a pass-through entity will be treated by the IRS as a real estate asset for purposes of the REIT tests, and interest derived from such loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We made investments in loans secured by interests in pass-through entities in a manner than complies with the various requirements applicable to our qualification as a REIT. To the extent, however, that any such loans do not satisfy all of the requirements for reliance on the safe harbor set forth in the Revenue Procedure, there can be no assurance that the IRS will not challenge the tax treatment of such loans, which could jeopardize our ability to qualify as a REIT.

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Retirement Plan Risks

If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or an owner of a retirement arrangement subject to Section 4975 of the Internal Revenue Code (such as an individual retirement account (“IRA”)) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.

There are special considerations that apply to employee benefit plans subject to the Employee Retirement Income Security Act (“ERISA”) (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that invest in our shares. Fiduciaries and IRA owners that invest the assets of such a plan or account in our common stock should satisfy themselves that:


•	the investment is consistent with their fiduciary and other obligations under ERISA and the Internal Revenue Code;


•	the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;


•	the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;


•	the investment in our shares, for which no public market currently exists, is consistent with the liquidity needs of the plan or IRA;


•	the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;


•	our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and


•	the investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

With respect to the annual valuation requirements described above, we will provide an estimated value for our common stock annually. We can make no claim whether such estimated value will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the Internal Revenue Service may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common stock. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions. For information regarding our estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities - Market Information” of this Annual Report on Form 10-K.

Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In addition, the investment transaction must be undone. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA owners should consult with counsel before making an investment in our common stock.


ITEM 1B.	UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments.


ITEM 2.	PROPERTIES

Real Estate Investments

As of December 31, 2014, our real estate portfolio consisted of 401 properties, including two properties that were held for sale. Our 399 properties held for investment encompassed approximately 10.2 million rentable square feet. The properties held for investment are located in 31 states and include office, industrial and bank branch properties. As of December 31, 2014, our portfolio held for investment was 79% occupied and the average annualized base rent per square foot of our real estate portfolio held for investment was $16.25 per square foot. The weighted-average remaining lease term of our real estate portfolio held for investment was 5.2 years as of December 31, 2014. For a discussion of our real estate portfolio, see Part I, Item 1, “Business” of this Annual Report on Form 10-K.

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Portfolio Lease Expirations

The following table reflects lease expirations of our 399 properties held for investment as of December 31, 2014:



Year of Expiration	Number of Leases Expiring	Annualized Base Rent (in thousands) ⁽¹⁾		% of Portfolio Annualized Base Rent Expiring		Leased Rentable Square Feet Expiring	% of Portfolio Leased Rentable Square Feet Expiring
Month-to-Month	51	$	905	0.7	%	101,318	1.3	%
2015	67	5,754		4.4	%	340,712	4.2	%
2016	79	8,093		6.2	%	435,367	5.4	%
2017	85	18,342		14.0	%	893,504	11.1	%
2018	53	7,166		5.5	%	341,029	4.3	%
2019	183	31,648		24.2	%	3,348,241	41.7	%
2020	29	6,073		4.6	%	202,597	2.5	%
2021	21	10,662		8.2	%	600,322	7.5	%
2022	17	13,704		10.5	%	492,731	6.1	%
2023	98	8,452		6.5	%	508,068	6.3	%
2024	9	9,161		7.0	%	500,915	6.2	%
Thereafter ⁽²⁾	40	10,784		8.2	%	268,938	3.4	%
Total	732	$	130,744	100.0	%	8,033,742	100.0	%

_____________________

⁽²⁾ Represents leases expiring at various dates from 2025 through 2027.

We assumed several leases related to the GKK Properties which contain shedding rights provisions. As of December 31, 2014, these shedding rights totaled approximately 0.3 million square feet and can be exercised at various dates during 2015 and 2016.

Concentration of Credit Risks

As of December 31, 2014, our highest tenant industry concentration (greater than 10% of our annualized base rent), of our 399 properties held for investment, was as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Finance	67	$	61,604	47.1	%

_____________________

As of December 31, 2014, no other tenant industries accounted for more than 10% of our annualized base rent.

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As of December 31, 2014, we had a concentration of credit risk related to leases, with the following tenant that represented more than 10% of our annualized base rent:

Annualized Base Rent Statistics

Tenant

Property

Tenant

Industry

Rentable Square Feet

% of Portfolio Rentable
Sq. Ft.
Leased

Annualized Base Rent ⁽¹⁾

(in thousands)

% of Portfolio Annualized Base Rent

Annualized Base Rent per Square Foot

Lease Expirations

Bank of America, N.A.

Various

Finance

3,093,593

30.4

27,465

21.0

8.88

⁽²⁾

_____________________

⁽²⁾ As of December 31, 2014, lease expiration dates ranged from 2015 through 2026 with a weighted-average remaining term of 5.2 years. Additionally, as of December 31, 2014, certain of Bank of America’s leases contained shedding rights provisions. These shedding rights totaled approximately 0.3 million square feet and can be exercised at various dates during the remainder of 2015 and 2016.


ITEM 3.	LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition. Nor are we aware of any such legal proceedings contemplated by government authorities.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

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PART II


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

Stockholder Information

As of March 3, 2015, we had approximately 187.6 million shares of common stock outstanding held by a total of approximately 42,000 stockholders. The number of stockholders is based on the records of DST Systems, Inc., which serves as our transfer agent.

Market Information

No public market currently exists for our shares of common stock, and we currently have no plans to list our shares on a national securities exchange. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase requirements. In addition, our charter prohibits the ownership of more than 9.8% of our stock by a single person, unless exempted by our board of directors. Consequently, there is the risk that our stockholders may not be able to sell their shares at a time or price acceptable to them.

We provide an estimated value per share to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligations pursuant to applicable FINRA and NASD Conduct Rules. This valuation was performed in accordance with the provisions of and also to comply with the IPA Valuation Guidelines. For this purpose, we estimated the value of the shares of our common stock as $4.52 per share as of December 31, 2014. This estimated value per share is based on our board of directors’ approval on December 9, 2014 of an estimated value per share of our common stock of $4.52 based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding, as of September 30, 2014. There were no material changes between (i) September 30, 2014 with respect to our other assets and our liabilities and (ii) December 9, 2014 to the net values of our assets and liabilities that impacted the overall estimated value per share.

The conflicts committee of our board of directors, composed solely of all of our independent directors, is responsible for the oversight of the valuation process, including the review and approval of the valuation and appraisal processes and methodologies used to determine our estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The estimated value per share was based upon the recommendation and valuation prepared by our advisor. Our advisor’s valuation of our real estate properties was based on either (i) appraisals of certain of our real estate properties performed by Duff & Phelps, an independent third party real estate valuation firm, and based on the methodologies and assumptions described further below; or (ii) the contractual sales prices less actual or estimated disposition costs and fees in the case of properties that were under contract to sell as of December 9, 2014 or properties sold subsequent to September 30, 2014 and prior to December 9, 2014.

We engaged Duff & Phelps to provide appraisals for all 15 of our historical real estate properties. In addition, we engaged Duff & Phelps to perform appraisals for all but seven of the 394 GKK Properties⁽¹⁾. Our historical real estate properties and the 387 GKK Properties appraised by Duff & Phelps are referred to herein collectively as the “Appraised Properties.” The seven GKK Properties not valued by Duff & Phelps either were under contract to sell as of December 9, 2014 or were sold subsequent to September 30, 2014 and prior to December 9, 2014. Duff & Phelps prepared appraisal reports summarizing key inputs and assumptions of its appraisals. Our advisor also performed valuations with respect to our real estate-related investments, cash, other assets, mortgage debt and other liabilities. The methodologies and assumptions used to determine the estimated value of our assets and liabilities are described further below.

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⁽¹⁾During the year ended December 31, 2011, we entered into the Settlement Agreement. The real estate properties indirectly transferred to us under the Settlement Agreement are referred to herein as the “GKK Properties”. The estimated value of the GKK Properties was $1,806.1 million at closing of the Settlement Agreement. In addition, we assumed $1,544.0 million of mortgage debt and approximately $203.0 million of other net assets at closing of the Settlement Agreement.

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Our advisor used the appraised values of the Appraised Properties and the contractual sales prices less actual or estimated disposition costs and fees in the case of properties that were under contract to sell as of December 9, 2014 or properties sold subsequent to September 30, 2014 and prior to December 9, 2014, together with our advisor’s estimated value of each of our other assets and our liabilities, to calculate and recommend an estimated value per share of our common stock. Upon (i) the conflicts committee’s receipt and review of our advisor’s valuation report, including our advisor’s summary of the appraisal reports prepared by Duff & Phelps and our advisor’s estimated value of each of our other assets and our liabilities, (ii) the conflicts committee’s review of the reasonableness of our estimated value per share resulting from our advisor’s valuation process, and (iii) in light of other factors considered by the conflicts committee and the conflicts committee’s own extensive knowledge of our assets and liabilities, the conflicts committee concluded that the estimated value per share proposed by our advisor was reasonable and recommended to the board of directors that it adopt $4.52 as the estimated value per share of our common stock. The board of directors unanimously agreed to accept the recommendation of the conflicts committee and approved $4.52 as the estimated value per share of our common stock, which determination is ultimately and solely the responsibility of the board of directors.

The table below sets forth the calculation of our estimated value per share as of December 9, 2014 as well as the calculation of our prior estimated value per share as of December 18, 2013:



	December 9, 2014 Estimated Value per Share			December 18, 2013 Estimated Value per Share ⁽⁴⁾			Change in Estimated Value per Share
Real estate properties - historical ⁽¹⁾	$	3.35		$	4.14		$	(0.79	)
Real estate - GKK Properties ⁽¹⁾	3.88			4.05			(0.17		)
Foreclosed real estate held for sale	0.13			0.11			0.02
Real estate loans receivable	0.13			0.13			—
Real estate securities	—			0.10			(0.10		)
Investments in joint ventures	0.14			0.15			(0.01		)
Cash and restricted cash ⁽²⁾	0.88			1.63			(0.75		)
Other assets	0.11			0.09			0.02
Mortgage and other debt obligations⁽³⁾	(3.85		)	(5.17		)	1.32
Other liabilities	(0.25		)	(0.38		)	0.13
Distributions paid on December 5, 2013	—			(0.40		)	0.40
Estimated value per share	$	4.52		$	4.45		$	0.07
Estimated enterprise value premium	None assumed			None assumed			None assumed
Total estimated value per share	$	4.52		$	4.45		$	0.07

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⁽¹⁾ The decrease in value was primarily due to real estate property sales.

⁽²⁾ The decrease in cash and restricted cash was primarily due to the paydown of mortgage and other debt obligations, partially offset by proceeds from real estate property sales and undistributed operating cash flows.

⁽³⁾ The decrease in mortgage and other debt obligations was primarily due to the repayment of principal related to asset sales, refinancing activities, the extinguishment of debt related to discounted payoff agreements, the extinguishment of debt related to foreclosure or deed-in-lieu of foreclosure and ongoing principal amortization payments.

⁽⁴⁾The December 18, 2013 estimated value per share was based upon the recommendation and valuation of our advisor. Our advisor’s recommendation and valuation of our real estate properties was based on either (i) appraisals of certain of our real estate properties performed by Duff & Phelps or (ii) the contractual sales prices less actual or estimated closing costs in the case of properties that were under contract to sell as of December 18, 2013 or properties sold subsequent to September 30, 2013 and prior to December 18, 2013. Our advisor performed valuations of our real estate-related investments, cash, other assets, mortgage debt and other liabilities. For more information relating to the December 18, 2013 estimated value per share and the assumptions and methodologies applied by our advisor and Duff & Phelps, see our Current Report on Form 8-K filed with the SEC on December 19, 2013.

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The increase in our estimated value per share from the previous estimate was primarily due to the items noted in the table below, which reflect the significant contributors to the increase in the estimated value per share from $4.45 to $4.52. The changes are not equal to the change in values of each asset and liability group presented in the table above due to asset sales, debt repayments and extinguishment of debt and other factors, which caused the value of certain asset or liability groups to change with no impact to our fair value of equity or the overall estimated value per share.



	Change in Estimated Value per Share
December 18, 2013 estimated value per share	$	4.45
Changes to estimated value per share
Real Estate
Properties held as of September 30, 2014 - historical	0.04
Properties held as of September 30, 2014 - GKK Properties	0.12
Properties sold through September 30, 2014	(0.03		)
Capital expenditures on real estate	(0.14		)
Total changes related to real estate	(0.01		)
Mortgage debt	(0.05		)	⁽¹⁾
Real estate securities	0.02			⁽²⁾
Undistributed operating cash flows	0.09			⁽³⁾
Other changes, net	0.02
Total change in estimated value per share	$	0.07		⁽⁴⁾
December 9, 2014 estimated value per share	$	4.52

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⁽¹⁾The change in the value of the mortgage debt is mostly due to a $52.0 million paydown on the BBD2 Loan in April 2014 which significantly reduced the loan to value ratio for this loan. This paydown reduced the assumed market rate of interest in the discounted cash flow analysis used to value the loan, while the contractual rate remained constant, and resulted in a substantial increase in the fair value of debt related to this loan which is now valued at a premium to its face value.

⁽²⁾As of September 30, 2014, we did not own any real estate securities. The change in estimated value per share related to real estate securities reflects the realized gain from the disposition of 4,705,898 shares of Gramercy Property Trust, Inc., partially offset by the unrealized gain as of September 30, 2013.

⁽³⁾Amount includes operating cash flows through September 30, 2014 from real estate properties that were under contract to sell as of December 9, 2014 or were sold subsequent to September 30, 2014 and prior to December 9, 2014, which will not provide future operating cash flows.

⁽⁴⁾The reconciliation of total change in estimated value per share does not reflect $7.3 million used to fulfill redemption requests in accordance with our share redemption program, as such redemptions resulted in no change to the estimated value per share because, while our net asset value was reduced by the $7.3 million of redemptions, it also resulted in a corresponding decrease in the number of shares outstanding.

As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets less the fair value of our liabilities according to GAAP, nor does it represent a liquidation value of our assets and liabilities or the amount our shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not under contract to sell, debt prepayment penalties or defeasance costs that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt. As of December 9, 2014, we had no potentially dilutive securities outstanding that would impact the estimated value per share of our common stock.

Our estimated value per share takes into consideration any potential liability related to a participation fee our advisor is entitled to upon meeting certain stockholder return thresholds in accordance with the advisory agreement. For purposes of determining the estimated value per share, our advisor calculated the potential liability related to this incentive fee based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties, and determined that there would be no liability related to the participation fee.

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Methodology

Our goal in calculating an estimated value per share is to arrive at a value that is reasonable and supportable using what we and our advisor deem to be appropriate valuation and appraisal methodologies and assumptions and a process that is in compliance with the IPA Valuation Guidelines. The following is a summary of the valuation and appraisal methodologies used to value our assets and liabilities:

Real Estate

Independent Valuation Firm: Duff & Phelps⁽¹⁾ was selected by our advisor and approved by our conflicts committee and board of directors to appraise the Appraised Properties. Duff & Phelps is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our advisor. The compensation we pay to Duff & Phelps is based on the scope of work and not on the appraised values of the Appraised Properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation, as well as the requirements of the state where each real property is located. Each appraisal was reviewed, approved and signed by an individual with the professional designation of MAI (Member of the Appraisal Institute). The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its appraisal reports, Duff & Phelps did not, and was not requested to, solicit third party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.

Duff & Phelps collected all reasonably available material information that it deemed relevant in appraising the Appraised Properties. Duff & Phelps relied in part on property-level information provided by our advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements; and (iii) information regarding recent or planned capital expenditures.

In conducting its investigation and analyses, Duff & Phelps took into account customary and accepted financial and commercial procedures and considerations as it deemed relevant. Although Duff & Phelps reviewed information supplied or otherwise made available by us or our advisor for reasonableness, it assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to it by any other party and did not independently verify any such information. With respect to operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Duff & Phelps, Duff & Phelps assumed that such forecasts and other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, board of directors and/or our advisor. Duff & Phelps relied on us to advise it promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.

In performing its analyses, Duff & Phelps made numerous other assumptions as of various points in time with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond its and our control, as well as certain factual matters. For example, unless specifically informed to the contrary, Duff & Phelps assumed that we had clear and marketable title to each of the Appraised Properties, that no title defects existed, that any improvements were made in accordance with law, that no hazardous materials were present or had been present previously, that no deed restrictions existed, and that no changes to zoning ordinances or regulations governing use, density or shape were pending or being considered. Furthermore, Duff & Phelps’ analyses, opinions and conclusions were necessarily based upon market, economic, financial and other circumstances and conditions existing as of or prior to the date of the appraisal, and any material change in such circumstances and conditions may affect Duff & Phelps’ analyses and conclusions. Duff & Phelps’ appraisal reports contain other assumptions, qualifications and limitations that qualify the analyses, opinions and conclusions set forth therein. Furthermore, the prices at which the Appraised Properties may actually be sold could differ from Duff & Phelps’ analyses.

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⁽¹⁾ Duff & Phelps is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public securities offerings, private placements, business combinations and similar transactions. We engaged Duff & Phelps to deliver appraisal reports with respect to the Appraised Properties and Duff & Phelps will receive fees upon the delivery of such reports. In addition, we have agreed to indemnify Duff & Phelps against certain liabilities arising out of this engagement. In the two years prior to December 9, 2014, Duff & Phelps and its affiliates provided a number of commercial real estate, appraisal, valuation and financial advisory services for us and our affiliates and received fees in connection with such services. In connection with prior valuations of our shares, we engaged Duff & Phelps to provide valuations of certain of our properties and to provide a review, based on a limited set of procedures, of the methodologies and assumptions used by our advisor in valuing certain properties. Duff & Phelps and its affiliates may from time to time in the future perform other commercial real estate, appraisal, valuation and financial advisory services for us and our affiliates in transactions related to the properties that are the subjects of the appraisals, so long as such other services do not adversely affect the independence of the applicable Duff & Phelps appraiser as certified in the applicable appraisal reports.

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Although Duff & Phelps considered any comments received from us or our advisor to its appraisal reports, the final appraised values of the Appraised Properties were determined by Duff & Phelps. The appraisal reports for the Appraised Properties are addressed solely to us to assist our advisor in calculating and recommending an updated estimated value per share of our common stock. The appraisal reports are not addressed to the public and may not be relied upon by any other person to establish an estimated value per share of our common stock and do not constitute a recommendation to any person to purchase or sell any shares of our common stock. In preparing its appraisal reports, Duff & Phelps did not solicit third-party indications of interest for the Appraised Properties. While Duff & Phelps is responsible for providing appraisals of the Appraised Properties, Duff & Phelps is not responsible for, did not calculate, and did not participate in, the determination of the estimated value per share of our common stock.

The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to Duff & Phelps’ appraisal reports. All of the Duff & Phelps appraisal reports, including the analyses, opinions and conclusions set forth in such reports, are qualified by the assumptions, qualifications and limitations set forth in the respective appraisal reports.

Historical Real Estate Properties: As of September 30, 2014, we owned 15 historical real estate properties (excluding the GKK Properties), consisting of office and industrial properties. We engaged Duff & Phelps to provide appraisals for these historical investments. Duff & Phelps appraised our historical real estate properties, using various methodologies including the direct capitalization approach, 10-year discounted cash flow analyses and sales comparison approach and relied primarily on 10-year discounted cash flow analyses for the final appraisals of each of these 15 historical real estate properties. Duff & Phelps calculated the discounted cash flow value of these historical real estate properties using property-level cash flow estimates, terminal capitalization rates and discount rates that fall within ranges it believes would be used by similar investors to value the properties we own based on recent comparable market transactions, adjusted for unique property and market-specific factors.

The total appraised value of our 15 historical real estate properties using the appraisal methodologies described above was $631.5 million, compared to a total cost basis, including acquisition fees and expenses, capital expenditures and leasing commissions through September 30, 2014, of $855.8 million.

The following summarizes the key assumptions that Duff & Phelps used in the 10-year discounted cash flow models to appraise these 15 historical real estate properties:



	Range in Values	Weighted-Average Basis
Terminal capitalization rate	6.25% to 8.50%	7.18%
Discount rate	7.25% to 9.25%	7.89%
Net operating income compounded annual growth rate ⁽¹⁾	1.01% to 20.99%	6.11%

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⁽¹⁾ The net operating income compounded annual growth rates (the “CAGRs”) reflect both the contractual and market rents and reimbursements (in cases where the contractual lease period is less than the hold period) net of expenses over the holding period. The range of CAGRs shown is the constant annual rate at which the net operating income is projected to grow to reach the net operating income in the final year of the hold period for each of the properties.

While we believe that Duff & Phelps’ assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the appraised value of our historical real estate properties and thus, our estimated value per share. The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points, assuming all other factors remain unchanged, with respect to the 15 real estate properties referenced in the table above. Additionally, the table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged.



	Increase (Decrease) on the Estimated Value per Share due to
	Decrease of 25 basis points		Increase of 25 basis points			Decrease of 5%		Increase of 5%
Terminal capitalization rates	$	0.07	$	(0.07	)	$	0.11	$	(0.11	)
Discount rates	0.07		(0.07		)	0.11		(0.11		)

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GKK Properties: As of September 30, 2014, the GKK Properties consisted of 394 bank branch properties, office buildings, operations centers and other properties. We engaged Duff & Phelps to provide appraisals for 387 of the GKK Properties. The total appraised value for these 387 GKK Properties totaled $723.6 million. With respect to seven GKK Properties that were under contract to sell as of December 9, 2014 or were sold subsequent to September 30, 2014 and prior to December 9, 2014, the estimated value was based on contractual sale prices, net of actual or expected selling costs. The estimated value for these seven GKK Properties was $7.2 million. Based on the appraisal and valuation methodologies described above, the estimated value of the GKK Properties was $730.8 million as of September 30, 2014, compared to a total cost basis, including capital expenditures and leasing commissions through September 30, 2014, of $681.9 million.

Duff & Phelps appraised 324 of the GKK Properties using the direct capitalization method, which applies a current market capitalization rate to the properties’ net operating income. In cases where a property was not stabilized, the estimated value was based on a stabilized property reduced for capital costs that would be incurred to lease up the property. The following summarizes the key assumption that was used to appraise these 324 GKK Properties:



Range in Direct Capitalization Rate		Weighted-Average Direct Capitalization Rate
5.75% to 10.50%		7.67%

While we believe that Duff & Phelps’ assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the appraised value of the 324 GKK Properties that Duff & Phelps appraised using the direct capitalization method and thus, our estimated value per share. The table below illustrates the impact on the estimated value per share if the direct capitalization rates were adjusted by 25 basis points, assuming all other factors remain unchanged, with respect to the 324 GKK Properties appraised by Duff & Phelps using the direct capitalization method. Additionally, the table below illustrates the impact on the estimated value per share if the capitalization rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged.



	Increase (Decrease) on the Estimated Value per Share due to
	Decrease of 25 basis points		Increase of 25 basis points			Decrease of 5%		Increase of 5%
Capitalization rates	$	0.13	$	(0.12	)	$	0.19	$	(0.17	)

Duff & Phelps appraised 36 of the GKK Properties by performing a 10-year discounted cash flow analysis. The following table summarizes the key assumptions that were used by Duff & Phelps in the discounted cash flow models to appraise these 36 GKK Properties:



	Range in Values	Weighted-Average Basis
Terminal capitalization rate	7.00% to 9.75%	8.20%
Discount rate	8.00% to 12.00%	9.90%
Net operating income CAGR ⁽¹⁾	(6.57)% to 15.35%	2.94%

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⁽¹⁾The net operating income CAGRs reflect both the contractual and market rents and reimbursements (in cases where the contractual lease period is less than the hold period) net of expenses over the holding period. The range of CAGRs shown is the constant annual rate at which the net operating income is projected to grow to reach the net operating income in the final year of the hold period for each of the properties.

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While we believe that Duff & Phelps’ assumptions and inputs are reasonable, a change in these assumptions and inputs would change the appraised value of these 36 GKK Properties and thus, our estimated value per share. The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points, assuming all other factors remain unchanged, with respect to the 36 GKK Properties valued by Duff & Phelps using the discounted cash flow analysis. Additionally, the table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged.



	Increase (Decrease) on the Estimated Value per Share due to
	Decrease of 25 basis points		Increase of 25 basis points			Decrease of 5%		Increase of 5%
Terminal capitalization rates	$	0.01	$	(0.01	)	$	0.01	$	(0.01	)
Discount rates	0.01		(0.01		)	0.01		(0.01		)

The remaining 27 GKK Properties were appraised by Duff & Phelps using a present value cash flow analysis as we do not have a fee ownership interest in these GKK Properties (with the exception of one vacant building with a long-term ground lease), but instead hold leasehold interests in the properties.

Finally, each 1% change in the appraised or estimated value of our real estate properties, including both historical properties and GKK Properties, would result in a change of $0.07 to our estimated value per share, assuming all other factors remain unchanged.

Foreclosed Real Estate Held-for-Sale: As of September 30, 2014, we owned three foreclosed condominium units in the Tribeca Building that were held-for-sale, all of which were either sold subsequent to September 30, 2014 and prior to December 9, 2014 or under contract to sell as of December 9, 2014. Our foreclosed condominiums held-for-sale were valued at the contractual sales prices less actual or estimated disposition costs and fees. As of September 30, 2014, the fair value and the carrying value of our foreclosed condos held-for-sale was $24.5 million and $19.4 million, respectively.

Real Estate Loans Receivable: The estimated values for our real estate loans receivable are equal to the GAAP fair values disclosed in our Quarterly Report on Form 10-Q for the period ended September 30, 2014, but do not equal the book value of the loans in accordance with GAAP. The values of the real estate loans receivable were estimated by applying a discounted cash flow analysis over the remaining expected lives of the investments, excluding any potential transaction costs. The cash flow estimates used in the analysis during the term of the investments were based on the investments’ contractual cash flows, which we anticipate we will receive. The expected cash flows for the loans were discounted at rates that we expect a market participant would require for instruments with similar characteristics, including remaining loan term, loan-to-value ratios, type of collateral, current performance, credit enhancements and other factors.

As of September 30, 2014, we owned four real estate loans receivable, consisting of a mortgage loan, a mezzanine loan and two B-notes. The cost of our real estate loans receivable, including origination fees and costs but excluding principal repayments, was $28.1 million. As of September 30, 2014, the fair value of our investments in real estate loans receivable was $25.3 million. The weighted-average discount rate applied to the cash flows from the real estate loans receivable, which have a weighted-average remaining term of 2.4 years, was approximately 15.4%. Similar to the valuation for real estate, a change in the assumptions and inputs would change the fair value of our real estate loans receivable and thus, our estimated value per share. Assuming all other factors remain unchanged, a decrease or increase in the discount rates of 25 basis points would have no impact on the estimated value per share and, additionally, a 5% decrease or increase in the discount rates would have no impact on the estimated value per share.

Participation Interest in Unconsolidated Joint Venture: As of September 30, 2014, we held an interest in an unconsolidated joint venture through which we have been granted a participation interest in certain future profits generated by the joint venture. Our advisor estimated the value of our participation interest in this unconsolidated joint venture using a discounted cash flow analysis of the expected distributions to us. The cash flow estimates used in the analysis were based on our participation interest in the estimated cash flows available after paying debt service and making distributions to the other joint venture members until such members have received distributions sufficient to recover the entire amount of their invested capital plus a stipulated return. The cash flow estimates of the joint venture were reviewed by our advisor. As of September 30, 2014, the carrying value and estimated fair value of our investment in this unconsolidated joint venture were $0 and $27.3 million, respectively. The estimated value of our unconsolidated joint venture for purposes of our estimated value per share was calculated by applying a 12% discount rate to the estimated cash flows for a total value of $0.14 per share. Assuming all other factors remain unchanged, a decrease or increase in the discount rate of 25 basis points would have no impact on the estimated value per share. Additionally, a 5% decrease or increase in the discount rates would have no impact on the estimated value per share.

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Notes Payable: The estimated values of our notes payable are equal to the GAAP fair values as disclosed in our Quarterly Report on Form 10-Q for the nine months ended September 30, 2014 and adjusted for a $0.2 million increase due to slight changes in the assumed market interest rate, based on the appraised values of two real estate properties which were finalized subsequent to the filing of the Quarterly Report on Form 10-Q. The estimated value of our notes payable does not equal the book value of the loans in accordance with GAAP. The GAAP fair values of our notes payable were determined using a discounted cash flow analysis. The discounted cash flow analysis was based on projected cash flow over the remaining loan terms, including extensions we expect to exercise, and on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio and type of collateral.

As of September 30, 2014, the fair value and carrying value of our notes payable were $725.8 million and $696.8 million, respectively. The fair value includes the $0.2 million adjustment due to slight changes in the assumed market interest rate mentioned above. The weighted-average discount rate applied to the future estimated debt payments, which have a weighted-average remaining term of 2.71 years, was approximately 3.66%. The table below illustrates the impact on our estimated value per share if the discount rates were adjusted by 25 basis points, assuming all other factors remain unchanged, with respect to our notes payable. Additionally, the table below illustrates the impact on the estimated value per share if the discount rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged.



	Increase (Decrease) on the Estimated Value per Share due to
	Decrease of 25 basis points			Increase of 25 basis points		Decrease of 5%			Increase of 5%
Discount rates	$	(0.02	)	$	0.02	$	(0.02	)	$	0.02

Other Assets and Liabilities: The carrying values of a majority of our other assets and liabilities are considered to equal their fair values due to their short maturities or liquid nature. Our advisor eliminated certain balances, such as straight-line rent receivables, lease intangible assets and liabilities, accrued capital expenditures, deferred financing costs, unamortized lease commissions and unamortized lease incentives, for the purpose of the valuation due to the fact that the value of those balances was already considered in the valuation of the respective investments. Our advisor has also excluded redeemable common stock, as temporary equity does not represent a true liability to us and the shares that this amount represents are included in our total outstanding shares of common stock for purposes of calculating the estimated value per share of our common stock.

Limitations of Estimated Value Per Share

As mentioned above, we are providing this estimated value per share to assist broker dealers that participated in our initial public offering in meeting their customer account statement reporting obligations. This valuation was performed in accordance with the provisions of and also to comply with IPA Valuation Guidelines. The estimated value per share set forth above first appeared on the December 31, 2014 customer account statements that were mailed in January 2015. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and this difference could be significant. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to GAAP.

Accordingly, with respect to the estimated value per share, we can give no assurance that:


•	a stockholder would be able to resell his or her shares at this estimated value;


•	a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of our company;


•	our shares of common stock would trade at the estimated value per share on a national securities exchange;


•	another independent third-party appraiser or third-party valuation firm would agree with our estimated value per share; or


•	the methodology used to calculate our estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.

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Further, the estimated value per share as of December 9, 2014 is based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2014. The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share does not take into account estimated disposition costs and fees for real estate properties that are not under contract to sell, debt prepayment penalties or defeasance costs that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt. We currently expect to utilize our advisor and/or an independent valuation firm to update the estimated value per share in December of each year, in accordance with the IPA Valuation Guidelines.

Historical Estimated Values per Share

The historical reported estimated values per share of our common stock approved by our board of directors are set forth below:



Estimated Value per Share	Effective Date of Valuation	Filing with the Securities and Exchange Commission
$4.45	December 18, 2013	Current Report on Form 8-K, filed December 19, 2013
$5.18	December 18, 2012	Current Report on Form 8-K, filed December 19, 2012
$5.16	March 22, 2012	Current Report on Form 8-K, filed March 26, 2012
$7.32	December 2, 2010	Current Report on Form 8-K, filed December 10, 2010
$7.17	November 20, 2009	Current Report on Form 8-K, filed November 23, 2009

Distribution Information

We elected to be taxed as a REIT under the Internal Revenue Code and have operated as such beginning with our taxable year ended December 31, 2006. To maintain our qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our REIT taxable income (computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.

Distributions declared during 2014 and 2013, aggregated by quarter, are as follows (dollars in thousands, except per share amounts):



	2014
	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total
Total Distributions Declared ⁽¹⁾	$	—	$	—	$	4,712	$	4,700	$	9,412
Total Per Share Distribution ⁽¹⁾	$	—	$	—	$	0.025	$	0.025	$	0.050



	2013
	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total
Total Distributions Declared ⁽²⁾	$	—	$	—	$	—	$	75,015	$	75,015
Total Per Share Distribution ⁽²⁾	$	—	$	—	$	—	$	0.395	$	0.395

_____________________

⁽¹⁾ On September 30, 2014, our board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on September 30, 2014. We paid this distribution on October 30, 2014. On December 9, 2014, our board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on December 29, 2014. We paid this distribution on January 2, 2015.

⁽²⁾ On November 6, 2013, our board of directors declared a distribution in the amount of $0.3950 per share of common stock, or an aggregate amount of $75.0 million, to stockholders of record as of the close of business on November 8, 2013. We paid this distribution on December 5, 2013.

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The tax composition of our distributions declared for the years ended December 31, 2014 and 2013 was as follows:



	2014		2013
Ordinary Income	—	%	—	%
Capital Gain	—	%	—	%
Return of Capital	100	%	100	%
Total	100	%	100	%

For more information with respect to our distributions paid, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Distributions.”

On March 20, 2012, our board of directors approved the suspension of monthly distribution payments in order to manage our reduced cash flow from operations and to redirect available funds to reduce our debt. Our primary focus in approving this suspension was and is the repayment of certain maturing debt obligations. Our focus in 2015 is to manage our existing investment portfolio, which includes strategically selling assets and exploring value-add opportunities for existing assets (primarily the GKK Properties), refinancing upcoming maturities and paying down debt and distributing available cash to stockholders. Reducing our debt will allow us to hold certain assets in our portfolio to improve their value and the returns to our stockholders. We plan to make certain strategic asset sales and, from time to time, may declare special distributions to our stockholders that would be funded with the net proceeds from those asset sales or from cash flow from other sources. We will continue our existing strategy of selling assets when we believe the assets have reached the stage that disposition will assist in improving returns to our stockholders. In addition, to the extent that we have excess operating cash flows, from time to time our board of directors may declare distributions in future periods based on cash flow generated by our real estate and real estate-related investments. We intend to maintain adequate cash reserves for liquidity, capital expenditures, debt repayments, future special redemptions under our share redemption program and other future capital needs.

As a result of general economic conditions over the last several years, our portfolio has experienced declines in cash flow from a number of our investments. Economic conditions have impacted our real estate investments resulting in a general decline in the occupancy of our portfolio, an important element to the continued growth of our portfolio, that has resulted in lower current cash flow. Tenant-specific issues, including bankruptcy and down sizing, have resulted in decreases in our operating cash flow because these tenants have terminated their leases early, not renewed their leases or have not paid their contractual rent to us. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of increases in future rental concessions, including three or more months of free rent to retain tenants who are up for renewal or to sign new tenants, may result in additional decreases in cash flow. Asset sales over the past four years and expected future asset sales have resulted in and will result in further decreases in operating cash flow. In addition, we have experienced a decline in cash flow from our real estate-related investments, as current economic conditions have impacted the ability of some borrowers under our loans to make contractual interest payments to us. In particular, our investments in mezzanine and mortgage loans have been impacted as the operating performance and values of buildings directly or indirectly securing our investment positions have decreased from the date of our acquisition or origination of these investments. In such instances, some of the borrowers have not been able to refinance their debt to us or sell the collateral at a price sufficient to repay our note balances in full when they become due.

Due to these factors, we may not generate sufficient operating cash flow on a quarterly basis to fund our operations. If our cash flow from operations deteriorates, we will be more dependent on asset sales to fund our operations and for our liquidity needs. These factors could also reduce our stockholders’ overall investment return.

In connection with the change to our distribution policy in March 2012 to suspend monthly distribution payments, our board of directors terminated our dividend reinvestment plan effective April 10, 2012. In addition, our board of directors amended and restated our share redemption program to provide only for redemptions sought in connection with special redemptions. Such redemptions are subject to an annual dollar limitation, which was $10.0 million in the aggregate for the calendar year 2014, and further subject to the limitations described in the share redemption program. On December 9, 2014, our board of directors approved the same annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by our board of directors), and further subject to the limitations described in our share redemption program. Based on historical redemption activity, we believe the $10.0 million redemption limitation for the calendar year 2015 will be sufficient for these special redemptions. During each calendar year, the annual dollar limitation for our share redemption program will be reviewed and adjusted from time to time, if necessary.

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Our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including those discussed under “Forward-Looking Statements,” Part I, Item 1, “Business — Market Outlook — Real Estate and Real Estate Finance Markets,” Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those factors include: the future operating performance of our investments in the existing real estate and financial environment; the success and economic viability of our tenants; the ability of our borrowers and their sponsors to continue to make their debt service payments and/or to repay their loans upon maturity; our ability to refinance existing indebtedness at comparable terms; changes in interest rates on our variable rate debt obligations; our ability to sell assets to cover our liquidity needs; our ability to successfully operate and sell the GKK Properties given current economic conditions and the concentration of the GKK Properties in the financial services sector; the significant debt obligations we assumed with respect to the GKK Properties; and our advisor’s limited experience operating and selling bank branch properties.

Equity Compensation Plan

We have adopted an Employee and Independent Director Incentive Stock Plan to (i) furnish incentives to individuals chosen to receive share-based awards because we consider them capable of improving our operations and increasing our profits; (ii) encourage selected persons to accept or continue employment with our advisor; and (iii) increase the interest of our independent directors in our welfare through their participation in the growth in the value of our shares of common stock. The total number of shares of common stock we have reserved for issuance under the Employee and Independent Director Incentive Stock Plan is equal to 5% of our outstanding shares at any time, but not to exceed 10,000,000 shares. No awards had been granted under the plan as of March 3, 2015. We have no timetable for the grant of any awards under the Employee and Independent Director Incentive Stock Plan, and our board of directors has adopted a policy that prohibits grants of any awards of shares of common stock to any person under the Employee and Independent Director Stock Plan. Our Employee and Independent Director Incentive Stock Plan was approved prior to the commencement of our public offering by our board of directors and initial stockholder, KBS Capital Advisors, our advisor.

Unregistered Sales of Equity Securities

During the year ended December 31, 2014, we did not sell any equity securities that were not registered under the Securities Act of 1933.

Share Redemption Program

We have a share redemption program pursuant to which stockholders may only sell their shares to us in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program and, together with redemptions sought in connection with a stockholder’s death, “special redemptions”). Such redemptions are subject to an annual dollar limitation and are further subject to the other limitations described in our share redemption program, including:

•

During each calendar year, redemptions sought in connection with special redemptions are limited to an annual amount determined by our board of directors. The annual dollar limitation for our share redemption program may be reviewed and adjusted from time to time during the year. The dollar limitation for calendar year 2014 was $10.0 million in the aggregate. On December 9, 2014, our board of directors approved an annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by our board of directors), and further subject to the limitations described in our share redemption program.


•	During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.


•	We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

We do not currently expect to have funds available for ordinary redemptions in the future.

If we cannot repurchase all shares presented for redemption in any month because of the limitations on redemptions set forth in the program, then we will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in our most recently effective registration statement as such registration statement has been amended or supplemented, then we would redeem all of such stockholder’s shares.

The complete share redemption program document is filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 and is available at the SEC’s website at http://www.sec.gov.

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The only redemptions we made under our share redemption program in 2014 were those that qualified as, and met the requirements for, special redemptions under our share redemption program. In 2014, we fulfilled all redemption requests that qualified as special redemptions under our share redemption program with cash flow from operations and proceeds from the sale of properties in 2014 and 2013.

In accordance with our share redemption program, the redemption price for all stockholders whose shares are eligible for redemption is equal to the most recent estimated value per share of our common stock as of the redemption date. On December 18, 2013, our board of directors approved an estimated value per share of our common stock of $4.45 (unaudited), based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, as of September 30, 2013, with the exception of our appraised real estate properties, which were appraised as of November 30, 2013. Effective for redemption dates from December 2013 through November 2014, the redemption price for all stockholders whose shares were eligible for redemption was $4.45 per share (unaudited).

On December 9, 2014, our board of directors approved an estimated value per share of our common stock of $4.52 per share (unaudited), based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of September 30, 2014. The change in redemption price became effective for the December 2014 redemption date and will be effective until the estimated value per share is updated. For a full description of the methodologies and assumptions used to value our assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Market Information.” We currently expect to utilize our advisor and/or an independent valuation firm to update the estimated value per share in December of each year.

During the year ended December 31, 2014 we redeemed shares pursuant to our share redemption program as follows:



Month	Total Number of Shares Redeemed ⁽¹⁾	Average Price Paid Per Share			Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2014	156,005	$	4.45	⁽²⁾	⁽³⁾
February 2014	83,817	$	4.45	⁽²⁾	⁽³⁾
March 2014	126,050	$	4.45	⁽²⁾	⁽³⁾
April 2014	79,866	$	4.45	⁽²⁾	⁽³⁾
May 2014	122,753	$	4.45	⁽²⁾	⁽³⁾
June 2014	139,889	$	4.45	⁽²⁾	⁽³⁾
July 2014	145,439	$	4.45	⁽²⁾	⁽³⁾
August 2014	148,491	$	4.45	⁽²⁾	⁽³⁾
September 2014	139,732	$	4.45	⁽²⁾	⁽³⁾
October 2014	330,727	$	4.45	⁽²⁾	⁽³⁾
November 2014	176,937	$	4.45	⁽²⁾	⁽³⁾
December 2014	121,480	$	4.52	⁽²⁾	⁽³⁾
Total	1,771,186

_____________________

⁽¹⁾ We announced commencement of our share redemption program on April 6, 2006 and amendments to the program on August 16, 2006 (which amendment became effective on December 14, 2006), August 1, 2007 (which amendment became effective on September 13, 2007), August 14, 2008 (which amendment became effective on September 13, 2008), March 26, 2009 (which amendment became effective on April 26, 2009), May 13, 2009 (which amendment became effective on June 12, 2009), March 26, 2012 (which amendment became effective on April 25, 2012) and March 13, 2013 (which amendment became effective on April 12, 2013).

⁽²⁾ In accordance with our share redemption program, the redemption price for all stockholders is equal to the most recent estimated value per share of our common stock as of the redemption date (described above).

⁽³⁾ We limit the dollar value of shares that may be redeemed under our share redemption program as described above. During the year ended December 31, 2014, we redeemed $7.9 million of shares of common stock. The only redemptions we made under our share redemption program during the year ended December 31, 2014 were those that qualified as, and met the requirements for, special redemptions under our share redemption program. For the year ended December 31, 2014, we fulfilled all redemption requests that qualified as special redemptions under our share redemption program. On December 9, 2014, our board of directors approved an annual dollar limitation for redemptions of $10.0 million in the aggregate for the calendar year 2015.

We may amend, suspend or terminate the program upon 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

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ITEM 6.	SELECTED FINANCIAL DATA

The following selected financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below (in thousands, except share and per share amounts):



	As of December 31,
	2014			2013			2012			2011			2010
Balance sheet data
Total real estate and real estate-related investments, net	$	1,159,478		$	1,335,604		$	1,820,366		$	3,084,354		$	2,204,198
Total assets	1,376,167			1,744,897			2,303,555			3,504,788			2,433,390
Total notes payable and repurchase agreements	658,098			962,282			1,320,533			2,299,208			1,479,015
Total liabilities	763,394			1,089,004			1,522,140			2,644,531			1,548,506
Redeemable common stock	10,000			10,000			10,000			45,376			45,382
Total KBS Real Estate Investment Trust, Inc. stockholders’ equity	602,773			645,893			771,415			814,881			861,838
	For the Years Ended December 31,
	2014			2013			2012			2011			2010
Operating data
Total revenues	$	212,465		$	218,304		$	218,093		$	143,574		$	131,316
(Loss) income from continuing operations ⁽¹⁾	(27,389		)	(88,240		)	(78,367		)	(63,691		)	8,221
(Loss) income from continuing operations per common share - basic and diluted ⁽¹⁾	$	(0.14	)	$	(0.46	)	$	(0.41	)	$	(0.34	)	$	0.05
Net loss attributable to common stockholders	(21,266		)	(46,495		)	(43,142		)	(19,338		)	(90,352		)
Net loss per common share, basic and diluted	$	(0.11	)	$	(0.24	)	$	(0.23	)	$	(0.10	)	$	(0.50	)
Other data
Cash flows provided by operating activities	$	26,487		$	9,506		$	34,438		$	39,059		$	53,388
Cash flows provided by investing activities	84,727			184,803			888,678			189,322			166,931
Cash flows used in financing activities	(263,930		)	(237,496		)	(722,529		)	(326,298		)	(123,840		)
Distributions declared	$	9,412		$	75,015		$	16,227		$	98,776		$	95,761
Distributions declared per common share ⁽²⁾	0.050			0.395			0.085			0.525			0.525
Weighted-average number of common shares outstanding, basic and diluted	188,891,977			190,454,153			191,547,385			188,134,294			182,437,352
Reconciliation of funds from operations ⁽³⁾
Net loss attributable to common stockholders	$	(21,266	)	$	(46,495	)	$	(43,142	)	$	(19,338	)	$	(90,352	)
Depreciation of real estate assets	41,173			41,897			43,172			25,985			17,414
Depreciation of real estate assets - discontinued operations	—			3,855			27,221			34,917			25,721
Amortization of lease-related costs	30,440			33,848			38,792			24,849			18,412
Amortization of lease-related costs - discontinued operations	—			2,659			30,878			24,287			19,126
Impairment charges on real estate	10,117			40,190			31,882			6,833			—
Impairment charges on real estate - discontinued operations	257			8,975			37,218			45,744			123,453
Gain on sales of foreclosed real estate held for sale	(1,108		)	(378		)	(127		)	(134		)	(2,011		)
Gain on sales of real estate, net	(2,282		)	—			—			—			—
Gain on sales of real estate, net - discontinued operations	(4,797		)	(47,997		)	(53,691		)	(5,141		)	(5,646		)
Gain on sale of real estate securities	(4,410		)	(10,470		)	(25,456		)	—			—
Adjustments for noncontrolling interest - consolidated entity ⁽⁴⁾	—			—			—			(2,053		)	(27,699		)
FFO	$	48,124		$	26,084		$	86,747		$	135,949		$	78,418

_____________________

⁽¹⁾ Amounts include certain properties in continuing operations that were held for sale or sold as of December 31, 2014 in accordance with ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). See Note 7 “Real Estate Held for Sale and Discontinued Operations.” for more information on the Company's real estate held for sale and discontinued operations as of December 31, 2014.

⁽²⁾ Distributions declared per common share assumes each share was issued and outstanding each day from January 1, 2010 through February 28, 2012 and was outstanding as of November 8, 2013. Distributions for the period from January 1, 2010 through February 28, 2012 were based on daily record dates and calculated at a rate of $0.00143836 per share per day. For more information related to distributions declared per common share for the years ended December 31, 2014 and 2013, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Distribution Information.”

⁽³⁾ We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding 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), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. In connection with NAREIT’s Accounting and Financial Standards Hot Topics, we are excluding impairment charges on real estate assets from our calculation of FFO. We have also restated FFO from prior periods to exclude these impairment charges. NAREIT believes that impairment charges on real estate assets are often early recognition of losses on prospective sales of properties, and therefore, the exclusion of these impairments is consistent with the exclusion of gains and losses recognized from the sales of real estate. Although these losses are included in the calculation of net income (loss), we have excluded these impairment charges in our calculation of FFO because impairments do not impact the current operating performance of our investments, and may or may not provide an indication of future operating performance. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. 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 provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO includes adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization. Accordingly, FFO should not be considered as an alternative to net income as an indicator of our operating performance.

⁽⁴⁾ The noncontrolling interest holder’s share of our consolidated venture’s real estate depreciation was $1.7 million and $1.8 million, respectively, in 2011 and 2010. Its share of amortization of lease-related costs was $0.3 million and $1.2 million, respectively, in 2011 and 2010.

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

The following discussion and analysis should be read in conjunction with the “Selected Financial Data” above and our accompanying consolidated financial statements and the notes thereto. Also see “Forward-Looking Statements” preceding Part I, Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.”

Overview

We are a Maryland corporation that was formed on June 13, 2005 to invest in a diverse portfolio of real estate properties and real estate-related investments. We elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2006 and we intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our Operating Partnership, of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by KBS Capital Advisors LLC (“KBS Capital Advisors”), our external advisor, pursuant to an advisory agreement. Our advisor owns 20,000 shares of our common stock. We have no paid employees.

As of December 31, 2014, we owned or, with respect to a limited number of properties, held a leasehold interest in, 401 real estate properties (of which two properties were held for sale), including the GKK Properties. In addition, as of December 31, 2014, we owned four real estate loans receivable, a participation interest with respect to a real estate joint venture and the Tribeca Building with 62 condominium units acquired through foreclosure, of which two condominium units were owned by us and were held for sale.

Our charter requires that we seek stockholder approval of our liquidation if our shares of common stock are not listed on a national securities exchange by November 2012, unless a majority of our independent directors determines that liquidation is not then in the best interest of our stockholders. Pursuant to our charter requirement, the conflicts committee assessed our portfolio of investments and related debt financings, including the assets and liabilities transferred to us under the Settlement Agreement in satisfaction of certain debt obligations owed to us by wholly owned subsidiaries of Gramercy. The conflicts committee also considered the prepayment penalties associated with certain debt obligations assumed by us under the Settlement Agreement. Taking into consideration our portfolio and current market conditions, in November 2012, in November 2013, and in November 2014, the conflicts committee unanimously determined that liquidation is not now in the best interests of our stockholders. Our charter requires that the conflicts committee revisit the issue of liquidation at least annually. Given the factors noted above, the conflicts committee believes it is likely it may reach the same conclusion next year.

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Market Outlook – Real Estate and Real Estate Finance Markets

The following discussion is based on management’s beliefs, observations and expectations with respect to the real estate and real estate finance markets.

Impact on Our Real Estate Investments

Impact on Our Real Estate-Related Investments

Impact on Our Financing Activities

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Liquidity and Capital Resources

Our principal demands for funds during the short- and long-term are for the payment of operating expenses, capital expenditures and general and administrative expenses and to pay down debt obligations in order to refinance loans with near term maturities. To date, we have had six primary sources of capital for meeting our cash requirements:


•	Proceeds from our primary offering, which closed in 2008;


•	Debt financings, including mortgage loans, repurchase agreements and credit facilities;


•	Proceeds from common stock issued under our dividend reinvestment plan (which terminated effective April 10, 2012);


•	Cash flow generated by our real estate and real estate-related investments;


•	Proceeds from the sales of real estate, real estate loans receivable and real estate securities; and


•	Principal repayments on our real estate loans receivable.

We ceased offering shares of common stock in our primary offering on May 30, 2008. We do not currently plan to acquire or originate additional real estate or real estate-related investments. We intend to use our cash on hand, proceeds from asset sales and principal repayments on our real estate loans receivable as our primary sources of immediate and long-term liquidity. To the extent available, we also intend to use cash flow generated by our real estate and real estate-related investments and funds available under our credit facilities. However, we have suffered and/or expect to suffer declines in cash flows from these sources.

In connection with the change to our distribution policy, our board of directors terminated our dividend reinvestment plan effective April 10, 2012. In addition, our board of directors amended and restated our share redemption program to provide only for special redemptions. Such redemptions are subject to an annual dollar limitation. On December 18, 2013, our board of directors approved an annual dollar limitation for redemptions of $10.0 million in the aggregate for the calendar year 2014 (subject to review and adjustment during the year by our board of directors), and further subject to the limitations described in the share redemption program document. On December 9, 2014, our board of directors approved the same annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by our board of directors), and further subject to the limitations described in the share redemption program document. Based on historical redemption activity, we believe the $10.0 million redemption limitation for the calendar year 2015 will be sufficient for these special redemptions. During each calendar year, the annual dollar limitation for our share redemption program will be reviewed and adjusted from time to time, if necessary.

Our focus in 2015 is: to manage our existing investment portfolio, which includes strategically selling assets and exploring value-add opportunities for existing assets, primarily the GKK Properties; refinancing upcoming maturities and paying down debt; and distributing available cash to stockholders. Reducing our debt will allow us to hold certain assets in our portfolio to improve their value and the returns to our stockholders. We plan to make certain strategic asset sales and, from time to time, may declare special distributions to our stockholders that would be funded with the net proceeds from those asset sales or from cash flow from other sources. We will continue our existing strategy of selling assets when we believe the assets have reached the stage that disposition will assist in improving returns to our stockholders. In addition, to the extent that we have excess operating cash flows, from time to time our board of directors may declare distributions in future periods based on cash flow generated by our real estate and real estate-related investments. We intend to maintain adequate cash reserves for liquidity, capital expenditures, debt repayments, future share redemptions and other future capital needs.

Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate investments is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of December 31, 2014, our real estate held for investment was 79% occupied.

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Our real estate-related investments generate cash flow in the form of interest income, which is reduced by the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate-related investments is primarily dependent on the operating performance of the underlying collateral and the borrowers’ ability to make debt service payments. As of December 31, 2014, the borrower under the Sandmar Mezzanine Loan was delinquent.

As a result of the factors described above, we may experience declines in future cash flows from our real estate and real estate-related investments and we expect an increased need for capital to cover leasing costs and capital improvements needed to improve the performance of our real estate assets.

For the year ended December 31, 2014, we met our cash needs for capital expenditures and the payment of debt obligations with cash on hand and proceeds from asset sales. We met our operating cash needs during the same period through cash flow generated by our real estate and real estate related investments. We believe that potential proceeds from the sale of real estate, cash flow from operations, potential proceeds from the sale or payoff of real estate loans receivable and cash on hand will be sufficient to meet our liquidity needs for 2015.

Cash Flows from Operating Activities

As of December 31, 2014, we owned or, with respect to a limited number of properties, held a leasehold interest in 401 real estate properties (of which two properties were held for sale). In addition, as of December 31, 2014, we owned four real estate loans receivable, a participation interest with respect to a real estate joint venture and the Tribeca Building with 62 condominium units acquired through foreclosure, of which two condominium units were owned by us and held for sale.

During the year ended December 31, 2014, net cash provided by operating activities was $26.5 million, compared to $9.5 million of net cash provided by operating activities during the year ended December 31, 2013. Net cash from operations increased in 2014 primarily due to the timing of payments for operating expenses, the release of restricted cash held by the lender under a mortgage loan and a decrease in interest expense as a result of the repayment of debt.

Cash Flows from Investing Activities

Net cash provided by investing activities was $84.7 million for the year ended December 31, 2014. The significant sources and uses of net cash provided by investing activities were as follows:


•	$93.3 million of cash provided from the sale of real estate;


•	$27.4 million of cash used for improvements to real estate;


•	$8.9 million of cash provided from the sale of foreclosed real estate held for sale;


•	$7.8 million of cash provided from the sale of real estate securities; and


•	a $2.0 million decrease in restricted cash for capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities was $263.9 million for the year ended December 31, 2014. The significant uses of cash for financing activities were as follows:


•	$252.6 million of net cash used for the repayment of debt as a result of $293.4 million of principal payments on notes payable and the payment of $1.7 million of deferred financing costs, partially offset by proceeds from notes payable of $42.5 million;


•	$7.9 million of cash used for redemptions of common stock;


•	$4.7 million of net cash used for distributions; and


•	offset by a $1.3 million decrease in restricted cash for debt service obligations.

In addition to using our capital resources to meet our debt service obligations, for capital expenditures and for operating costs, we use our capital resources to make certain payments to our advisor and during our offering we made certain payments to our dealer manager. We also reimburse our advisor and dealer manager for certain costs they incur on our behalf. We pay our advisor fees in connection with the management and disposition of our assets.

Among the fees payable to our advisor is an asset management fee. With respect to investments in real estate, we pay our advisor a monthly asset management fee equal to one-twelfth of 0.75% of the amount actually paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition fees and expenses related thereto. In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment.

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With respect to investments in loans and any investments other than real estate, we pay our advisor a monthly asset management fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination fees and expenses related thereto) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination fees and expenses related to the acquisition or funding of such investment, as of the time of calculation.

With respect to an investment that has suffered an impairment in value, reduction in cash flow or other negative circumstances, such investment may either be excluded from the calculation of the asset management fee described above or included in such calculation at a reduced value that is recommended by our advisor and our management and then approved by a majority of our independent directors, and this change in the fee shall be applicable to an investment upon the earlier to occur of the date on which (i) such investment is sold, (ii) such investment is surrendered to a person other than the company, our direct or indirect wholly owned subsidiary or a joint venture or partnership in which we have an interest, (iii) our advisor determines that it will no longer pursue collection or other remedies related to such investment, or (iv) our advisor recommends a revised fee arrangement with respect to such investment. As of December 31, 2014, we excluded our interest in an unconsolidated joint venture from the calculation of asset management fees and reduced the asset management fee calculation for our investment in the Tribeca Building to reflect sales of condominium units and we will continue to adjust the asset management fee calculation to reflect future sales. We also calculate the asset management fee for the GKK Properties based on the original cost of our investment in the GKK Mezzanine Loan, rather than on the gross value of the GKK Properties we own or in which we hold a leasehold interest. However, once the gross value of the GKK properties falls below the original cost of our investment in the GKK Mezzanine Loan, we will calculate the asset management fee based on the gross value of the GKK Properties. As of December 31, 2014, we had not determined to calculate the asset management fee at an adjusted value for any other investments or to exclude any other investments from the calculation of the asset management fee.

On November 8, 2014, we renewed the advisory agreement with our advisor.

As of December 31, 2014, we had $58.7 million of cash and cash equivalents.

As of December 31, 2014, our borrowings and other liabilities were approximately 46% of both the cost (before deducting depreciation or other noncash reserves) and book value (before deducting depreciation) of our tangible assets. We limit our total liabilities to 75% of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets; however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our limitation and we disclose such borrowing to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for exceeding the total liabilities limitation.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of December 31, 2014 (in thousands):



	Payments Due During the Years Ending December 31,
Contractual Obligations	Total		2015		2016-2017		2018-2019		Thereafter
Outstanding debt obligations related to historical portfolio⁽¹⁾	$	243,449	$	—	$	243,449	$	—	$	—
Outstanding debt obligations related to the GKK Properties⁽¹⁾	$	421,179	$	15,651	$	237,323	$	134,695	$	33,510
Interest payments on outstanding debt obligations related to historical portfolio⁽²⁾	$	10,037	$	7,213	$	2,824	$	—	$	—
Interest payments on outstanding debt obligations related to the GKK Properties⁽²⁾	$	83,018	$	23,586	$	37,613	$	17,233	$	4,586
Operating leases⁽³⁾	$	86,206	$	17,185	$	29,552	$	4,857	$	34,612

_____________________

⁽¹⁾ Amounts include principal payments under notes payable based on maturity dates of debt obligations as of December 31, 2014.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts and weighted-average interest rates as of December 31, 2014. We incurred interest expense of $41.0 million, excluding amortization of deferred financing costs and the amortization of debt discount and premium totaling $5.0 million, during the year ended December 31, 2014.

⁽³⁾ Amounts relate to future minimum lease payments under non-cancelable building and ground leases.

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Loan Maturities and Defaults

During the year ended December 31, 2014, we: entered into a discounted payoff agreement with respect to a loan secured by one of our historical real estate investments with an outstanding principal balance of $26.8 million (the “Bridgeway Technology Center Mortgage Loan”); entered into a deed-in-lieu of foreclosure and transferred the GKK Properties that secured a mortgage loan we assumed pursuant to the Settlement Agreement with an outstanding principal balance of $6.1 million (the “BOA Windsor Mortgage Portfolio Loan”) to the lender in full satisfaction of the debt and other obligations due under the loan; transferred a GKK Property that secured a mortgage loan we assumed pursuant to the Settlement Agreement with an outstanding principal balance of $37.6 million (the “801 Market Street Mortgage Loan”) to the lender in connection with a foreclosure; and transferred a GKK Property that secured a mortgage loan we assumed pursuant to the Settlement Agreement with an outstanding principal balance of $14.6 million (the “Jenkins Court Mortgage Loan”) to the lender in connection with a foreclosure.

Bridgeway Technology Center Mortgage Loan

Beginning in June 2013, we failed to meet the monthly debt service payment requirements of the Bridgeway Technology Center Mortgage Loan and defaulted on this loan. As a result of the default, on June 12, 2013, the lender declared the total outstanding principal amount of $26.8 million together with any accrued interest, applicable default interest and any other interest and late charges immediately due and payable. The Bridgeway Technology Center Mortgage Loan matured on August 1, 2013. On April 14, 2014, we entered into an agreement with the lender to satisfy all amounts owed under the Bridgeway Technology Center Mortgage Loan, including the outstanding principal balance of $26.8 million and accrued and unpaid interest of $2.1 million, at a discounted payoff amount of $25.6 million, resulting in a gain on extinguishment of debt of $3.3 million.

BOA Windsor Mortgage Portfolio Loan

The BOA Windsor Mortgage Portfolio Loan matured on October 31, 2012 and on February 14, 2013, proceedings relating to the foreclosure of the properties securing the loan were commenced. On February 21, 2014, we entered into agreements for deed-in-lieu of foreclosure and transferred the properties securing the BOA Windsor Mortgage Portfolio Loan to the lender in full satisfaction of the debt and other obligations due under the loan.

As a result of the deed-in-lieu of foreclosure, we recorded a gain on extinguishment of debt of $1.8 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $7.0 million and the carrying value of the real estate properties and other assets which secured the loan of approximately $5.2 million, upon transfer of the properties securing the loan.

801 Market Street Mortgage Loan

The 801 Market Street Mortgage Loan matured on February 1, 2013 and as a result of the maturity, the lender commenced foreclosure proceedings and sought a judgment against us in the amount of $35.3 million, together with additional interest, fees, charges and costs recoverable under the loan documents. Effective as of June 17, 2013, we and the lender agreed to the appointment of a receiver to manage the property securing the 801 Market Street Mortgage Loan (“801 Market Street”) during the foreclosure proceedings. Upon the appointment of a receiver, we were precluded from any participation in the management of, or access to income or any financial information with respect to, 801 Market Street. The foreclosure sale of 801 Market Street took place on July 1, 2014 and title to the property transferred to the purchaser as of August 9, 2014, at which point we derecognized the property. In connection with the transfer of title to 801 Market Street to the purchaser, the lender released us from all debt and other obligations due under the 801 Market Street Mortgage Loan, with the exception of certain obligations described in the transaction documents which survive the transfer of title to 801 Market Street to the purchaser.

During the years ended December 31, 2014, 2013 and 2012, we recorded revenues of $4.1 million, $8.6 million and $8.1 million, respectively, related to 801 Market Street. During the years ended December 31, 2014, 2013 and 2012, we recorded expenses of $5.0 million, $10.8 million and $20.2 million, respectively, related to 801 Market Street. We were not involved in the management of, and were unable to obtain any financial information related to, 801 Market Street between the time the receiver was appointed and the time title to the property transferred to the purchaser. Revenues and expenses during this period were estimated primarily based on historical operations of 801 Market Street prior to the appointment of the receiver.

As a result of the foreclosure sale, we recorded a gain on extinguishment of debt of $12.6 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $43.8 million and the carrying value of 801 Market Street and the other assets which secured the loan of approximately $31.2 million, upon transfer of the assets securing the loan.

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Jenkins Court Mortgage Loan

Beginning in June 2013, we failed to meet the monthly debt service payment requirements of the Jenkins Court Mortgage Loan and defaulted on this loan. On or about August 20, 2013, the lender commenced foreclosure proceedings and sought a judgment against us in the amount of $13.2 million, together with additional interest, fees, charges and costs recoverable under the loan documents. Effective as of September 24, 2013, we and the lender agreed to the appointment of a receiver to manage the property securing the loan (“Jenkins Court”) during the foreclosure proceedings. Upon the appointment of a receiver, we were precluded from any participation in the management of, or access to income or any financial information with respect to, Jenkins Court. The foreclosure sale of Jenkins Court took place on June 3, 2014 and title to Jenkins Court transferred to the purchaser as of July 24, 2014, at which point, we derecognized Jenkins Court. In connection with the transfer of title to the purchaser, the lender released us from all debt and other obligations related to the Jenkins Court Mortgage Loan, with the exception of certain obligations described in the transaction documents which survive the transfer of title to Jenkins Court to the purchaser.

During the years ended December 31, 2014, 2013 and 2012, we recorded revenues of $1.3 million, $2.3 million and $2.7 million, respectively, related to Jenkins Court. During the years ended December 31, 2014, 2013 and 2012, we recorded expenses of $2.6 million, $4.5 million and $3.9 million, respectively, related to Jenkins Court. We were not involved in the management of, and were unable to obtain any financial information related to, Jenkins Court between the time the receiver was appointed and the time title to Jenkins Court transferred to the purchaser. Revenues and expenses during this period were estimated primarily based on historical operations of Jenkins Court prior to the appointment of the receiver.

As a result of the foreclosure sale, we recorded a gain on extinguishment of debt of $3.6 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $12.2 million and the carrying value of Jenkins Court and the other assets which secured the loan of approximately $8.6 million, upon transfer of the assets securing the loan.

Debt Covenants

The documents evidencing our outstanding debt obligations typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties. A breach of the financial covenants in these documents may result in the lender imposing additional restrictions on our operations, such as restrictions on our ability to incur additional debt, or may allow the lender to impose “cash traps” with respect to cash flow from the property securing the loan. In addition, such a breach may constitute an event of default and the lender could require us to repay the debt immediately. If we fail to make such repayment in a timely manner, the lender may be entitled to take possession of any property securing the loan. As of December 31, 2014, the Company was in compliance with these debt covenants.

Asset Management Services Agreement Related to the GKK Properties

On March 30, 2012, we, through an indirect wholly owned subsidiary (“KBS Acquisition Sub”), entered into an Asset Management Services Agreement (the “Services Agreement”) with the Property Manager with respect to the GKK Properties. Pursuant to the Services Agreement, the Property Manager agreed to provide, among other services: standard asset management services, assistance related to dispositions, accounting services and budgeting and business plans for the GKK Properties (collectively, the “Services”). The Property Manager is not affiliated with us or KBS Acquisition Sub.

On December 19, 2013, KBS Acquisition Sub entered into an amended and restated asset management services agreement (the “Amended Services Agreement”) with the Property Manager. The effective date of the Amended Services Agreement was December 1, 2013. Pursuant to the Amended Services Agreement, we made a payment in the amount of $12.0 million to the Property Manager in satisfaction of the profit participation provisions under the Services Agreement. In addition, as compensation for the Services, we agreed to pay the Property Manager: (i) an annual fee of $7.5 million plus all GKK Property-related expenses incurred by the Property Manager, (ii) subject to certain terms and conditions in the Amended Services Agreement, a profit participation interest based on a percentage (ranging from 10% to 30%) of the amount by which the gross fair market value or gross sales price of certain identified portfolios of GKK Properties exceeds the sum of (a) an agreed-upon baseline value for such GKK Property portfolios plus (b) new capital expended to increase the value of GKK Properties within the portfolios and expenditures made to pay for tenant improvements and leasing commissions related to these GKK Properties as of the measurement date, and (iii) a monthly construction oversight fee equal to a percentage of construction costs for certain construction projects at the GKK Properties overseen by the Property Manager.

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Results of Operations

Overview

As of December 31, 2013, we owned or, with respect to a limited number of properties, held a leasehold interest in, 427 real estate properties, including eight properties held for non-sale disposition and 12 properties (of which 11 properties were GKK Properties) classified as held for sale, four real estate loans receivable (one of which was impaired), a participation interest with respect to a real estate joint venture and the Tribeca Building with 62 condominium units acquired through foreclosure, of which three condominium units were owned by us and were held for sale. Subsequent to December 31, 2013, we sold one historical office property, four historical industrial properties and 11 GKK Properties; terminated the lease of three properties in which we held a leasehold interest; transferred two GKK Properties to the lenders in connection with foreclosure proceedings; and designated two properties as held for sale. In addition, we transferred five GKK Properties, which were security under the BOA Windsor Mortgage Portfolio Loan, to the lender in exchange for our release from the debt outstanding and other obligations related to this mortgage loan. As a result, as of December 31, 2014, we owned or, with respect to a limited number of properties, held a leasehold interest in, 401 real estate properties, including two properties (one of which was a GKK Property) classified as held for sale. Also, as of December 31, 2014, we owned four real estate loans receivable (one of which was impaired), a participation interest with respect to a real estate joint venture and the Tribeca Building with 62 condominium units acquired through foreclosure, of which two condominium units were owned by us and held for sale.

In accordance with our early adoption of ASU 2014-08, properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on our consolidated statements of operations. Properties that were classified as held for sale in financial statements issued prior to reporting periods beginning January 1, 2014 will remain in discontinued operations on our consolidated statement of operations. Accordingly, as of December 31, 2014, we classified one historical real estate property as held for sale and disposed of six real estate properties, two other properties in connection with foreclosure proceedings and a portfolio of five properties in connection with a deed-in-lieu of foreclosure that were not classified as held for sale in the financial statements issued for reporting periods prior to January 1, 2014. In accordance with the early adoption of ASU 2014-08, the operations of these properties are included in continuing operations on our consolidated statements of operations. Our results of operations for the year ended December 31, 2014 are not indicative of those expected in future periods due to anticipated asset sales. In general, we expect that our revenues and expenses related to our portfolio will decrease in future periods due to disposition activity.

Comparison of the year ended December 31, 2014 versus the year ended December 31, 2013

The following table provides summary information about our results of operations for the year ended December 31, 2014 and 2013 (dollar amounts in thousands):



	Years Ended December 31,						Increase (Decrease)			Percentage Change		$ Change Due to GKK Properties			$ Change Due to Historical Real Estate Properties Held Throughout Both Periods
	2014			2013			Increase (Decrease)			Percentage Change		$ Change Due to GKK Properties
Rental income	$	151,351		$	160,014		$	(8,663	)	(5	)%	$	(4,838	)	$	(3,825	)
Tenant reimbursements	54,366			51,306			3,060			6	%	3,221			(161		)
Interest income from real estate loans receivable	3,077			3,258			(181		)	(6	)%	N/A			N/A
Parking revenues and other operating income	3,671			3,726			(55		)	(1	)%	81			(136		)
Operating, maintenance and management costs	84,288			86,204			(1,916		)	(2	)%	(1,941		)	25
Real estate taxes, property-related taxes and insurance	27,243			28,989			(1,746		)	(6	)%	(1,229		)	(517		)
Asset management fees to affiliate	9,975			10,110			(135		)	(1	)%	—			(135		)
General and administrative expenses	18,788			17,861			927			5	%	1,535			(608		)
Depreciation and amortization expense	71,613			75,745			(4,132		)	(5	)%	(1,620		)	(2,512		)
Interest expense	45,923			61,682			(15,759		)	(26	)%	(7,371		)	(8,388		)
Impairment charge on real estate	10,117			40,190			(30,073		)	(75	)%	(5,701		)	(24,372		)
Provision for loan losses	1,973			—			1,973			100	%	N/A			N/A
Gain on sales of real estate securities	4,410			10,470			(6,060		)	(58	)%	(6,060		)	—
Gain on sales of real estate, net	2,282			—			2,282			100	%	722			1,560
Gain on sales of foreclosed real estate held for sale	1,108			378			730			193	%	N/A			N/A
Gain from extinguishment of debt	21,328			—			21,328			100	%	18,031			3,297
Gain on sales of real estate, net (discontinued operations)	4,797			47,997			(43,200		)	(90	)%	(31,244		)	(11,956		)
Income from discontinued operations	1,583			2,723			(1,140		)	(42	)%	(504		)	(636		)
Impairment charge on discontinued operations	(257		)	(8,975		)	8,718			(97	)%	6,525			2,193

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Rental income from our real estate properties decreased by $8.7 million primarily due to properties sold or disposed of other than by sale that are included in income from continuing operations as a result of our adoption of ASU 2014-08 and slightly lower occupancy (as a result of tenants vacating or tenants reducing leased space) at certain properties. Overall, we expect rental income to decrease in future periods due to anticipated real estate property sales. Our rental income in future periods will also vary in large part based on the occupancy rates and rental rates of the properties in our portfolio.

Tenant reimbursements from our real estate properties increased by $3.1 million primarily due to higher recovery of operating expenses related to the GKK Properties. Our tenant reimbursements in future periods will vary based on several factors, including the occupancy rate of the buildings, changes in base year terms, and changes in reimbursable operating expenses. Generally, as new leases are negotiated, the base year resets to operating expenses incurred in the year the lease is signed and the tenant generally only reimburses operating expenses to the extent and by the amount that its allocable share of the building’s operating expenses in future years increases from its base year. As a result, as new leases are executed, tenant reimbursements would generally decrease. Rental income may or may not change by amounts corresponding to changes in tenant reimbursements due to new leases. Overall, we expect tenant reimbursements to decrease in future periods due to anticipated real estate property sales.

Interest income from real estate loans receivable decreased slightly from $3.3 million for the year ended December 31, 2013 to $3.1 million for the year ended December 31, 2014, due to the decrease in interest received from an impaired loan, the Sandmar Mezzanine Loan. In general, we expect interest income in future periods to remain fairly constant, but to decrease to the extent that we receive principal repayments on or make dispositions of real estate loans receivable. Interest income from real estate loans receivable in future periods may also be affected by potential loan impairments as a result of current or future market conditions. As of December 31, 2014, the borrower under the Sandmar Mezzanine Loan was delinquent.

If any of the borrowers under our real estate loans receivable are unable to repay their loan at maturity or default on their loan, the impact to future interest income and loan recoveries may be significant and will depend on several factors unique to each individual loan. In general, if we have a first priority lien on the collateral securing a loan, we may agree to extend the loan at similar terms, modify the terms of the loan, or foreclose on the collateral. If we foreclose on the collateral, we may either operate the property, resulting in our receipt of any cash flows generated by the property or our payment of any cash shortfalls related to the property, or sell the property for whatever amount we are able to obtain, which may or may not be equal to the loan balance prior to foreclosure. In general, if we own a mezzanine loan or a B-Note and the borrower is unable to repay its loan at maturity, we may have more restrictions and fewer options regarding the resolution of our investment. In certain circumstances, the senior lenders, in conjunction with us, may be willing to grant the borrower extensions or may grant extensions in exchange for more favorable terms (such as higher interest rates, a partial payoff, or the entitlement to a portion of a junior lender’s interest income, etc.). If the senior lenders will not grant the borrower an extension, we, as the mezzanine lender, may foreclose on the ownership interests of the borrower and indirectly take legal title to the property subject to the existing senior loans or we may negotiate a discounted repayment. We could attempt to negotiate an extension or modification with the senior lenders as the new borrower; however, if the senior lenders were not willing to extend or modify the loans and we were not able to repay the senior loans, we would most likely relinquish our interests or rights in the investment to the holders of the senior loans. Actual outcomes may differ significantly from the above based on factors specific to individual loans and situations.

Property operating, maintenance and management costs from our real estate properties decreased by $1.9 million primarily due to real estate property sales. Such declines were partially offset by higher utility and snow removal expenses related to the GKK Properties located in the midwestern and northeastern regions of the United States, which experienced an extremely cold winter season during the first quarter 2014. Overall, we expect property operating, maintenance and management costs to decrease in future periods due to anticipated real estate property sales.

Real estate taxes, property-related taxes and insurance from our real estate properties decreased from $29.0 million during the year ended December 31, 2013 to $27.2 million during the year ended December 31, 2014 primarily due to real estate property sales. Overall, we expect real estate taxes, property-related taxes and insurance to decrease in future periods due to anticipated real estate property sales.

Asset management fees remained constant at approximately $10.0 million during the years ended December 31, 2014 and 2013. Overall, we expect asset management fees to decrease in future periods due to anticipated asset sales or payoffs. See “Liquidity and Capital Resources.”

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General and administrative expenses increased by $0.9 million primarily as a result of an increase in payment to the Property Manager of $3.4 million in satisfaction of profit participation provisions under the Amended Services Agreement, partially offset by a decrease of $2.6 million related to lower legal fees, accounting fees and other professional fees related to accounting system implementation costs and lower management fees related to the GKK Properties under the Amended Services Agreement. See “— Contractual Commitments and Contingencies — Asset Management Services Agreement Related to the GKK Properties” for more information. General and administrative expenses consist primarily of management fees related to the Services Agreement, legal fees, audit fees, transfer agent fees, state and local income taxes and other professional fees.

Depreciation and amortization expense from our real estate properties decreased by $4.1 million primarily due to real estate property sales and decreased amortization of tenant origination and absorption costs resulting from lease expirations, partially offset by the acceleration of amortization of tenant improvements costs and tenant origination and absorption costs in connection with early lease terminations related to the GKK Properties. Upon classifying a property as held for sale, we cease depreciation and amortization expense for that property. Overall, we expect depreciation and amortization expense to decrease in future periods due to anticipated real estate property sales.

Interest expense from the financing of our portfolio decreased by $15.8 million, partially due to a decrease of $7.4 million related to debt secured by the GKK Properties, which was due to a decrease in the average loan balance as a result of principal repayments or debt extinguishments subsequent to December 31, 2013. Excluding debt secured by the GKK Properties, interest expense decreased by $8.4 million as a result of lower effective interest rates and an overall decrease in debt outstanding and discounted payoff related to Bridgeway Technology Center Mortgage Loan in April 2014. Included in interest expense is the amortization of deferred financing costs of $1.5 million and $0.8 million for the years ended December 31, 2014 and 2013, respectively. Interest expense in future periods will vary based on fluctuations in one-month LIBOR, our level of future borrowings and our ability to refinance existing indebtedness at similar rates. We do not currently plan to acquire or originate more real estate or real estate-related assets and, therefore, do not plan to enter into any purchase financing in the future. However, we may need to refinance our existing indebtedness in the future. Overall, we expect interest expense to decrease in future periods due to anticipated asset sales and principal paydowns.

We recorded a provision for loan loss reserves of $2.0 million related to the Sandmar Mezzanine Loan during the year ended December 31, 2014. During the year ended December 31, 2013, the Company did not record a provision for loan loss reserves.

During the year ended December 31, 2014, we recorded a non-cash impairment charge of $10.1 million to write-down the carrying values of six properties (including two GKK Properties) to their estimated fair values. Included in our impairment charge during the year ended December 31, 2014 was a $7.2 million impairment charge to reduce the carrying value of our investment in Tysons Dulles Plaza, an office property located in McLean, Virginia, to its estimated fair value due to a change in cash flow projections. We revised our cash flow projections for Tysons Dulles Plaza primarily because of a continued lag in demand in the Washington D.C. office rental market, resulting in ongoing leasing challenges and lower projected revenue growth. We also revised our cash flow projections to account for higher projected capital costs for tenant improvements and general building upgrades needed to attract additional tenants. In addition to the impairment on Tysons Dulles Plaza, we recognized impairment charges during the year ended December 31, 2014 of $2.9 million related to five other properties held for investment. No impairment charge related to any individual property was greater than $1.3 million. These impairments generally resulted from changes in leasing projections including longer estimated lease-up periods and lower projected rental rates, thus decreasing the projected cash flows the properties would generate. During the year ended December 31, 2013, we recognized an impairment charge of $40.2 million on real estate held for investment with respect to 11 properties (including five GKK Properties), to reduce the book values of the properties to their estimated fair values. Please see “— Comparison of the year ended December 31, 2013 versus the year ended December 31, 2012” below for a discussion of impairment charges recorded during the year ended December 31, 2013.

During the year ended December 31, 2014, we sold 1,386,602 shares of common stock of Gramercy and recognized a gain on the sale of real estate securities of $4.4 million. During the year ended December 31, 2013, we sold 4,613,398 shares of common stock of Gramercy and recognized a gain on the sale of real estate securities of $10.5 million.

We recognized a gain on sales of real estate of $2.3 million related to the disposition of four historical industrial properties and two GKK Properties during the year ended December 31, 2014.

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During the year ended December 31, 2014, we recognized a gain on extinguishment of debt of $21.3 million. The gain on extinguishment of debt consisted of (i) a $1.8 million gain related to a deed-in-lieu of foreclosure agreement with respect to the BOA Windsor Mortgage Portfolio Loan, (ii) a $3.3 million gain related to the discounted payoff of the Bridgeway Technology Center Mortgage Loan, (iii) a $12.6 million gain related to the 801 Market Street Mortgage Loan foreclosure and (iv) a $3.6 million gain related to the Jenkins Court Mortgage Loan foreclosure. For more information, see “─ Contractual Commitments and Contingencies — Loan Maturities and Defaults” above.

We recognized a gain on sale of real estate of $4.8 million in discontinued operations related to the disposition of one historical office property and nine GKK Properties during the year ended December 31, 2014. During the year ended December 31, 2013, we recognized a gain on sale of real estate of $48.0 million related to the disposition of 111 GKK Properties and one historical office property.

Income from discontinued operations for the years ended December 31, 2014 and December 31, 2013 was $1.6 million and $2.7 million, respectively. Income from discontinued operations is composed of the results of operations from properties sold and properties designated as held for sale prior to January 1, 2014. As of December 31, 2014, two properties were classified as held for sale, including one GKK Property that is included in discontinued operations. Total revenues and other income from discontinued operations decreased from $26.3 million during the year ended December 31, 2013 to $2.5 million during the year ended December 31, 2014. Total expenses from discontinued operations decreased from $23.6 million during the year ended December 31, 2013 to $0.9 million during the year ended December 31, 2014.

During the year ended December 31, 2014, we recognized an impairment charge on real estate from discontinued operations of $0.3 million with respect to two GKK Properties held for sale. The impairment charge was primarily a result of a reduction in the estimated sales prices of the two GKK Properties held for sale. During the year ended December 31, 2013, we recognized an impairment charge on real estate from discontinued operations of $9.0 million with respect to one historical office property and 30 GKK Properties.

Comparison of the year ended December 31, 2013 versus the year ended December 31, 2012

The following table provides summary information about our results of operations for the year ended December 31, 2013 and 2012 (dollar amounts in thousands):



	Years Ended December 31,						Increase (Decrease)			Percentage Change		$ Change Due to GKK Properties			$ Change Due to Historical Real Estate Properties Held Throughout Both Periods
	2013			2012			Increase (Decrease)			Percentage Change		$ Change Due to GKK Properties
Rental income	$	160,014		$	157,317		$	2,697		2	%	$	2,939		$	(242	)
Tenant reimbursements	51,306			53,272			(1,966		)	(4	)%	(1,584		)	(382		)
Interest income from real estate loans receivable	3,258			3,189			69			2	%	N/A			N/A
Interest income from real estate securities	—			689			(689		)	(100	)%	N/A			N/A
Parking revenues and other operating income	3,726			3,626			100			3	%	15			85
Operating, maintenance, and management costs	86,204			80,899			5,305			7	%	5,361			(56		)
Real estate taxes, property-related taxes and insurance	28,989			28,121			868			3	%	750			118
Asset management fees to affiliate	10,110			10,355			(245		)	(2	)%	—			(245		)
General and administrative expenses	17,861			22,439			(4,578		)	(20	)%	(3,451		)	(1,127		)
Depreciation and amortization expense	75,745			81,964			(6,219		)	(8	)%	(3,701		)	(2,518		)
Interest expense	61,682			67,035			(5,353		)	(8	)%	(2,378		)	(2,975		)
Impairment charge on real estate	40,190			31,882			8,308			26	%	(7,824		)	16,132
Provision for loan losses	—			142			(142		)	(100	)%	N/A			N/A
Gain on sales of real estate securities	10,470			25,456			(14,986		)	(59	)%	10,470			(25,456		)
Gain on sales of foreclosed real estate held for sale	378			127			251			198	%	N/A			N/A
Income from unconsolidated joint venture	—			750			(750		)	(100	)%	N/A			N/A
Gain on sales of real estate, net (discontinued operations)	47,997			53,691			(5,694		)	(11	)%	(12,268		)	6,574
Income (loss) from discontinued operations	2,723			(2,761		)	5,484			(199	)%	5,911			(427		)
Impairment charge on discontinued operations	(8,975		)	(37,218		)	28,243			(76	)%	20,344			7,899
Gain from extinguishment of debt (discontinued operations)	—			21,513			(21,513		)	(100	)%	(21,513		)	—

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Rental income from our real estate properties increased by $2.7 million primarily due to higher rental rates and a net decrease of above-market in-place lease amortization for the year ended December 31, 2013 resulting from tenant lease expirations and early tenant lease renewals subsequent to December 31, 2012 with respect to the GKK Properties and slightly offset by lower occupancy (as a result of tenants vacating or tenants reducing leased space).

Tenant reimbursements from our real estate properties decreased by $2.0 million primarily due to the reset of tenant base years and lower occupancy (as a result of tenants vacating or tenants reducing leased space). Our tenant reimbursements in future periods will vary based on several factors discussed above under “— Comparison of the year ended December 31, 2014 versus the year ended December 31, 2013.”

Interest income from real estate loans receivable remained constant at approximately $3.3 million and $3.2 million for the years ended December 31, 2013 and 2012, respectively. In general, we expect interest income in future periods to remain fairly constant, but to decrease to the extent that we have principal repayments or dispositions of real estate-related investments. Interest income from real estate loans receivable in future periods may also be affected by potential loan impairments as a result of current or future market conditions. Please see “— Comparison of the year ended December 31, 2014 versus the year ended December 31, 2013” above for a discussion of the impact of potential loan impairments on interest income and a discussion of the impact to us if any of the borrowers under our real estate loans receivable are unable to repay their loans at maturity or default on their loan.

Property operating, maintenance and management costs from our real estate properties increased by $5.3 million primarily due to repair and maintenance costs, utility expenses, bad debt expenses and other general operating expenses related to the GKK Properties.

Real estate taxes, property-related taxes and insurance from our real estate properties increased from $28.1 million during the year ended December 31, 2012 to $29.0 million during the year ended December 31, 2013 primarily due to general inflation.

Asset management fees decreased from $10.4 million during the year ended December 31, 2012 to $10.1 million during the year ended December 31, 2013 due to the dispositions of real estate-related investments and the exclusion of an impaired real estate loan receivable from our asset management fee calculation beginning in March 2012.

General and administrative expenses decreased by $4.6 million primarily due to lower legal fees and accounting fees. General and administrative expenses consist primarily of legal fees, audit fees, transfer agent fees, state and local income taxes and other professional fees.

Depreciation and amortization expense from our real estate properties decreased by $6.2 million, as a result of a decrease of $3.7 million related to the GKK Properties and a decrease of $2.5 million related to our historical real estate portfolio. The decrease in depreciation and amortization expense was primarily due to decreased amortization of tenant origination and absorption costs resulting from lease expirations.

Interest expense from the financing of our portfolio decreased by $5.4 million, partially due to a decrease of $2.4 million related to debt secured by the GKK Properties. The $2.4 million decrease in interest expense related to the debt secured by the GKK Properties was due to a decrease in the average loan balance as a result of principal repayments or debt extinguishments subsequent to December 31, 2012. Excluding debt secured by the GKK Properties, interest expense decreased by $3.0 million primarily due to an overall decrease to the average loan balance and lower effective interest rate on our outstanding debt. Included in interest expense is the amortization of deferred financing costs of $0.8 million and $6.0 million for the years ended December 31, 2013 and 2012, respectively.

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During the year ended December 31, 2013, we recognized an impairment charge on real estate properties held for investment of $40.2 million, with respect to 11 properties (including five GKK Properties and one historical property held for non-sale disposition), to reduce the book values of these real estate properties to their estimated fair values. These impairment charges were reflected in the latest estimated value per share of our common stock. We recognized an impairment charge of $31.9 million on real estate held for investment during the year ended December 31, 2012 with respect to four historical office properties, three historical industrial properties and seven GKK Properties. The facts and circumstances leading to the impairments on our real estate held for investment during the year ended December 31, 2013 are as follows:

•

Tysons Dulles Plaza: We recognized an impairment charge during the year ended December 31, 2013 of $19.5 million to reduce the carrying value of our investment in Tysons Dulles Plaza, an office property located in McLean, Virginia, to its estimated fair value. We revised our cash flow projections for Tysons Dulles Plaza primarily because of a decrease in demand in the Washington D.C. office rental market, resulting in lower projected revenues, and higher projected capital costs for tenant improvements and general building upgrades needed to attract additional tenants. We also revised our projections to address various deferred maintenance issues and other building system upgrades and replacements.

•

Bridgeway Technology Center: We recognized an impairment charge during the year ended December 31, 2013 of $6.6 million related to our investment in Bridgeway Technology Center, an office-flex property located in Newark, California, due to a change in the projected hold period and a decrease in projected cash flows as a result of a difficult leasing environment. We defaulted on the mortgage loan secured by Bridgeway Technology Center and the lender commenced proceedings to foreclose on the property. As of December 31, 2013, these foreclosure proceedings were ongoing. As a result, we revised the projected hold period and recognized an impairment charge to reduce the carrying value of Bridgeway Technology Center to its estimated fair value. See “— Contractual Commitments and Contingencies — Loan Maturities and Defaults — Bridgeway Technology Center Mortgage Loan” for information regarding the status of the foreclosure proceedings.

•

University Park Buildings: We recognized an impairment charge during the year ended December 31, 2013 of $4.2 million related to our investment in the University Park Buildings, an office property located in Sacramento, California, due to a decrease in projected rental rates. As a result, the projected undiscounted cash flows decreased to an amount less than the carrying value of the property and we recognized an impairment charge to reduce the carrying value of the University Park Buildings to its estimated fair value.

•

Other Properties: We recognized impairment charges during the year ended December 31, 2013 of $9.9 million related to eight other properties held for investment. No impairment charge related to any individual property was greater than $2.2 million. These impairments generally resulted from changes in leasing projections including longer estimated lease-up periods and lower projected rental rates, thus decreasing the projected cash flows the properties would generate.

During the year ended December 31, 2013, we sold sold 4,613,398 shares of common stock of Gramercy and recognized a gain on the sale of real estate securities of $10.5 million. During the year ended December 31, 2012, we sold certain real estate securities to an unaffiliated buyer and recognized a gain on the sale of real estate securities of $25.5 million.

We recognized a gain on sale of real estate of $48.0 million related to the disposition of 111 GKK Properties and one historical office property during the year ended December 31, 2013. During the year ended December 31, 2012, we recognized a gain on sale of real estate of $53.7 million related to the disposition of six historical office properties, three historical industrial properties and 190 GKK Properties.

Income (loss) from discontinued operations for the years ended December 31, 2013 and 2012 was $2.7 million and $(2.8) million, respectively. Income (loss) from discontinued operations is composed of the results of operations from properties sold and properties designated as held for sale prior to January 1, 2014. During the year ended December 31, 2013, we sold 111 GKK Properties and one historical office property and designated 12 properties as held for sale (of which 11 were GKK Properties). We sold six historical office properties, three historical industrial properties and 190 GKK Properties during the year ended December 31, 2012. Total revenues and other income from discontinued operations decreased from $198.4 million during the year ended December 31, 2012 to $26.3 million during the year ended December 31, 2013. Total expenses from discontinued operations decreased from $201.1 million during the year ended December 31, 2012 to $23.6 million during the year ended December 31, 2013.

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During the year ended December 31, 2013, we recognized an impairment charge on real estate from discontinued operations of $9.0 million with respect to one historical office property and 30 GKK Properties held for sale or sold as of December 31, 2013. The impairment charge was primarily a result of a reduction in the estimated sales prices of certain properties held for sale. The estimated sales prices were based on purchase and sale agreements we have entered into, offers received which we intend to accept or broker estimates of value. These impairment charges were reflected in the latest estimated value per share of our common stock. During the year ended December 31, 2012, we recognized an impairment charge on real estate from discontinued operations of $37.2 million with respect to three historical office properties, two historical industrial properties and 210 GKK Properties.

During the year ended December 31, 2012, we recognized a gain on extinguishment of debt from discontinued operations of $21.5 million related to the One Citizens Loan and the Goldman Mortgage Loan, which matured on January 11, 2012 and August 31, 2012, respectively. The gain on extinguishment of debt related to the One Citizens Loan represents the difference between the carrying amount of the outstanding debt and other liabilities of $45.9 million and the carrying value of the real estate properties and other assets of approximately $34.9 million. The gain on extinguishment of debt related to the Goldman Mortgage Loan represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $175.9 million (excluding the value of our subordinated interest in the Goldman Mortgage Loan in excess of the $12.0 million cash consideration paid to us by the lender for our subordinated interest in the loan) and the carrying value of the real estate properties and other assets of approximately $165.4 million, at the time of the transfer of the properties and other assets in satisfaction of the loan.

Funds from Operations and Modified Funds from Operations

We believe that FFO is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current NAREIT definition. FFO represents net income, excluding 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), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. In connection with NAREIT’s Accounting and Financial Standards Hot Topics, we are excluding impairment charges on real estate assets from our calculation of FFO. We have also restated FFO from prior periods to exclude these impairment charges. NAREIT believes that impairment charges on real estate assets are often early recognition of losses on prospective sales of properties, and therefore, the exclusion of these impairments is consistent with the exclusion of gains and losses recognized from the sales of real estate. Although these losses are included in the calculation of net income (loss), we have excluded these impairment charges in our calculation of FFO because impairments do not impact the current operating performance of our investments, and may or may not provide an indication of future operating performance. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. 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 provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance. MFFO excludes from FFO: acquisition fees and expenses; adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above and below market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the IPA in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

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We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes non-operating items included in FFO. MFFO also excludes non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO provides investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs, which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

FFO and MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO and MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO and MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO and MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO and MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures. During periods of significant disposition activity, FFO and MFFO are much more limited as measures of future performance.

Although MFFO includes other adjustments, the exclusion of straight-line rent, amortization of above- and below-market leases, gain from extinguishment of debt, impairment charges on real estate loans receivable and the net amortization of discounts and premiums on mortgage loans related to the GKK Properties are the most significant adjustments to us at the present time. We have excluded these items based on the following economic considerations:

•

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

•

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the operating performance of the real estate;

•

Gain from extinguishment of debt. A gain from extinguishment of debt represents the difference between the carrying value of any consideration transferred to the lender in return for the extinguishment of a debt and the net carrying value of the debt at the time of settlement. We have excluded the gain from extinguishment of debt in our calculation of MFFO because these gains do not impact the current operating performance of our investments and do not provide an indication of future operating performance;

•

Impairment charges on real estate loans receivable. An impairment charge on real estate loans receivable represents a write-down of the carrying value of a real estate loan to reflect the current valuation of the asset, whether or not the asset is intended to be held long-term. Although these losses are included in the calculation of net income (loss), we have excluded these impairment charges in our calculation of MFFO because impairments do not impact the current operating performance of our investments, and may or may not provide an indication of future operating performance. We believe it is useful to investors to have a supplemental metric that addresses core operating performance directly and therefore excludes such things as impairment charges on real estate loans receivable; and

•

Net amortization of discounts and premiums on mortgage loans related to the GKK Properties. Discounts and premiums on debt are amortized over the term of the loan as an adjustment to interest expense. This application results in interest expense recognition that is different than the underlying contractual terms of the debt. We have excluded the amortization of discounts and premiums related to the debt assumed in connection with the Settlement Agreement in our calculation of MFFO to more appropriately reflect the economic impact of our debt as the amortization of discounts and premiums has no ongoing economic impact on our operations. The debt assumed related to the GKK Properties was marked to market as of the date we entered into Settlement Agreement, which resulted in discounts and premiums related to the debt assumed. We believe excluding these items provides investors with a useful supplemental metric that directly addresses core operating performance.

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Our calculation of FFO and MFFO is presented in the table below for the years ended December 31, 2014, 2013 and 2012, respectively (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Years Ended December 31,
	2014			2013			2012
Net loss	$	(21,266	)	$	(46,495	)	$	(43,142	)
Depreciation of real estate assets	41,173			41,897			43,172
Depreciation of real estate assets - discontinued operations	—			3,855			27,221
Amortization of lease-related costs	30,440			33,848			38,792
Amortization of lease-related costs - discontinued operations	—			2,659			30,878
Impairment charges on real estate	10,117			40,190			31,882
Impairment charges on real estate - discontinued operations	257			8,975			37,218
Gain on foreclosed real estate held for sale	(1,108		)	(378		)	(127		)
Gain on sales of real estate, net	(2,282		)	—			—
Gain on sales of real estate, net - discontinued operations	(4,797		)	(47,997		)	(53,691		)
Gain on sale of real estate securities	(4,410		)	(10,470		)	(25,456		)
FFO	48,124			26,084			86,747
Straight-line rent and amortization of above- and below-market leases	(12,391		)	(15,307		)	(24,429		)
Gain from extinguishment of debt	(21,328		)	—			(21,513		)
Impairment charges on real estate loans receivable	1,973			—			142
Amortization of discounts and closing costs on real estate loans receivable	(975		)	(1,009		)	(575		)
Amortization of discounts and premiums on GKK notes payable, net	3,371			4,198			1,429
MFFO	$	18,774		$	13,966		$	41,801

FFO and MFFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.

Distributions

On September 30, 2014, our board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on September 30, 2014, for an aggregate distribution of $4.7 million. We paid this distribution on October 30, 2014. On December 9, 2014, our board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on December 29, 2014, for an aggregate distribution of $4.7 million. We paid this distribution on January 2, 2015. We funded these distributions with cash flow from operations. For the year ended December 31, 2014, our net loss was $21.3 million. FFO for the year ended December 31, 2014 was $48.1 million and cash flow from operating activities was $26.5 million. For information on our liquidity and distribution policies, see “— Liquidity and Capital Resources.”

Critical Accounting Policies

Below is a discussion of the accounting policies that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

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Revenue Recognition

Real Estate

We recognize minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is reasonably assured and record amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or by us. When we are 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.

We record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

We make estimates of the collectibility of our tenant receivables related to base rents, including deferred rent receivable, expense reimbursements and other revenue or income. Management specifically analyzes accounts receivable, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectibility of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, we will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

Real Estate Loans Receivable

Interest income on our real estate loans receivable is recognized on an accrual basis over the life of the investment using the interest method. Direct loan origination fees and origination or acquisition costs, as well as acquisition premiums or discounts, are amortized over the term of the loan as an adjustment to interest income. We place loans on nonaccrual status when any portion of principal or interest is 90 days past due, or earlier when concern exists as to the ultimate collection of principal or interest. When a loan is placed on nonaccrual status, we reverse the accrual for unpaid interest and generally do not recognize subsequent interest income until cash is received, or the loan returns to accrual status. We will resume the accrual of interest if we determine the collection of interest according to the contractual terms of the loan is probable.

We generally recognize income on impaired loans on either a cash basis, where interest income is only recorded when received in cash, or on a cost-recovery basis, where all cash receipts are applied against the carrying value of the loan. We consider the collectibility of the loan’s principal balance in determining whether to recognize income on impaired loans on a cash basis or a cost-recovery basis.

Real Estate Securities

We recognize interest income on real estate securities that are beneficial interests in securitized financial assets and are rated “AA” and above on an accrual basis according to the contractual terms of the securities. Discounts or premiums are amortized to interest income over the life of the investment using the interest method.

We recognize interest income on real estate securities that are beneficial interests in securitized financial assets that are rated below “AA” using the effective yield method, which requires us to periodically project estimated cash flows related to these securities and recognize interest income at an interest rate equivalent to the estimated yield on the security, as calculated using the security’s estimated cash flows and amortized cost basis, or reference amount. Changes in the estimated cash flows are recognized through an adjustment to the yield on the security on a prospective basis. Projecting cash flows for these types of securities requires significant judgment, which may have a significant impact on the timing of revenue recognized on these investments.

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Real Estate

Depreciation and Amortization

Real estate costs related to the acquisition and improvement of properties are capitalized and amortized over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. We consider the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant’s lease term or expected useful life. We anticipate the estimated useful lives of our assets by class to be generally as follows:



Buildings	15 - 40 years
Building improvements	10 - 25 years
Tenant improvements	Shorter of lease term or expected useful life
Tenant origination and absorption costs	Remaining term of related leases, including below-market renewal periods

Real Estate Acquisition Valuation

We record the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. Acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date.

We assess the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

We record above-market and below-market in-place lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases and for the initial term plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods.

We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease up periods.

We amortize the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable term of the leases.

Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income.

Impairment of Real Estate and Related Intangible Assets and Liabilities

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets and liabilities may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets and liabilities may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the real estate and related intangible assets and liabilities through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets and liabilities, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets and liabilities.

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Projecting future cash flows involves estimating expected future operating income and expenses related to the real estate and its related intangible assets and liabilities as well as market and other trends. Using inappropriate assumptions to estimate cash flows could result in incorrect fair values of the real estate and its related intangible assets and liabilities and could result in the overstatement of the carrying values of our real estate and related intangible assets and liabilities and an overstatement of our net income.

Real Estate Held for Sale and Discontinued Operations

We generally consider non-foreclosed real estate 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 held for sale” and “assets related to real estate held for sale,” respectively, for all periods presented in the accompanying consolidated financial statements. Notes payable and other liabilities related to real estate held for sale are classified as “notes payable related to real estate held for sale” and “liabilities related to real estate held for sale,” respectively, for all periods presented in the accompanying consolidated financial statements. Real estate classified as held for sale is no longer depreciated and is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Additionally, with respect to properties that were classified as held for sale in financial statements prior to January 1, 2014, we record the operating results as discontinued operations for all periods presented if the operations have been or are expected to be eliminated and we will not have any significant continuing involvement in the operations of the property following the sale. Operating results related to properties that were disposed of or classified as held for sale in the ordinary course of business during the year ended December 31, 2014 that had not been classified as held for sale in financial statements prior to January 1, 2014 are included in continuing operations on our consolidated statements of operations.

Change in a Plan to Sell

When real estate is initially considered “held for sale” it is measured at the lower of its depreciated book value, or estimated fair value less estimated costs to sell. Changes in the market may compel us to decide to reclassify a property that was designated as held for sale to held for investment. A property that is reclassified from held for sale to held for investment or non-sale disposition is measured and recorded individually at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used, or (ii) its fair value at the date of the subsequent decision not to sell. Any adjustment to the carrying amount of the property as a result of the reclassification is included in income from continuing operations as an impairment charge on real estate held for investment.

Real Estate Held for Non-Sale Disposition

We consider real estate assets that do not meet the criteria to be classified as held for sale but are expected to be disposed of other than by sale as real estate held for non-sale disposition. The assets and liabilities related to real estate held for non-sale disposition are included in our consolidated balance sheets and the results of operations are presented as part of continuing operations in our consolidated statements of operations for all periods presented. With respect to properties that were disposed of other than by sale prior to January 1, 2014, we recorded the operating results as discontinued operations for all periods presented. Operating results of properties that were disposed of other than by sale during the year ended December 31, 2014 are included in continuing operations on our consolidated statements of operations.

Foreclosed Real Estate Held for Sale

Foreclosed real estate held for sale consists of properties to which we have received title through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that we intend to market for sale in the near term. Foreclosed real estate held for sale is initially recorded at the estimated fair value of the real estate less estimated costs to sell, or the fair value of the loan satisfied if more clearly evident. The excess of the carrying value of the loan over the fair value of the property less estimated costs to sell, if any, is charged-off against the reserve for loan losses when title to the property is obtained. Costs of holding the property are expensed as incurred in our consolidated statements of operations. The gain or loss on final disposition of foreclosed real estate held for sale is recorded as other income and is considered income (loss) from continuing operations as it represents the final stage of our loan collection process.

Real Estate Loans Receivable

Our real estate loans receivable are recorded at amortized cost, net of loan loss reserves, and evaluated for impairment at each balance sheet date. The amortized cost of a real estate loan receivable is the outstanding unpaid principal balance, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination or acquisition of the loan.

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The reserve for loan losses is a valuation allowance that reflects our estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is adjusted through “Provision for loan losses” in our consolidated statements of operations and is decreased by charge-offs to specific loans when losses are confirmed. The reserve for loan losses includes a portfolio-based component and an asset-specific component.

An asset-specific reserve relates to reserves for losses on loans considered impaired. We consider a loan to be impaired when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. We also consider a loan to be impaired if we grant the borrower a concession through a modification of the loan terms or if we expect to receive assets (including equity interests in the borrower) with fair values that are less than the carrying value of our loan in satisfaction of the loan. A reserve is established when the present value of payments expected to be received, observable market prices, the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) or amounts expected to be received in satisfaction of a loan are lower than the carrying value of that loan.

A portfolio-based reserve covers the pool of loans that do not have asset-specific reserves. A provision for loan losses is recorded when available information as of each balance sheet date indicates that it is probable that a loss occurred in the pool of loans and the amount of the loss can be reasonably estimated, but we do not know which specific loans within the pool will ultimately result in losses. Required reserve balances for this pool of loans are derived from estimated probabilities of default and estimated loss severities assuming a default occurs. On a quarterly basis, we assign estimated probabilities of default and loss severities to each loan in the portfolio based on factors such as the debt service coverage of the underlying collateral, the estimated fair value of the collateral, the significance of the borrower’s investment in the collateral, the financial condition of the borrower and/or its sponsors, the likelihood that the borrower and/or its sponsors would allow the loan to default, our willingness and ability to step in as owner in the event of default, and other pertinent factors.

Failure to recognize impairments would result in the overstatement of earnings and the carrying value of our real estate loans receivable. Actual losses, if any, could differ significantly from estimated amounts.

Fair Value Measurements

Under GAAP, we are required to measure certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

When available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, we measure 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 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.

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

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We consider the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on current information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with our estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid-ask spread or significant increase in the bid-ask spread, (vii) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information is released publicly (for example, a principal-to-principal market).

We consider the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (iv) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.

Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and 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 qualify for treatment as a REIT.

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Distribution Paid

On January 2, 2015, we paid distributions of $4.7 million, which related to a distribution declared by our board of directors in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on December 29, 2014.

Distributions Declared

On March 6, 2015, our board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on March 20, 2015. We expect to pay this distribution on or about March 26, 2015.

Advisory Agreement Amendment

On January 15, 2015, we and our advisor entered into an amendment to the advisory agreement between the parties to amend certain terms related to the disposition fee payable to our advisor by us. In accordance with the advisory agreement, for substantial assistance in connection with the sale of properties, loans or other investments as determined by the conflicts committee of our board of directors, we pay our advisor or our affiliates a disposition fee of 1% of the contract sales price of the properties, loans or other investments sold. However, in no event may the total commissions (including such disposition fees) paid to our advisor, our affiliates and unaffiliated third parties exceed 6% of the contract sales price of the property, loan or other investment sold or exceed a competitive real estate commission. Pursuant to the amendment, the disposition fee related to the sales of GKK Properties has been modified to provide that our conflicts committee will determine in its sole discretion the amount of the disposition fee related to the sale of GKK Properties upon the terms set forth below, which disposition fee may be an amount not to exceed 1% of the contract sales price, which maximum amount is consistent with the fixed percentage applicable to the sales of other properties, loans and other investments under the advisory agreement.

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The amendment provides that with respect to sales of the GKK Properties, and provided that our conflicts committee determines that our advisor has provided a substantial amount of services in connection with the sale of each GKK Property for which the payment of a disposition fee is requested by our advisor, then:

(a)

With respect to portfolio or single asset sales of GKK Properties designated by our conflicts committee in its sole discretion at or about the time of the sale, we will pay our advisor a fee in an amount not to exceed 1% of the contract sales price and subject to other limitations and conditions set forth in the advisory agreement, as determined by our conflicts committee in its sole discretion, which fee will be payable upon the respective closing; and

(b)

With respect to sales of all other GKK Properties for which a disposition fee has not yet been paid, if, upon the sale of the final GKK Property, our conflicts committee determines in its sole discretion that we have recovered our entire investment related to the GKK Mezzanine Loan and the GKK Properties subsequent to the Settlement Agreement, after taking into consideration the net cash flow received by us from the investment, whether in the form of (i) net proceeds from the sales or other dispositions or transfers of the GKK Properties, (ii) the net cash flow related to the GKK Mezzanine Loan, (iii) the net cash flow related to the GKK Properties subsequent to the Settlement Agreement and/or (iv) other proceeds related to the assets and liabilities received under the Settlement Agreement, then we will pay our advisor a fee in an amount not to exceed 1% of the contract sales price and subject to other conditions set forth in the advisory agreement, as determined by our conflicts committee in its sole discretion, which fee will be payable promptly upon such determination by our conflicts committee.

As of January 15, 2015, we had sold 158 GKK Properties for an aggregate contract sales price of $211.5 million for which we had not paid or accrued a disposition fee. If our conflicts committee determines we have recovered our entire investment related to the GKK Mezzanine Loan and the GKK Properties upon the sale of the final GKK Property, our conflicts committee may authorize us to pay our advisor a disposition fee of up to 1% of the aggregate contract sales prices of these GKK Properties sold as of January 15, 2015.

Disposition Fee Related to the Tribeca Building

In 2006 and 2007, we originally made the three debt investments (collectively, the “Tribeca Loans”) related to the Tribeca Building located at 415 Greenwich Street in New York, New York. On February 19, 2010, the borrowers under the Tribeca Loans defaulted and we foreclosed on the Tribeca Building by exercising our right to accept 100% of the ownership interest of the borrowers. We acquired the remaining unsold condominium units of the Tribeca Building (the residential, retail and parking space condominium units transferred to us are, collectively, the “Units” and, individually, each is a “Unit”). We have sold 26 residential units, two retail spaces and the parking spaces, and as the remaining two unsold residential units of the Tribeca Building were under contract to sell, on January 15, 2015, our conflicts committee approved, pursuant to the advisory agreement, the payment of a disposition fee of 1% of the contract sales price of the Units sold or to be sold. The aggregate amount of the disposition fee for the Units is approximately $0.6 million and will be payable upon the closing of the sale of the final Unit.

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ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the effects of interest rate changes as a result of borrowings used to (i) maintain liquidity, (ii) fund the financing and refinancing of our real estate investment portfolio, and (iii) fund operations and payments on the debt assumed in connection with the Settlement Agreement. We are also exposed to the effects of changes in interest rates as a result of our investments in mortgage, mezzanine and other real estate loans receivable. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We have managed and will continue to manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that variable rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the overall returns to our stockholders and that the losses may exceed the amount we invested in the instruments.

The table below summarizes the book values, weighted-average interest rates and fair values of our real estate loans receivable and notes payable for each category as of December 31, 2014 based on the maturity dates as of December 31, 2014 (dollars in thousands):



	Maturity Date ⁽¹⁾																	Total Book Value ⁽²⁾
	2015			2016			2017			2018		2019			Thereafter			Total Book Value ⁽²⁾			Fair Value
Assets
Loans receivable
Mezzanine loans - fixed rate	$	—		$	—		$	1,187		$	—	$	—		$	—		$	1,187		$	1,362
Weighted-average annual effective interest rate ⁽³⁾	—			—			3.9		%	—		—			—			3.9		%
Mortgage loans - fixed rate	$	6,920		$	—		$	—		$	—	$	—		$	—		$	6,920		$	6,869
Weighted-average annual effective interest rate ⁽³⁾	8.1		%	—			—			—		—			—			8.1		%
B-notes - fixed rate	$	—		$	—		$	20,815		$	—	$	—		$	—		$	20,815		$	17,587
Weighted-average annual effective interest rate ⁽³⁾	—			—			11.4		%	—		—			—			11.4		%
Liabilities
Notes payable
Fixed rate - Historical real estate properties	$	—		$	62,200		$	—		$	—	$	—		$	—		$	62,200		$	65,721
Weighted-average interest rate ⁽⁴⁾	—			5.9		%	—			—		—			—			5.9		%
Fixed rate - GKK Properties mortgage loans	$	—		$	63,394		$	123,665		$	—	$	134,876		$	52,714		$	374,649		$	401,219
Weighted-average interest rate ⁽⁴⁾	—			5.5		%	6.2		%	—		6.0		%	5.4		%	5.9		%
Variable rate - Historical real estate properties	$	—		$	181,249		$	—		$	—	$	—		$	—		$	181,249		$	181,274
Weighted-average interest rate ⁽⁴⁾	—			2.0		%	—			—		—			—			2.0		%
Variable rate - GKK Properties mortgage loans	$	—		$	—		$	40,000		$	—	$	—		$	—		$	40,000		$	40,160
Weighted-average interest rate ⁽⁴⁾	—						3.2		%	—		—			—			3.2		%

_____________________

⁽¹⁾ The maturity dates presented are as of December 31, 2014.

⁽²⁾ Book value of loans receivable is presented net of asset-specific reserves. Book value of notes payable is presented net of discounts and premiums on notes payable.

⁽³⁾ The weighted-average annual effective interest rate is calculated based on actual interest income recognized in 2014, using the interest method, divided by the average amortized cost basis of the investment during 2014. The weighted-average effective interest rates presented are as of December 31, 2014.

⁽⁴⁾ The weighted-average interest rate as of December 31, 2014 is calculated as the contractual interest rate in effect as of December 31, 2014, using interest rate indices as of December 31, 2014, where applicable.

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We borrow funds and made investments at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt or fixed rate real estate loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of December 31, 2014, the fair value and book value of our fixed rate real estate loans receivable were $25.8 million and $28.9 million, respectively. The fair value estimate of our real estate loans receivable is calculated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral-dependent loans) and the estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. As of December 31, 2014, the fair value of our fixed rate debt was $466.9 million and the carrying value of our fixed rate debt was $436.8 million. The fair value estimate of our fixed rate debt was calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated as of December 31, 2014. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting changes in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on variable rate debt would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of variable rate instruments. As of December 31, 2014, we were exposed to market risks related to fluctuations in interest rates on our $221.2 million of variable rate debt outstanding. Based on interest rates as of December 31, 2014, if interest rates are 100 basis points higher during the 12 months ending December 31, 2015, interest expense on our variable rate debt outstanding would increase by approximately $2.2 million. As of December 31, 2014, one-month LIBOR was 0.17125% and if this index was reduced to 0% during the 12 months ending December 31, 2015, interest expense on our variable rate debt would decrease by $0.4 million.

The weighted-average annual effective interest rate of our fixed rate real estate loans receivable as of December 31, 2014 was 9.5%. The weighted-average annual effective interest rate represents the effective interest rate as of December 31, 2014, using the interest method, which we use to recognize interest income on our real estate loans receivable without asset-specific loan loss reserves. The weighted-average interest rates of our fixed rate debt and variable rate debt as of December 31, 2014 were 5.9% and 2.2%, respectively. The weighted-average interest rate represents the actual interest rate in effect as of December 31, 2014, using interest rate indices as of December 31, 2014, where applicable.

For developments related to our loans receivable and notes payable, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”


ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index to Financial Statements at page F-1 of this report.


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

None.


ITEM 9A.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended.

In connection with the preparation of our Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

Based on its assessment, our management believes that, as of December 31, 2014, our internal control over financial reporting was effective based on those criteria. There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


ITEM 9B.	OTHER INFORMATION

As of the quarter ended December 31, 2014, all items required to be disclosed under Form 8-K were reported under Form 8-K.

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PART III

We will file a definitive Proxy Statement for our 2015 Annual Meeting of Stockholders (the “2015 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2015 Proxy Statement that specifically address the items required to be set forth herein are incorporated by reference.


ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. Our Code of Conduct and Ethics can be found at http://www.kbsreit.com.

The other information required by this Item is incorporated by reference from our 2015 Proxy Statement.


ITEM 11.	EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from our 2015 Proxy Statement.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference from our 2015 Proxy Statement.


ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference from our 2015 Proxy Statement.


ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference from our 2015 Proxy Statement.

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PART IV


ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES


(a)	Financial Statement Schedules

See the Index to Financial Statements at page F-1 of this report.

The following financial statement schedules are included herein at pages F-44 through F-61 of this report:

Schedule II - Valuation and Qualifying Accounts

Schedule III - Real Estate Assets and Accumulated Depreciation and Amortization

Schedule IV - Mortgage Loans on Real Estate


(b)	Exhibits



Ex.		Description

3.1		Articles of Amendment and Restatement of the Company, incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2006

3.2		Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2006

4.1		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-11, Commission File No. 333-126087

10.1		Assumption and Joinder Agreement (related to the Portfolio Loan - University Avenue), by and among various indirect wholly owned subsidiaries of the Company, U.S. Bank National Association and Bank of America, N.A., dated as of January 21, 2014, incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013

10.2		Assumption and Joinder Agreement (related to the Portfolio Loan - Tysons Dulles Plaza), by and among various indirect wholly owned subsidiaries of the Company, U.S. Bank National Association and Bank of America, N.A., dated as of January 21, 2014, incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013

10.3		Fourth Amendment to Loan Agreement (related to BBD2), by and between First States Investors 5200, LLC and Wells Fargo Bank, N.A., as Trustee for the Holders of BSDB 2005-AFR1 Trust Commercial Mortgage Pass-Through Certificates, Series 2005-AFR1 dated as of April 16, 2014, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014

10.4		Advisory Agreement, by and between the Company and KBS Capital Advisors, LLC, dated as of November 8, 2014, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed November 8, 2014

10.5		Amendment No. 1 to the Advisory Agreement, by and between the Company and KBS Capital Advisors, LLC, dated as of January 15, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed January 15, 2015

21.1		Subsidiaries of the Company

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

99.1		Amended and Restated Share Redemption Program, dated March 6, 2013, incorporated by reference to Exhibit 99.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012

Table of Contents



Ex.		Description

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2014 and 2013	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012	F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013 and 2012	F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012	F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012	F-7
Notes to Consolidated Financial Statements	F-8

Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts	F-44
Schedule III - Real Estate Assets and Accumulated Depreciation and Amortization	F-45
Schedule IV - Mortgage Loans on Real Estate	F-60

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

KBS Real Estate Investment Trust, Inc.

We have audited the accompanying consolidated balance sheets of KBS Real Estate Investment Trust, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules listed in Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KBS Real Estate Investment Trust, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective January 1, 2014.

/s/ Ernst & Young LLP

Irvine, California

March 9, 2015

F-2

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	December 31, 2014			December 31, 2013
Assets
Real estate held for investment:
Land	$	284,079		$	293,340
Buildings and improvements	926,334			948,105
Tenant origination and absorption costs	88,349			107,471
Total real estate held for investment, at cost and net of impairment charges	1,298,762			1,348,916
Less accumulated depreciation and amortization	(192,380		)	(168,087		)
Total real estate held for investment, net	1,106,382			1,180,829
Real estate held for sale, net	12,129			97,970
Foreclosed real estate held for sale	12,045			19,064
Total real estate, net	1,130,556			1,297,863
Real estate loans receivable, net	28,922			29,768
Real estate securities	—			7,973
Total real estate and real estate-related investments, net	1,159,478			1,335,604
Cash and cash equivalents	58,675			211,391
Restricted cash	62,755			101,069
Rents and other receivables, net	41,548			37,285
Above-market leases, net	22,767			26,916
Assets related to real estate held for sale	1,046			5,837
Deferred financing costs, prepaid expenses and other assets, net	29,898			26,795
Total assets	$	1,376,167		$	1,744,897
Liabilities and equity
Notes payable:
Notes payable	$	652,398		$	908,982
Notes payable related to real estate held for sale	5,700			53,300
Total notes payable	658,098			962,282
Accounts payable and accrued liabilities	22,579			34,288
Due to affiliates	444			—
Distributions payable	4,699			—
Below-market leases, net	40,854			53,617
Liabilities related to real estate held for sale	308			3,125
Other liabilities	36,412			35,692
Total liabilities	763,394			1,089,004
Commitments and contingencies (Note 15)
Redeemable common stock	10,000			10,000
Stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 187,845,515 and 189,616,701 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively	1,879			1,896
Additional paid-in capital	1,662,483			1,670,356
Cumulative distributions and net losses	(1,061,589		)	(1,030,911		)
Accumulated other comprehensive income	—			4,552
Total stockholders’ equity	602,773			645,893
Total liabilities and stockholders’ equity	$	1,376,167		$	1,744,897

See accompanying notes to consolidated financial statements.

F-3

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)



	Years Ended December 31,
	2014			2013			2012
Revenues:
Rental income	$	151,351		$	160,014		$	157,317
Tenant reimbursements	54,366			51,306			53,272
Interest income from real estate loans receivable	3,077			3,258			3,189
Interest income from real estate securities	—			—			689
Parking revenues and other operating income	3,671			3,726			3,626
Total revenues	212,465			218,304			218,093
Expenses:
Operating, maintenance, and management	84,288			86,204			80,899
Real estate taxes, property-related taxes, and insurance	27,243			28,989			28,121
Asset management fees to affiliate	9,975			10,110			10,355
General and administrative expenses	18,788			17,861			22,439
Depreciation and amortization	71,613			75,745			81,964
Interest expense	45,923			61,682			67,035
Impairment charges on real estate held for investment	10,117			40,190			31,882
Provision for loan losses	1,973			—			142
Total expenses	269,920			320,781			322,837
Other income
Gain on sales of real estate securities (includes $4.5 million, $10.6 million and $25.2 million of unrealized gains reclassified from accumulated other comprehensive income during the years ended December 31, 2014, 2013 and 2012, respectively)	4,410			10,470			25,456
Gain on sales of real estate, net	2,282			—			—
Gain on sales of foreclosed real estate held for sale	1,108			378			127
Income from unconsolidated joint venture	—			—			750
Gain from extinguishment of debt	21,328			—			—
Other interest income	535			658			44
Other income	403			2,731			—
Total other income	30,066			14,237			26,377
Loss from continuing operations	(27,389		)	(88,240		)	(78,367		)
Discontinued operations:
Gain on sales of real estate, net	4,797			47,997			53,691
Income (loss) from discontinued operations	1,583			2,723			(2,761		)
Impairment charges on discontinued operations	(257		)	(8,975		)	(37,218		)
Gain from extinguishment of debt on discontinued operations	—			—			21,513
Total income from discontinued operations	6,123			41,745			35,225
Net loss	$	(21,266	)	$	(46,495	)	$	(43,142	)
Basic and diluted income (loss) per common share:
Continuing operations	$	(0.14	)	$	(0.46	)	$	(0.41	)
Discontinued operations	0.03			0.22			0.18
Net loss per common share	$	(0.11	)	$	(0.24	)	$	(0.23	)
Weighted-average number of common shares outstanding, basic and diluted	188,891,977			190,454,153			191,547,385

See accompanying notes to consolidated financial statements.

F-4

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Years Ended December 31,
	2014			2013			2012
Net loss	$	(21,266	)	$	(46,495	)	$	(43,142	)
Other comprehensive (loss) income
Unrealized change in market value of real estate securities	(100		)	13,867			1,294
Reclassification of realized gain on real estate securities	(4,452		)	(10,609		)	(25,240		)
Unrealized gains on derivative instruments	—			114			1,348
Total other comprehensive (loss) income	(4,552		)	3,372			(22,598		)
Total comprehensive loss	$	(25,818	)	$	(43,123	)	$	(65,740	)

See accompanying notes to consolidated financial statements.

F-5

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)



	Common Stock					Additional Paid-in Capital			Cumulative Distributions and Net Income (Loss)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Amounts			Additional Paid-in Capital			Cumulative Distributions and Net Income (Loss)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2011	190,731,533		$	1,907		$	1,639,228		$	(850,032	)	$	23,778		$	814,881
Net loss	—		—			—			(43,142		)	—			(43,142		)
Other comprehensive loss	—		—			—			—			(22,598		)	(22,598		)
Issuance of common stock	1,713,996		17			11,114			—			—			11,131
Redemptions of common stock	(1,384,513	)	(13		)	(7,715		)	—			—			(7,728		)
Transfers from redeemable common stock	—		—			35,376			—			—			35,376
Distributions declared	—		—			—			(16,227		)	—			(16,227		)
Commissions to affiliate on stock issuances	—		—			(262		)	—			—			(262		)
Other offering costs	—		—			(16		)	—			—			(16		)
Balance, December 31, 2012	191,061,016		$	1,911		$	1,677,725		$	(909,401	)	$	1,180		$	771,415
Net loss	—		—			—			(46,495		)	—			(46,495		)
Other comprehensive income	—		—			—			—			3,372			3,372
Redemptions of common stock	(1,444,315	)	(15		)	(7,369		)	—			—			(7,384		)
Distributions declared	—		—			—			(75,015		)	—			(75,015		)
Balance, December 31, 2013	189,616,701		$	1,896		$	1,670,356		$	(1,030,911	)	$	4,552		$	645,893
Net loss	—		—			—			(21,266		)	—			(21,266		)
Other comprehensive loss	—		—			—			—			(4,552		)	(4,552		)
Redemptions of common stock	(1,771,186	)	(17		)	(7,873		)	—			—			(7,890		)
Distributions declared	—		—			—			(9,412		)	—			(9,412		)
Balance, December 31, 2014	187,845,515		$	1,879		$	1,662,483		$	(1,061,589	)	$	—		$	602,773

See accompanying notes to consolidated financial statements.

F-6

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Years Ended December 31,
	2014			2013			2012
Cash Flows from Operating Activities:
Net loss	$	(21,266	)	$	(46,495	)	$	(43,142	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Continuing operations	71,613			75,745			81,964
Discontinued operations	—			6,514			58,099
Impairment charges on real estate - continuing operations	10,117			40,190			31,882
Impairment charges on real estate - discontinued operations	257			8,975			37,218
Noncash interest income on real estate-related investments	(975		)	(1,009		)	(575		)
Change in provision for loan losses	1,973			—			53
Deferred rent	(3,351		)	(4,095		)	(6,662		)
Bad debt expense	683			2,490			835
Amortization of deferred financing costs	1,581			1,216			6,850
Deferred interest payable	637			2,184			—
Amortization of above- and below-market leases, net	(9,040		)	(11,212		)	(17,767		)
Gain on sales of foreclosed real estate held for sale	(1,108		)	(378		)	(127		)
Gain on sales of real estate, net	(7,079		)	(47,997		)	(53,691		)
Gain on sales of real estate securities	(4,410		)	(10,470		)	(25,456		)
Gain on extinguishment of debt	(21,328		)	—			(21,513		)
Amortization of discounts and premiums on notes payable, net	3,371			4,198			1,429
Changes in operating assets and liabilities:
Restricted cash for operational expenditures	23,222			4,177			2,809
Rents and other receivables	(4,876		)	6,586			2,801
Prepaid expenses and other assets	(7,241		)	(5,714		)	2,444
Accounts payable and accrued liabilities	(8,508		)	(6,076		)	(5,049		)
Due to affiliates	45			(104		)	104
Other liabilities	2,170			(9,219		)	(18,068		)
Net cash provided by operating activities	26,487			9,506			34,438
Cash Flows from Investing Activities:
Improvements to real estate	(27,377		)	(20,359		)	(21,805		)
Proceeds from sales of real estate, net	93,335			183,379			833,469
Proceeds from sales of foreclosed real estate held for sale	8,861			7,589			2,700
Proceeds from sale of real estate loans receivable	—			—			16,830
Principal repayments on real estate loans receivable	127			87			18
Extension fees related to real estate loans receivable	—			—			103
Proceeds from sale of real estate securities	7,831			22,166			46,214
Purchases of pledged securities	—			—			(1,833		)
Maturities of pledged securities	—			—			10,424
Net change in restricted cash for capital expenditures	1,950			3,941			2,558
Payment of contingent consideration related to the GKK Properties	—			(12,000		)	—
Net cash provided by investing activities	84,727			184,803			888,678
Cash Flows from Financing Activities:
Proceeds from notes payable	42,500			185,634			159,382
Principal payments on notes payable	(293,358		)	(343,498		)	(699,525		)
Principal payments on repurchase agreements	—			—			(149,657		)
Cash surrendered from deed in lieu of foreclosures	(9		)	—			(162		)
Net change in restricted cash for debt service obligations	1,271			3,729			(8,410		)
Payments of deferred financing costs	(1,731		)	(962		)	(2,557		)
Payments to redeem common stock	(7,890		)	(7,384		)	(7,728		)
Payments of commissions on stock issuances and other offering costs	—			—			(278		)
Distributions paid to common stockholders	(4,713		)	(75,015		)	(13,594		)
Net cash used in financing activities	(263,930		)	(237,496		)	(722,529		)
Net (decrease) increase in cash and cash equivalents	(152,716		)	(43,187		)	200,587
Cash and cash equivalents, beginning of period	211,391			254,578			53,991
Cash and cash equivalents, end of period	$	58,675		$	211,391		$	254,578

See accompanying notes to consolidated financial statements.

F-7

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014


1.	ORGANIZATION

KBS Real Estate Investment Trust, Inc. (the “Company”) was formed on June 13, 2005 as a Maryland corporation and has elected to be taxed as a real estate investment trust (“REIT”). Substantially all of the Company’s assets are held by, and the Company conducts substantially all of its operations through, KBS Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), and its subsidiaries. The Company is the sole general partner of and directly owns a 99% partnership interest in the Operating Partnership. The Company’s wholly owned subsidiary, KBS REIT Holdings LLC, a Delaware limited liability company (“KBS REIT Holdings”), owns the remaining 1% partnership interest in the Operating Partnership and is its sole limited partner.

The Company owns a diverse portfolio of real estate and real estate-related investments. As of December 31, 2014, the Company owned or, with respect to a limited number of properties, held a leasehold interest in, 401 real estate properties (of which two properties were held for sale), including the GKK Properties (defined below). In addition, as of December 31, 2014, the Company owned four real estate loans receivable, a participation interest with respect to a real estate joint venture and a 10-story condominium building with 62 units acquired through foreclosure, of which two condominium units were owned by the Company and held for sale.

On September 1, 2011, the Company, through indirect wholly owned subsidiaries (collectively, “KBS”), entered into a Collateral Transfer and Settlement Agreement (the “Settlement Agreement”) with, among other parties, GKK Stars Acquisition LLC (“GKK Stars”), the wholly owned subsidiary of Gramercy Property Trust, Inc. (“Gramercy”) that indirectly owned the Gramercy real estate portfolio, to effect the orderly transfer of certain assets and liabilities of the Gramercy real estate portfolio to KBS in satisfaction of certain debt obligations under a mezzanine loan owed by wholly owned subsidiaries of Gramercy to KBS (the “GKK Mezzanine Loan”). The Settlement Agreement resulted in the transfer of the equity interests in certain subsidiaries of Gramercy (the “Equity Interests”) that indirectly owned or, with respect to a limited number of properties, held a leasehold interest in, 867 properties (the “GKK Properties”), consisting of 576 bank branch properties and 291 office buildings, operations centers and other properties. As of December 15, 2011, GKK Stars had transferred all of the Equity Interests to the Company, giving the Company title to or, with respect to a limited number of GKK Properties, a leasehold interest in, 867 GKK Properties as of that date.

Subject to certain restrictions and limitations, the business of the Company is managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement with the Company (as amended, the “Advisory Agreement”) in effect through November 8, 2015. The Advisory Agreement may be renewed for an unlimited number of one-year periods upon the mutual consent of the Advisor and the Company. Either party may terminate the Advisory Agreement upon 60 days written notice. The Advisor owns 20,000 shares of the Company’s common stock.

Upon commencing its initial public offering (the “Offering”), the Company retained KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Advisor, to serve as the dealer manager of the Offering pursuant to a dealer manager agreement dated January 27, 2006 (the “Dealer Manager Agreement”). The Company ceased offering shares of common stock in its primary offering on May 30, 2008. The Company terminated its dividend reinvestment plan effective April 10, 2012.

The Company sold 171,109,494 shares of common stock in its primary offering for gross offering proceeds of $1.7 billion. The Company sold 28,306,086 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $233.7 million. As of December 31, 2014, the Company had redeemed 11,590,065 of the shares sold in the Offering for $85.4 million.

Asset Management Services Agreement Related to the GKK Properties

On March 30, 2012, the Company, through an indirect wholly owned subsidiary (“KBS Acquisition Sub”), entered into an Asset Management Services Agreement (the “Services Agreement”) with GKK Realty Advisors LLC (the “Property Manager”), an affiliate of Gramercy, with respect to the GKK Properties. Pursuant to the Services Agreement, the Property Manager agreed to provide, among other services: standard asset management services, assistance related to dispositions, accounting services and budgeting and business plans for the GKK Properties (the “Services”). The Property Manager is not affiliated with the Company or KBS Acquisition Sub.

F-8

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

On December 19, 2013, KBS Acquisition Sub entered into an amended and restated asset management services agreement (the “Amended Services Agreement”) with the Property Manager. The effective date of the Amended Services Agreement was December 1, 2013. Pursuant to the Amended Services Agreement, the Company made a payment in the amount of $12.0 million to the Property Manager in satisfaction of the profit participation provisions under the Services Agreement. In addition, as compensation for the Services, the Company agreed to pay the Property Manager: (i) an annual fee of $7.5 million plus all GKK Property-related expenses incurred by the Property Manager, (ii) subject to certain terms and conditions in the Amended Services Agreement, a profit participation interest based on a percentage (ranging from 10% to 30%) of the amount by which the gross fair market value or gross sales price of certain identified portfolios of GKK Properties exceeds the sum of (a) an agreed-upon baseline value for such GKK Property portfolios plus (b) new capital expended to increase the value of GKK Properties within the portfolios and expenditures made to pay for tenant improvements and leasing commissions related to these GKK Properties as of the measurement date, and (iii) a monthly construction oversight fee equal to a percentage of construction costs for certain construction projects at the GKK Properties overseen by the Property Manager.

The Amended Services Agreement will terminate on December 31, 2016, with a one-year extension option at the Company’s option, subject to certain terms and conditions contained in the Amended Services Agreement. The Amended Services Agreement supersedes and replaces all prior agreements related to the Services among the Company and its affiliates and the Property Manager and its affiliates.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company, KBS REIT Holdings, the Operating Partnership, their direct and indirect wholly owned subsidiaries, and joint ventures the Company controls or for which it is the primary beneficiary, as well as the related amounts of noncontrolling interests. All significant intercompany balances and transactions are eliminated in consolidation.

The Company evaluates the need to consolidate joint ventures and consolidates joint ventures that it determines to be variable interest entities for which it is the primary beneficiary. The Company also consolidates joint ventures that are not determined to be variable interest entities, but for which it exercises control over major operating decisions through substantive participation rights, such as approval of budgets, selection of property managers, asset management, investment activity and changes in financing.

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).

Use of Estimates

The preparation of the 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 consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. The Company early adopted ASU No. 2014-08 (defined below) for the reporting period beginning January 1, 2014. As a result, certain reclassifications were made to the consolidated balance sheets, statements of operations and footnote disclosures for all applicable periods presented to reflect properties sold or held for sale during the period ended December 31, 2014. Operating results of properties that were classified as held for sale in financial statements prior to January 1, 2014 will remain in discontinued operations on the Company’s consolidated statements of operations. Operating results of properties that were disposed of or classified as held for sale in the ordinary course of business during the year ended December 31, 2014 that had not been classified as held for sale in financial statements prior to January 1, 2014 are included in continuing operations on the Company’s consolidated statements of operations.

F-9

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Revenue Recognition

Real Estate

The Company recognizes minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is reasonably assured and records amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or 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.

The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

The Company makes estimates of the collectibility of its tenant receivables related to base rents, including deferred rent receivable, expense reimbursements and other revenue or income. Management specifically analyzes accounts receivable, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectibility 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 reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

Real Estate Loans Receivable

Interest income on the Company’s real estate loans receivable is recognized on an accrual basis over the life of the investment using the interest method. Direct loan origination fees and origination or acquisition costs, as well as acquisition premiums or discounts, are amortized over the term of the loan as an adjustment to interest income. The Company places loans on nonaccrual status when any portion of principal or interest is 90 days past due, or earlier when concern exists as to the ultimate collection of principal or interest. When a loan is placed on nonaccrual status, the Company reverses the accrual for unpaid interest and generally does not recognize subsequent interest income until cash is received, or the loan returns to accrual status. The Company will resume the accrual of interest if it determines the collection of interest according to the contractual terms of the loan is probable.

Real Estate Securities

The Company recognizes interest income on real estate securities that are beneficial interests in securitized financial assets and are rated “AA” and above on an accrual basis according to the contractual terms of the securities. Discounts or premiums are amortized to interest income over the life of the investment using the interest method.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The Company recognizes interest income on real estate securities that are beneficial interests in securitized financial assets that are rated below “AA” using the effective yield method, which requires the Company to periodically project estimated cash flows related to these securities and recognize interest income at an interest rate equivalent to the estimated yield on the security, as calculated using the security’s estimated cash flows and amortized cost basis, or reference amount. Changes in the estimated cash flows are recognized through an adjustment to the yield on the security on a prospective basis. Projecting cash flows for these types of securities requires significant judgment, which may have a significant impact on the timing of revenue recognized on these investments.

Cash and Cash Equivalents

The Company recognizes interest income on its cash and cash equivalents as it is earned and classifies such amounts as other interest income.

Real Estate

Depreciation and Amortization

Real estate costs related to the acquisition and improvement of properties are capitalized and amortized over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. The Company considers the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant’s lease term or expected useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:



Buildings	15 - 40 years
Building improvements	10 - 25 years
Tenant improvements	Shorter of lease term or expected useful life
Tenant origination and absorption costs	Remaining term of related leases, including below-market renewal periods

Real Estate Acquisition Valuation

The Company records the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. Acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date.

The Company assesses the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases and for the initial term plus any extended term for any leases with below-market renewal options. The Company amortizes any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods.

The Company estimates the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease up periods, considering current market conditions. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease up periods.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The Company amortizes the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable term of the leases.

Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s net income.

Impairment of Real Estate and Related Intangible Assets and Liabilities

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets and liabilities may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets and liabilities may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate and related intangible assets and liabilities through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets and liabilities.

Real Estate Held for Sale and Discontinued Operations

The Company generally considers non-foreclosed real estate 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 held for sale” and “assets related to real estate held for sale,” respectively, for all periods presented in the accompanying consolidated financial statements. Notes payable and other liabilities related to real estate held for sale are classified as “notes payable related to real estate held for sale” and “liabilities related to real estate held for sale,” respectively, for all periods presented in the accompanying consolidated financial statements. Real estate classified as held for sale is no longer depreciated and is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Additionally, with respect to properties that were classified as held for sale in financial statements prior to January 1, 2014, the Company records the operating results as discontinued operations for all periods presented if the operations have been or are expected to be eliminated and the Company will not have any significant continuing involvement in the operations of the property following the sale. Operating results of properties that were disposed of or classified as held for sale in the ordinary course of business during the year ended December 31, 2014 that had not been classified as held for sale in financial statements prior to January 1, 2014 are included in continuing operations on the Company’s consolidated statements of operations.

Change in a Plan to Sell

When real estate is initially considered “held for sale” it is measured at the lower of its depreciated book value, or estimated fair value less estimated costs to sell. Changes in the market may compel the Company to decide to reclassify a property that was designated as held for sale to held for investment. A property that is reclassified from held for sale to held for investment or non-sale disposition is measured and recorded individually at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used, or (ii) its fair value at the date of the subsequent decision not to sell. Any adjustment to the carrying amount of the property as a result of the reclassification is included in income from continuing operations as an impairment charge on real estate held for investment.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Real Estate Held for Non-Sale Disposition

The Company considers real estate assets that do not meet the criteria for held for sale but are expected to be disposed of other than by sale as real estate held for non-sale disposition. The assets and liabilities related to real estate held for non-sale disposition are included in the Company’s consolidated balance sheets and the results of operations are presented as part of continuing operations in the Company’s consolidated statements of operations for all periods presented. With respect to properties that were disposed of other than by sale prior to January 1, 2014, the Company records the operating results as discontinued operations for all periods presented. Operating results of properties that were disposed of other than by sale during the year ended December 31, 2014 are included in continuing operations on the Company’s consolidated statements of operations.

Foreclosed Real Estate Held for Sale

Foreclosed real estate held for sale consists of properties to which the Company has received title through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that the Company intends to market for sale in the near term. Foreclosed real estate held for sale is initially recorded at the estimated fair value of the real estate less estimated costs to sell, or the fair value of the loan satisfied if more clearly evident. The excess of the carrying value of the loan over the fair value of the property less estimated costs to sell, if any, is charged-off against the reserve for loan losses when title to the property is obtained. Costs of holding the property are expensed as incurred in the Company’s consolidated statements of operations. The gain or loss on final disposition of foreclosed real estate held for sale is recorded as other income and is considered income (loss) from continuing operations as it represents the final stage of the Company’s loan collection process.

Real Estate Loans Receivable

The Company’s real estate loans receivable are recorded at amortized cost, net of loan loss reserves, and evaluated for impairment at each balance sheet date. The amortized cost of a real estate loan receivable is the outstanding unpaid principal balance, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination or acquisition of the loan.

The reserve for loan losses is a valuation allowance that reflects management’s estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is adjusted through “Provision for loan losses” on the Company’s consolidated statements of operations and is decreased by charge-offs to specific loans when losses are confirmed. The reserve for loan losses includes a portfolio-based component and an asset-specific component.

An asset-specific reserve relates to reserves for losses on loans considered impaired. The Company considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. The Company also considers a loan to be impaired if it grants the borrower a concession through a modification of the loan terms or if it expects to receive assets (including equity interests in the borrower) with fair values that are less than the carrying value of the loan in satisfaction of the loan. A reserve is established when the present value of payments expected to be received, observable market prices, the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) or amounts expected to be received in satisfaction of a loan are lower than the carrying value of that loan.

A portfolio-based reserve covers the pool of loans that do not have asset-specific reserves. A provision for loan losses is recorded when available information as of each balance sheet date indicates that it is probable that a loss occurred in the pool of loans and the amount of the loss can be reasonably estimated, but the Company does not know which specific loans within the pool will ultimately result in losses. Required reserve balances for this pool of loans are derived from estimated probabilities of default and estimated loss severities assuming a default occurs. On a quarterly basis, the Company’s management assigns estimated probabilities of default and loss severities to each loan in the portfolio based on factors such as the debt service coverage of the underlying collateral, the estimated fair value of the collateral, the significance of the borrower’s investment in the collateral, the financial condition of the borrower and/or its sponsors, the likelihood that the borrower and/or its sponsors would allow the loan to default, the Company’s willingness and ability to step in as owner in the event of default, and other pertinent factors.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Failure to recognize impairments would result in the overstatement of earnings and the carrying value of the Company’s real estate loans receivable. Actual losses, if any, could differ significantly from estimated amounts.

Participation Interest in an Unconsolidated Joint Venture

The Company holds a participation interest with respect to a real estate joint venture. The carrying value of this participation interest as of December 31, 2014 and 2013 was $0 and the Company did not record any income or losses with respect to this participation interest during the years ended December 31, 2014, 2013 and 2012.

Cash and Cash Equivalents

The Company considers all short-term (with an original maturity of three months or less), highly-liquid investments utilized as part of the Company’s cash-management activities to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value.

The Company’s cash and cash equivalents balance exceeded federally insurable limits as of December 31, 2014. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

Restricted Cash

Restricted cash is comprised of lender impound reserve accounts on the Company’s borrowings for security deposits, property taxes, insurance, rent from master lease, letters of credit, debt service obligations and capital improvements and replacements.

Real Estate Securities

The Company classifies its investments in real estate securities as available-for-sale, since the Company may sell them prior to their maturity but does not hold them principally for the purpose of making frequent investments and sales with the objective of generating profits on short-term differences in price. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss). Estimated fair values are generally based on quoted market prices, when available, or on estimates provided by independent pricing sources or dealers who make markets in such securities. In certain circumstances, such as when the market for the securities becomes inactive, the Company may determine it is appropriate to perform an internal valuation of the securities. Upon the sale of a security, the previously recognized unrealized gain (loss) is reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) is recognized in earnings.

On a quarterly basis, the Company evaluates its real estate securities for other-than-temporary impairment. The Company reviews the projected future cash flows from these securities for changes in assumptions due to prepayments, credit loss experience and other factors. If, based on the Company’s quarterly estimate of cash flows, there has been an adverse change in the estimated cash flows from the cash flows previously estimated, the present value of the revised cash flows is less than the present value previously estimated, and the fair value of the securities is less than its amortized cost basis, an other-than-temporary impairment is deemed to have occurred.

The Company is required to distinguish between other-than-temporary impairments related to credit and other-than-temporary impairments related to other factors (e.g., market fluctuations) on its debt securities that it does not intend to sell and where it is not likely that the Company will be required to sell the security prior to the anticipated recovery of its amortized cost basis. The Company calculates the credit component of the other-than-temporary impairment as the difference between the amortized cost basis of the security and the present value of its estimated cash flows discounted at the yield used to recognize interest income. The credit component will be charged to earnings and the component related to other factors is recorded to other comprehensive income (loss).

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Derivative Instruments

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates on its variable rate real estate loans receivable and notes payable. The Company records these derivative instruments at fair value on the accompanying consolidated balance sheets. Derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) in the accompanying consolidated statements of equity. The changes in fair value for derivative instruments that are not designated as a hedge or that do not meet the hedge accounting criteria are recorded as gain or loss on derivative instruments in the accompanying consolidated statements of operations.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivative instruments that are part of a hedging relationship to specific forecasted transactions or recognized obligations on the consolidated balance sheets. The Company also assesses and documents, both at the hedging instrument’s inception and on a quarterly basis thereafter, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the respective hedged items. When it is determined that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues hedge accounting prospectively and reclassifies amounts recorded to accumulated other comprehensive income (loss) to earnings. As of December 31, 2014, the Company had no derivative instruments.

Deferred Financing Costs

Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity unless specific rules are met that would allow for the carryover of such costs to the refinanced debt. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close.

Fair Value Measurements

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

When available, the Company utilizes quoted market prices from independent third-party sources to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of a liability 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 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 considers the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on current information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid-ask spread or significant increase in the bid-ask spread, (vii) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information is released publicly (for example, a principal-to-principal market).

The Company considers the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (iv) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Share Redemption Program

The Company has a share redemption program pursuant to which stockholders may sell their shares to the Company only in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program and together with redemptions sought in connection with a stockholder’s death, “special redemptions”). Such redemptions are subject to an annual dollar limitation and are further subject to the other limitations described in the share redemption program, including:

•

During each calendar year, special redemptions are limited to an annual amount determined by the board of directors. The annual dollar limitation for special redemptions may be reviewed and adjusted from time to time during the year. The dollar limitation for calendar year 2014 was $10.0 million in the aggregate. On December 9, 2014, the Company’s board of directors approved an annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by the board of directors), and further subject to the limitations described in the share redemption program.


•	During any calendar year, the Company may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.


•	The Company has no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

The Company currently does not expect to have funds available for ordinary redemptions in the future.

If the Company cannot repurchase all shares presented for redemption in any month because of the limitations on redemptions set forth in the share redemption program, then the Company will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in the Company’s most recently effective registration statement, as such registration statement has been amended or supplemented, then the Company would redeem all of such stockholder’s shares.

The Company redeems shares eligible for redemption at the estimated value per share of the Company’s common stock as of the applicable redemption date.

On December 18, 2013, the Company’s board of directors approved an estimated value per share of the Company’s shares of common stock of $4.45 per share (unaudited), based on the estimated value of the Company’s assets less the estimated value of its liabilities, or net asset value, divided by the number of shares outstanding, as of September 30, 2013, with the exception of the Company’s appraised real estate properties, which were appraised as of November 30, 2013. As such, the redemption price for shares eligible for redemption was $4.45 per share for redemption dates from December 2013 through November 2014.

On December 9, 2014, the Company’s board of directors approved an estimated value per share of the Company’s common stock of $4.52 (unaudited), based on the estimated value of the Company’s assets less the estimated value of its liabilities, or net asset value, divided by the number of shares outstanding, all as of September 30, 2014. Commencing with the December 2014 redemption date and until the estimated value per share is updated, the redemption price for all shares eligible for redemption is $4.52 per share (unaudited).

The estimated value per share was based upon the recommendation and valuation prepared by the Advisor. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of the Company’s assets less the fair value of its liabilities according to GAAP, nor does it represent a liquidation value of the Company’s assets and liabilities or the amount the Company’s shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that the Company is externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not under contract to sell, debt prepayment penalties or defeasance costs that could apply upon the prepayment of certain of the Company’s debt obligations or the impact of restrictions on the assumption of debt.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The value of the Company’s shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. The Company currently expects to utilize the Advisor and/or an independent valuation firm to update the estimated value per share in December of each year.

The Company’s board of directors may amend, suspend or terminate the share redemption program upon 30 days’ notice to its stockholders. The Company may provide this notice by including such information in a Current Report on Form 8-K or in the Company’s annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to its stockholders.

The Company records amounts that are redeemable under the share redemption program as redeemable common stock in the accompanying consolidated balance sheets because the shares are mandatorily redeemable at the option of the holder upon the stockholder’s death, “qualifying disability” or “determination of incompetence” and therefore their redemption is outside the control of the Company. Pursuant to the share redemption program, beginning in 2012, the maximum amount redeemable under the Company’s share redemption program is limited to an annual dollar amount determined by the Company’s board of directors, as described above. However, because the amounts that can be redeemed in future periods are determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company presents the amounts available for redemptions in future periods as redeemable common stock in the accompanying balance sheets.

The Company classifies financial instruments that represent a mandatory obligation of the Company to redeem shares as liabilities. The Company’s redeemable common shares are contingently redeemable at the option of the holder upon the stockholder’s death, “qualifying disability” or “determination of incompetence.” When shares are tendered for redemption and the Company determines that it has a mandatory obligation to redeem shares under the share redemption program, it will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.

The Company limits the dollar value of shares that may be redeemed under the share redemption program as described above. During the year ended December 31, 2014, the Company redeemed $7.9 million of common stock. The only redemptions the Company made under the share redemption program in 2014 were those that qualified as, and met the requirements for, special redemptions. In 2014, the Company fulfilled all redemption requests that qualified as special redemptions under the Company’s share redemption program.

Related Party Transactions

Pursuant to the Advisory Agreement, the Company is obligated to pay the Advisor specified fees upon the provision of certain services, including the management of the Company’s investments and other services (including, but not limited to, the disposition of investments). The Company also reimbursed the Advisor for offering costs related to the dividend reinvestment plan (which terminated effective April 10, 2012) and for acquisition and origination expenses, and reimburses certain operating expenses incurred by the Advisor on behalf of the Company or incurred in connection with providing services to the Company such as certain costs of managing or selling the Company’s assets. As detailed in the Advisory Agreement, the Advisor is also entitled to certain other fees, including an incentive fee, upon achieving certain performance goals, and the Advisor and its affiliates may receive compensation in the form of stock-based awards.

Also, under the Dealer Manager Agreement, and to the extent permitted under state securities laws and subject to certain exceptions, if the Company paid selling commissions in connection with the issuance of shares to an investor in the primary offering, the Company paid the Dealer Manager selling commissions of up to 3.0% of gross offering proceeds from the issuance of shares to that investor under the dividend reinvestment plan (which terminated effective April 10, 2012). The Dealer Manager reallowed all such selling commissions to the broker-dealer associated with such account. The Company also reimbursed the Dealer Manager for certain expenses related to the dividend reinvestment plan offering.

The Company records all related party fees as incurred, subject to any limitations described in the Advisory Agreement. The Company has granted no stock-based compensation awards to the Advisor or its affiliates and it did not incur any subordinated participation in net cash flows or subordinated incentive listing fees during the year ended December 31, 2014 or any previous periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Operating Expenses

Under the Advisory Agreement, the Advisor has the right to seek reimbursement from the Company for all costs and expenses it incurs in connection with the provision of services to the Company, including the Company’s allocable share of the Advisor’s overhead, such as rent, employee costs, utilities and information technology costs. Commencing July 1, 2010, the Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. In the future, the Advisor may seek reimbursement for additional employee costs. The Company will not reimburse the Advisor for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries and benefits the Advisor or its affiliates may pay to the Company’s executive officers.

Asset Management Fee

With respect to investments in real estate, the Company pays the Advisor a monthly asset management fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition fees and expenses related thereto. In the case of investments made through joint ventures, the asset management fee will be determined based on the Company’s proportionate share of the underlying investment. The Company calculates the asset management fee for its investment in the GKK Properties based on the original cost of the Company’s investment in the GKK Mezzanine Loan, rather than on the gross value of the GKK Properties it owns or in which it holds a leasehold interest.

With respect to investments in loans and any investments other than real estate, the Company pays the Advisor a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination fees and expenses related thereto) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination fees and expenses related to the acquisition or funding of such investment, as of the time of calculation.

With respect to an investment that has suffered an impairment in value, reduction in cash flow or other negative circumstances, such investment shall either be excluded from the calculation of the asset management fee described above or included in such calculation at a reduced value that is recommended by the Advisor and the Company’s management and then approved by a majority of the Company’s independent directors, and this change in the fee shall be applicable to an investment upon the earlier to occur of the date on which (i) such investment is sold, (ii) such investment is surrendered to a person other than the Company, its direct or indirect wholly owned subsidiary or a joint venture or partnership in which the Company has an interest, (iii) the Advisor determines that it will no longer pursue collection or other remedies related to such investment, or (iv) the Advisor recommends a revised fee arrangement with respect to such investment.

Disposition Fees

For substantial assistance in connection with the sale of properties or other investments, the Company pays the Advisor or its affiliates a disposition fee of 1% of the contract sales price of the properties or other investments sold. However, in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed 6% of the contract sales price of the properties or other investments sold. On January 15, 2015, the Company and the Advisor entered into an amendment to the Advisory Agreement between the parties to amend certain terms related to the disposition fee payable to the Advisor by the Company. See Note 16, “Subsequent Events — Advisory Agreement Amendment.”

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). To continue to qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to continue to qualify for treatment as a REIT.

The Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries have been assessed interest or penalties by any major tax jurisdictions. The Company’s evaluations were performed for the tax years ended December 31, 2014, 2013 and 2012. As of December 31, 2014, returns for the calendar years 2010 through 2013 remain subject to examination by major tax jurisdictions.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock, as there were no potentially dilutive securities outstanding during the years ended December 31, 2014, 2013 and 2012, respectively.

Distributions declared per share of common stock were $0.050, $0.395 and $0.085 for the years ended December 31, 2014, 2013 and 2012, respectively. For the period from January 1, 2012 through February 28, 2012, distributions were based on daily record dates and calculated at a rate of $0.00143836 per share per day. Each day during the period from January 1, 2012 through February 28, 2012 was a record date for distributions. On November 6, 2013, the Company’s board of directors declared a distribution in the amount of $0.395 per share of common stock to stockholders of record as of the close of business on November 8, 2013. On September 30, 2014, the Company’s board of directions declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on September 30, 2014. On December 9, 2014, the Company’s board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on December 29, 2014.

Segments

The Company’s segments are based on the Company’s method of internal reporting, which classifies its operations by investment type: (i) real estate, (ii) real estate-related and (iii) commercial properties primarily leased to financial institutions received under the Settlement Agreement, the GKK Properties. For financial data by segment, see Note 13, “Segment Information.”

Square Footage, Occupancy and Other Measures

Square footage, occupancy and other measures used to describe real estate and real estate-related investments included in these Notes to Consolidated Financial Statements are presented on an unaudited basis.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Recently Issued Accounting Standards Update

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”). ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: a) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; b) the component of an entity or group of components of an entity is disposed of by sale; or c) the component of an entity or group of components of an entity is disposed of other than by sale. ASU No. 2014-08 also requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective for reporting periods beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted ASU No. 2014-08 for the reporting period beginning January 1, 2014. As a result of the adoption of ASU No. 2014-08, results of operations for properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above. Additionally, any gain or loss on sale of real estate that does not meet the criteria for classification as a discontinued operation would be included in income from continuing operations on the consolidated statements of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company is still evaluating the impact of adopting ASU No. 2014-09 on its financial statements, but does not expect the adoption of ASU No. 2014-09 to have a material impact on its financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of ASU 2014-15 to have a significant impact on its financial statements.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU No. 2015-01”). The amendments in ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a significant impact on its financial statements.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014


3.	REAL ESTATE HELD FOR INVESTMENT

As of December 31, 2014, the Company’s portfolio of real estate held for investment, including the GKK Properties, was composed of approximately 10.2 million rentable square feet and was 79% occupied. These properties are located in 31 states and include office properties, industrial properties and bank branch properties. Included in the Company’s portfolio of real estate held for investment was 6.6 million rentable square feet related to the GKK Properties held for investment, which were 80% occupied as of December 31, 2014.

The following table summarizes the Company’s investments in real estate as of December 31, 2014 and 2013 (in thousands), including real estate held for non-sale disposition:



	Land		Buildings and Improvements			Tenant Origination and Absorption Costs			Total Real Estate Held for Investment
As of December 31, 2014:
Office	$	71,491	$	423,650		$	1,824		$	496,965
Industrial	16,788		80,565			3,137			100,490
GKK Properties	195,800		422,119			83,388			701,307
Real estate held for investment, at cost and net of impairment charges ⁽¹⁾	$	284,079	$	926,334		$	88,349		$	1,298,762
Accumulated depreciation/amortization	—		(155,353		)	(37,027		)	(192,380		)
Real estate held for investment, net	$	284,079	$	770,981		$	51,322		$	1,106,382
As of December 31, 2013:
Office	$	73,480	$	418,921		$	5,515		$	497,916
Industrial ⁽²⁾	16,788		82,816			5,220			104,824
GKK Properties ⁽²⁾	203,072		446,368			96,736			746,176
Real estate held for investment, at cost and net of impairment charges	$	293,340	$	948,105		$	107,471		$	1,348,916
Accumulated depreciation/amortization	—		(129,127		)	(38,960		)	(168,087		)
Real estate held for investment, net	$	293,340	$	818,978		$	68,511		$	1,180,829

_____________________

⁽¹⁾ See “—Impairment of Real Estate.”

⁽²⁾ The Company owned one industrial property and seven GKK Properties encompassing approximately 0.8 million rentable square feet that were held for non-sale disposition as of December 31, 2013.

Operating Leases

The Company’s real estate assets are leased to tenants under operating leases for which the terms and expirations vary. As of December 31, 2014, the Company’s leases, including the GKK Properties held for investment and excluding options to extend, had remaining terms of up to 12.2 years with a weighted-average remaining term of 5.2 years. As of December 31, 2014, leases related to the GKK Properties, excluding options to extend, had remaining terms of up to 12.2 years with a weighted-average remaining term of 5.4 years. Some of the Company’s leases have provisions to extend the term of the leases, options for early termination for all or a part of the leased premises after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. Additionally, the Company assumed several leases related to the GKK Properties which contain shedding rights provisions. As of December 31, 2014, these shedding rights totaled approximately 0.3 million square feet and can be exercised at various dates during the remainder of 2015 and 2016. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $3.0 million and $3.2 million as of December 31, 2014 and 2013, respectively.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

During the years ended December 31, 2014, 2013 and 2012, the Company recognized deferred rent from tenants of $3.4 million, $4.0 million and $5.2 million, respectively. These excess amounts for the years ended December 31, 2014, 2013 and 2012 were net of $1.4 million, $1.4 million and $0.4 million of lease incentive amortization, respectively. As of December 31, 2014 and 2013, the cumulative deferred rent balance was $31.4 million and $27.7 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $6.0 million and $6.0 million of unamortized lease incentives as of December 31, 2014 and 2013, respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.

The future minimum rental income from the Company’s properties under non-cancelable operating leases, including leases subject to shedding rights and excluding options to extend, as of December 31, 2014 for the years ending December 31 is as follows (in thousands):



2015	$	129,108
2016	126,527
2017	116,538
2018	103,040
2019	88,230
Thereafter	225,331
	$	788,774

As of December 31, 2014, the Company’s highest tenant industry concentration (greater than 10% of annualized base rent) was as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Finance	67	$	61,604	47.1	%

_____________________

As of December 31, 2014, no other tenant industries accounted for more than 10% of the Company’s annualized base rent. The Company currently has approximately 400 tenants over a diverse range of industries and geographical regions. As of December 31, 2014 and 2013, the Company had a bad debt expense reserve of $1.1 million and $6.4 million. During the years ended December 31, 2014, 2013 and 2012, the Company recorded bad debt expense related to its tenant receivables of $0.5 million, $2.2 million and $0.7 million, respectively.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

As of December 31, 2014, the Company had a concentration of credit risk related to leases with the following tenant that represented more than 10% of the Company’s annualized base rent:

Annualized Base Rent Statistics

Tenant

Property

Tenant

Industry

Rentable Square Feet

% of Portfolio Rentable

Sq. Ft.

Leased ⁽¹⁾

Annualized Base Rent ⁽¹⁾

(in thousands)

% of Portfolio Annualized Base Rent

Annualized Base Rent per Square Foot

Lease Expirations

Bank of America, N.A.

Various

Finance

3,093,593

30.4

27,465

21.0

8.88

⁽²⁾

_____________________

⁽²⁾ As of December 31, 2014, lease expiration dates ranged from 2015 through 2026 with a weighted-average remaining term of 5.2 years. Additionally, as of December 31, 2014, certain of Bank of America’s leases contained shedding right provisions. These shedding rights totaled approximately 0.3 million square feet and can be exercised at various dates during the remainder of 2015 and 2016.

Bank of America Corporation is the guarantor of various leases that its subsidiary, Bank of America, N.A., has with the Company. The condensed consolidated financial information of Bank of America Corporation has been included herein because of the significant credit concentration the Company has with this guarantor. Bank of America Corporation currently files its financial statements in reports filed with the SEC, and the following unaudited summary financial data regarding Bank of America Corporation is taken from its previously filed public reports. For more detailed financial information regarding Bank of America Corporation, please refer to its financial statements, which are publicly available with the SEC at http://www.sec.gov.



	Years Ended December 31,
	2014		2013		2012
Consolidated Statements of Income (in millions)
Total revenue, net of interest expense	$	84,247	$	88,942	$	83,334
Income before income taxes	6,855		16,172		3,072
Net income	4,833		11,431		4,188

	As of
	December 31, 2014		December 31, 2013
Consolidated Balance Sheets (in millions)
Total assets	$	2,104,534	$	2,102,273
Total liabilities	1,861,063		1,869,588
Total stockholders’ equity	243,471		232,685

No other tenant represented more than 10% of the Company’s annualized base rent.

Geographic Concentration Risk

As of December 31, 2014, the Company’s net investments in real estate in North Carolina represented 12% of the Company’s total assets. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in North Carolina’s real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office or bank branch space resulting from the local business climate, could adversely affect the Company’s operating results.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Impairment of Real Estate

Due to changes in cash flow estimates and hold periods, the Company recognized non-cash impairment charges to write-down the carrying value of certain of its real estate investments to their estimated fair values. During the year ended December 31, 2014, the Company recorded impairment charges of $10.1 million with respect to six properties (including two GKK Properties). Included in the Company’s impairment charges during the year ended December 31, 2014 was a $7.2 million impairment charge to reduce the carrying value of the Company’s investment in Tysons Dulles Plaza, an office property located in McLean, Virginia, to its estimated fair value due to a change in cash flow projections. The Company revised its cash flow projections for Tysons Dulles Plaza primarily because of a continued lag in demand in the Washington D.C. office rental market, resulting in ongoing leasing challenges and lower projected revenue growth. The Company also revised its cash flow projections to account for higher projected capital costs for tenant improvements and general building upgrades needed to attract additional tenants. In addition to the impairment on Tysons Dulles Plaza, the Company recognized impairment charges during the year ended December 31, 2014 of $2.9 million related to five other properties held for investment. No impairment charge related to any individual property was greater than $1.3 million. These impairments generally resulted from changes in leasing projections including longer estimated lease-up periods and lower projected rental rates, thus decreasing the projected cash flows the properties would generate.

During the year ended December 31, 2013, the Company recorded impairment charges of $40.2 million with respect to 11 of its real estate properties held for investment, consisting of (i) $19.5 million related to its investment in Tysons Dulles Plaza, (ii) $6.6 million related to its investment in Bridgeway Technology Center, (iii) $4.2 million related to its investment in the University Park Buildings, and (iv) $9.9 million related to eight other properties held for investment.

The Company recognized an impairment charge during the year ended December 31, 2013 of $19.5 million to reduce the carrying value of the Company’s investment in Tysons Dulles Plaza to its estimated fair value. The Company revised its cash flow projections for Tysons Dulles Plaza to address various deferred maintenance issues and other building system upgrades and replacements. The Company also revised its cash flow projections for Tysons Dulles Plaza because of a decrease in demand in the Washington D.C. office rental market, resulting in lower projected revenues, higher projected capital costs for tenant improvements and general building upgrades needed to attract additional tenants.

The Company recognized an impairment charge during the year ended December 31, 2013 of $6.6 million related to its investment in Bridgeway Technology Center, an office-flex property located in Newark, California, due to a change in the projected hold period and a decrease in projected cash flows as a result of a difficult leasing environment.

The Company recognized an impairment charge during the year ended December 31, 2013 of $4.2 million related to its investment in the University Park Buildings, an office property located in Sacramento, California, due to a decrease in projected rental rates. As a result, the projected undiscounted cash flows decreased to an amount less than the carrying value of the property and the Company recognized an impairment charge to reduce the carrying value of the University Park Buildings to their estimated fair value.

The Company recognized impairment charges during the year ended December 31, 2013 $9.9 million related to eight other properties held for investment. No impairment charge related to any individual property was greater than $2.2 million. These impairments generally resulted from changes in leasing projections including longer estimated lease-up periods and lower projected rental rates, thus decreasing the projected cash flows the properties would generate.

See Note 7, “Real Estate Held for Sale and Discontinued Operations,” for information regarding impairments of assets related to real estate held for sale.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014


4.	TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of December 31, 2014 and 2013, the Company’s tenant origination and absorption costs, above-market lease assets, and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	December 31, 2014			December 31, 2013			December 31, 2014			December 31, 2013			December 31, 2014			December 31, 2013
Cost, net of impairments ⁽¹⁾	$	88,349		$	107,471		$	34,329		$	36,586		$	(76,128	)	$	(83,300	)
Accumulated amortization ⁽¹⁾	(37,027		)	(38,961		)	(11,562		)	(9,670		)	35,274			29,683
Net amount	$	51,322		$	68,510		$	22,767		$	26,916		$	(40,854	)	$	(53,617	)

_____________________

⁽¹⁾ In 2014 and 2013, the Company wrote-off fully amortized tenant origination and absorption costs of $16.8 million and $12.0 million, respectively, above-market lease assets of $1.3 million and $3.4 million, respectively, and below-market lease liabilities of $6.2 million and $2.0 million, respectively.

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands):



	Tenant Origination and Absorption Costs									Above-Market Lease Assets									Below-Market Lease Liabilities
	For the Years Ended December 31,									For the Years Ended December 31,									For the Years Ended December 31,
	2014			2013			2012			2014			2013			2012			2014		2013		2012
Amortization	$	(16,345	)	$	(18,483	)	$	(22,440	)	$	(3,790	)	$	(4,560	)	$	(6,840	)	$	12,531	$	12,875	$	13,545

The remaining unamortized balance for these outstanding intangible assets and liabilities as of December 31, 2014 is expected to be amortized for the years ending December 31 as follows (in thousands):



	Tenant Origination and Absorption Costs			Above-Market Lease Assets			Below-Market Lease Liabilities
2015	$	(11,336	)	$	(3,396	)	$	10,548
2016	(9,246		)	(3,196		)	9,550
2017	(8,454		)	(2,752		)	8,395
2018	(7,935		)	(2,495		)	5,384
2019	(6,298		)	(2,093		)	4,068
Thereafter	(8,053		)	(8,835		)	2,909
	$	(51,322	)	$	(22,767	)	$	40,854
Weighted-Average Remaining Amortization Period	6.0 years			8.4 years			4.9 years

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014


5.	REAL ESTATE LOANS RECEIVABLE

As of December 31, 2014 and 2013, the Company, through indirect wholly owned subsidiaries, had invested in or originated real estate loans receivable as follows (dollars in thousands):



Loan Name Location of Related Property or Collateral	Date Acquired/ Originated	Property Type	Loan Type	Outstanding Principal Balance as of December 31, 2014 ⁽¹⁾		Book Value as of December 31, 2014 ⁽²⁾			Book Value as of December 31, 2013 ⁽²⁾			Contractual Interest Rate ⁽³⁾	Annualized Effective Interest Rate ⁽³⁾		Maturity Date
Sandmar Mezzanine Loan Southeast U.S. ⁽⁴⁾	01/09/2007	Retail	Mezzanine	$	5,160	$	5,181		$	5,025		5.4%	3.9	%	01/01/2017
Lawrence Village Plaza Loan Origination New Castle, Pennsylvania ⁽⁵⁾	08/06/2007	Retail	Mortgage	6,920		6,920			6,878			8.0%	8.1	%	09/01/2015
San Diego Office Portfolio B-Note San Diego, California ⁽⁶⁾	10/26/2007	Office	B-Note	20,000		17,450			16,710			5.8%	11.2	%	10/11/2017
4929 Wilshire B-Note Los Angeles, California	11/19/2007	Office	B-Note	3,886		3,365			3,245			6.1%	12.4	%	07/11/2017
				$	35,966	$	32,916		$	31,858
Reserve for Loan Losses ⁽⁷⁾				—		(3,994		)	(2,090		)
				$	35,966	$	28,922		$	29,768

_____________________

⁽¹⁾ Outstanding principal balance as of December 31, 2014 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns.

⁽²⁾ Book value represents outstanding principal balance, adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs. Loan balances are presented gross of any asset-specific reserves.

⁽³⁾ Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2014, using the interest method, divided by the average amortized cost basis of the investment during 2014. The contractual interest rates and annualized effective interest rates presented are as of December 31, 2014.

⁽⁴⁾ The Company had recorded an asset-specific loan loss reserve against this investment as of December 31, 2014. See “—Reserve for Loan Losses.”

⁽⁵⁾ On August 29, 2014, the Company and the borrower under the Lawrence Village Plaza Loan Origination entered into a loan modification under which the maturity date was extended to September 1, 2015.

⁽⁶⁾ The borrower under this note is a wholly owned subsidiary of the Irvine Company. Donald Bren, who is the brother of Peter Bren (one of the Company’s executive officers and sponsors), is the chairman of the Irvine Company. During the year ended December 31, 2014, the Company recognized $1.9 million of interest income related to its investment in this loan.

⁽⁷⁾ See “—Reserve for Loan Losses.”

As of December 31, 2014 and 2013, interest receivable from real estate loans receivable was $0.1 million and $0.5 million, respectively, and is included in rents and other receivables.

The following is a schedule of maturities for all real estate loans receivable outstanding as of December 31, 2014 (in thousands):



	Face Value (Funded)
2015	$	6,920
2016	—
2017	29,046
	$	35,966

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The following summarizes the activity related to real estate loans receivable for the year ended December 31, 2014 (in thousands):



Real estate loans receivable, net - December 31, 2013	$	29,768
Deferred interest	279
Principal repayments received on real estate loans receivable	(127		)
Accretion of discounts on purchased real estate loans receivable	1,007
Amortization of origination fees and costs on purchased and originated real estate loans receivable	(32		)
Change in loan loss reserve	(1,973		)
Real estate loans receivable, net - December 31, 2014	$	28,922

The following summarizes the Company’s investments in real estate loans receivable as of December 31, 2014 (in thousands):



Outstanding principal balance	$	35,966
Discounts on real estate loans receivable	(8,060		)
Accumulated accretion of discounts on purchases of real estate loans receivable	4,894
Origination fees and costs on purchases and originations of real estate loans receivable	348
Accumulated amortization of origination fees and costs, net	(232		)
Reserve for loan losses	(3,994		)
Real estate loans receivable, net - December 31, 2014	$	28,922

For the years ended December 31, 2014, 2013 and 2012, interest income from real estate loans receivable consisted of the following (in thousands):



	Years Ended December 31,
	2014			2013		2012
Contractual interest income	$	2,102		$	2,249	$	2,363
Interest accretion	1,007			972		767
Amortization of origination fees and costs and acquisition costs, net	(32		)	37		59
Interest income from real estate loans receivable	$	3,077		$	3,258	$	3,189

The Company generally recognizes income on impaired loans on either a cash basis, where interest income is only recorded when received in cash, or on a cost-recovery basis, where all cash receipts are applied against the carrying value of the loan. The Company will resume the accrual of interest if it determines the collection of interest according to the contractual terms of the loan is probable. The Company considers the collectibility of the loan’s principal balance in determining whether to recognize income on impaired loans on a cash basis or a cost-recovery basis. Beginning in July 2014, interest income received on the Sandmar Mezzanine Loan was recorded on a cost-recovery basis. During the years ended December 31, 2014 and 2013, the Company recognized $0.2 million and $0.4 million, respectively, of interest income related to the Sandmar Mezzanine Loan, which has an asset-specific reserve.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Reserve for Loan Losses

Changes in the Company’s reserve for loan losses for the year ended December 31, 2014 were as follows (in thousands):



Reserve for loan losses, December 31, 2013	$	2,090
Provision for loan losses	1,973
Reduction to reserve for loan losses	(69		)
Reserve for loan losses, December 31, 2014	$	3,994

As of December 31, 2014, the total reserve for loan losses consisted of $4.0 million of asset-specific reserves related to the Sandmar Mezzanine Loan, which had an amortized cost basis of $5.2 million.

The Company recorded a provision for loan loss reserves of $2.0 million related to the Sandmar Mezzanine Loan during the year ended December 31, 2014. During the year ended December 31, 2013, the Company did not record a provision for loan loss reserves. As of December 31, 2014, the borrower under the Sandmar Mezzanine Loan was delinquent and the Company will recognize income on this loan on a cost-recovery basis.


6.	REAL ESTATE SECURITIES

During the year ended December 31, 2014, the Company sold 1,386,602 shares of common stock of Gramercy for an aggregate sales price of $7.9 million. As a result, during the year ended December 31, 2014, the Company realized a gain on sale of its shares of common stock of Gramercy of $4.4 million. The following summarizes the activity related to real estate securities for the year ended December 31, 2014 (in thousands):



	Amortized Cost Basis			Unrealized Gains (Losses)			Total
Real estate securities - December 31, 2013	$	3,421		$	4,552		$	7,973
Unrealized change in market value of real estate securities	—			(100		)	(100		)
Sale of real estate securities	(3,421		)	(4,452		)	(7,873		)
Real estate securities - December 31, 2014	$	—		$	—		$	—


7.	REAL ESTATE HELD FOR SALE AND DISCONTINUED OPERATIONS

The Company early adopted ASU No. 2014-08 for the reporting period beginning January 1, 2014. As a result of the adoption of ASU 2014-08, properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. For more information, see Note 2, “Summary of Significant Accounting Policies — Recently Issued Accounting Standards Update.” Properties that were classified as held for sale in financial statements issued for the reporting periods prior to January 1, 2014 will remain in discontinued operations on the Company’s consolidated statement of operations. The operations and the aggregate net gains recognized upon the dispositions of properties that were classified as held for sale or to be disposed of prior to the reporting period beginning January 1, 2014 are presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the year ended December 31, 2013, the Company disposed of 112 properties (of which 111 were GKK Properties). During the year ended December 31, 2014, the Company disposed of 16 properties (of which 11 were GKK Properties), transferred a portfolio of five properties to the lender in satisfaction of the debt and other obligations due under the BOA Windsor Mortgage Portfolio (defined below), terminated its leasehold interest in three properties, transfered two GKK Properties to the lenders in connection with foreclosure proceedings (see Note 9, “Notes Payable — Loan Maturities and Defaults,” for information regarding foreclosure proceedings) and classified two properties (of which one was a GKK Property) with an aggregate net book value of $12.8 million as held for sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The following summary presents the major components of assets related to real estate held for sale and liabilities related to real estate held for sale as of December 31, 2014 and 2013 (in thousands):



	December 31,
	2014			2013
Assets related to real estate held for sale
Total real estate, at cost and net of impairment charges	$	13,157		$	111,922
Accumulated depreciation and amortization	(1,028		)	(13,952		)
Real estate held for sale, net	12,129			97,970
Other assets	1,046			5,837
Total assets related to real estate held for sale	$	13,175		$	103,807
Liabilities related to real estate held for sale
Notes payable	5,700			53,300
Other liabilities	308			3,125
Total liabilities related to real estate held for sale	$	6,008		$	56,425

During the year ended December 31, 2014, the Company classified one historical real estate property as held for sale. In addition, the Company sold four historical real estate properties and two GKK Properties, disposed of a portfolio of five properties in connection with a deed-in-lieu of foreclosure, and transferred two GKK Properties to the lenders in connection with foreclosure proceedings, which properties were not classified as held for sale in financial statements issued for the reporting period prior to January 1, 2014. In accordance with the Company’s early adoption of ASU No. 2014-08, the operations of these properties are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to these properties for the years ended December 31, 2014 and 2013 (in thousands):



	Years Ended December 31,
	2014		2013		2012
Revenues
Rental income	$	7,992	$	14,993	$	14,629
Tenant reimbursements and other operating income	2,020		3,004		2,811
Total revenues	10,012		17,997		17,440
Expenses
Operating, maintenance, and management	2,795		8,066		6,754
Real estate taxes and insurance	1,683		2,695		1,482
Asset management fees to affiliate	326		522		512
General and administrative expenses	50		13		42
Depreciation and amortization	2,263		4,604		7,382
Interest expense	4,483		7,801		4,525
Impairment of real estate	2,196		873		14,200
Total expenses	13,796		24,574		34,897

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Discontinued Operations

The following table summarizes operating income (loss) from discontinued operations for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	Years Ended December 31,
	2014			2013			2012
Total revenues and other income	$	2,505		$	26,297		$	198,388
Total expenses	922			23,574			201,149
Income (loss) from discontinued operations before gain on sales of real estate, net and impairment charge	1,583			2,723			(2,761		)
Gain on sales of real estate, net	4,797			47,997			53,691
Impairment charge	(257		)	(8,975		)	(37,218		)
Gain from extinguishment of debt	—			—			21,513
Income (loss) from discontinued operations	$	6,123		$	41,745		$	35,225


8.	FORECLOSED REAL ESTATE HELD FOR SALE

In 2006 and 2007, the Company originally made three debt investments (collectively, the “Tribeca Loans”) related to the Tribeca Building located at 415 Greenwich Street in New York, New York. On February 19, 2010, the borrowers under the Tribeca Loans defaulted and the Company foreclosed on the Tribeca Building by exercising its right to accept 100% of the ownership interest of the borrowers. The Company acquired the remaining unsold condominium units of the Tribeca Building (the residential, retail and parking space condominium units transferred to the Company are, collectively, the “Units” and, individually, each is a “Unit”) and assumed the project liabilities. The Company recorded the Tribeca Building at fair value using a discounted cash flow valuation model based on the net realizable value (expected sales price less estimated costs to sell the unsold Units) of the real estate.

As of December 31, 2014, the Company’s investment in the Tribeca Building consisted of two Units with a carrying value of $12.0 million and is presented as foreclosed real estate held for sale on the consolidated balance sheet. As of December 31, 2014, the remaining two Units in the Tribeca Building were under contract to sell. As such, and pursuant to the Advisory Agreement, on January 15, 2015, the conflicts committee of the Company’s board of directors approved a disposition fee to the Advisor equal to 1% of the aggregate contract sales price of the Units sold or to be sold by the Company. As a result, the Company recorded a disposition fee of $0.4 million, which is included in gain on sales of foreclosed real estate held for sale on the accompanying consolidated statements of operations, related to 26 Units, two retail Units and the parking space Units sold as of December 31, 2014. The disposition fee is calculated on a Unit by Unit basis and subject to other limitations set forth under the Advisory Agreement.

During the year ended December 31, 2014, the Company sold one Unit and recognized a gain on sale of $1.1 million (which includes disposition fees of $0.4 million discussed above) and recorded expenses of $1.2 million related to foreclosed real estate held for sale. Disposition fees are not payable until the final condominium unit is sold. During the year ended December 31, 2013, the Company sold two retail Units and parking space Units and recognized a gain on sale of $0.4 million and recorded expenses of $1.5 million related to foreclosed real estate held for sale. During the year ended December 31, 2012, the Company sold one Unit and recognized a gain on sale of $0.1 million and recorded expenses of $2.6 million related to foreclosed real estate held for sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

9. NOTES PAYABLE

As of December 31, 2014 and 2013, the Company’s notes payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):



Loan Type	Book Value as of December 31, 2014			Book Value as of December 31, 2013			Contractual Interest Rates as of December 31, 2014 ⁽¹⁾	Weighted-Average Interest Rates as of December 31, 2014 ⁽¹⁾	Weighted-Average Remaining Term in Years ⁽²⁾
Fixed Rate
Mortgage loans	$	62,200		$	165,399		5.9%	5.9%	1.8
GKK Properties mortgage loans	381,179			600,694			5.3% - 6.8%	5.9%	3.9
	443,379			766,093
Variable Rate
Mortgage loans	181,249			210,400			One-month LIBOR + 1.80%	2.0%	1.0
GKK Properties mortgage loans	40,000			—			One-month LIBOR + 3.00%	3.2%	2.4
	221,249			210,400
Total notes payable principal outstanding	664,628			976,493
Discount on notes payable, net⁽³⁾	(6,530		)	(14,211		)
Total notes payable, net	$	658,098		$	962,282

_____________________

⁽¹⁾ Contractual interest rates as of December 31, 2014 represent the range of interest rates in effect under these loans as of December 31, 2014. Weighted-average interest rates as of December 31, 2014 are calculated as the actual interest rates in effect under these loans as of December 31, 2014 (consisting of the contractual interest rates), using interest rate indices as of December 31, 2014, where applicable.

⁽²⁾ Weighted-average remaining term in years represents the initial maturity dates or the maturity dates as extended as of December 31, 2014; subject to certain conditions, the maturity dates of certain loans may be further extended.

⁽³⁾ Represents the unamortized discount and premium on notes payable due to the above- and below-market interest rates when the loans were assumed. The discount and premium are amortized over the remaining life of the respective loan.

As of December 31, 2014 and 2013, the Company’s deferred financing costs were $2.0 million and $1.9 million, respectively, net of amortization. During the years ended December 31, 2014, 2013 and 2012, the Company incurred interest expense, net of discontinued operations, of $45.9 million, $61.7 million and $67.0 million, respectively. Included in interest expense was: (i) the amortization of deferred financing costs of $1.5 million, $0.8 million and $6.0 million for the years ended December 31, 2014, 2013 and 2012, respectively and (ii) the amortization of discount and premium on notes payable, which increased interest expense by $3.4 million, $2.5 million and $2.5 million for the years ended December 31, 2014, 2013 and 2012. As of December 31, 2014 and 2013, $1.9 million and $7.9 million of interest was payable, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of December 31, 2014 (in thousands):



2015	$	15,651
2016	321,597
2017	159,175
2018	8,651
2019	126,044
Thereafter	33,510
	$	664,628

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The following summarizes the activity related to notes payable for the year ended December 31, 2014 (in thousands):



Total notes payable, net - December 31, 2013	$	962,282
Proceeds from notes payable	42,500
Deferred interest payable	637
Principal repayments	(269,830		)
Extinguishment of debt - discounted payoff agreement	(26,825		)
Extinguishment of debt - foreclosure or deed-in-lieu of foreclosure	(54,037		)
Amortization of discount and premium on notes payable, net	3,371
Total notes payable, net - December 31, 2014	$	658,098

Significant Financing Transaction

Citizens Bank Portfolio Mortgage Loan

On May 29, 2014, the Company, through an indirect wholly owned subsidiary, entered into a three-year mortgage loan with an unaffiliated lender, for borrowings of $40.0 million (the “Committed Amount”) secured by 52 Citizens Bank branch properties (the “Citizens Bank Portfolio Mortgage Loan”). The Citizens Bank Portfolio Mortgage Loan matures on June 1, 2017, with a one-year extension option, subject to certain terms and conditions contained in the loan documents. The Citizens Bank Portfolio Mortgage Loan bears interest at a floating rate of 300 basis points over one-month LIBOR. Monthly payments are interest-only. The Committed Amount must be reduced to $35.0 million as of May 29, 2015 and $30.0 million as of May 29, 2016. In addition, the Committed Amount must not be greater than $25.0 million as of May 29, 2017 for the Company to be permitted to exercise its extension option.

The Company used proceeds from the Citizens Bank Portfolio Mortgage Loan closing and cash on hand to repay the $63.1 million outstanding principal balance due under the previous loan secured by 52 Citizens Bank branch properties (the “CRE Mortgage Loan”). The CRE Mortgage Loan bore interest at 8.24% and was scheduled to mature July 1, 2036.

The Company, the borrower under the Citizens Bank Portfolio Mortgage Loan and two of the Company’s wholly owned subsidiaries, jointly and severally, are providing a guaranty of 100% of the principal outstanding and any and all other sums outstanding under or relating to the Citizens Bank Portfolio Mortgage Loan on the date the loan becomes due and payable in full.

BBD2 Loan

On April 16, 2014, the Company entered into an amendment (the “Fourth Amendment”) with respect to a mortgage loan the Company assumed pursuant to the Settlement Agreement (the “BBD2 Loan”). Pursuant to the terms of the Fourth Amendment, the Company paid to the lender under the BBD2 Loan (the “BBD2 Lender”) the amount of $52.0 million, $7.0 million of which was drawn from a reserve fund. The $52.0 million payment was applied to the outstanding balance of the BBD2 Loan free of defeasance, prepayment or any other fees, costs, expenses, restrictions or obligations of any type. Among other modifications, the Company and the BBD2 Lender also agreed upon a revised method of calculating operating income and the removal of the limitation on the number of times an event causing the imposition of a “cash trap” could be cured by the Company under the BBD2 Loan Agreement, as disclosed in the Fourth Amendment. As of December 31, 2014, the outstanding principal balance for the BBD2 Loan was $138.0 million.

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December 31, 2014

Loan Maturities and Defaults

During the year ended December 31, 2014, the Company: entered into a discounted payoff agreement with respect to a loan secured by one of the Company’s historical real estate investments with an outstanding principal balance of $26.8 million (the “Bridgeway Technology Center Mortgage Loan”); entered into a deed-in-lieu of foreclosure and transferred the GKK Properties that secured a mortgage loan the Company assumed pursuant to the Settlement Agreement with an outstanding principal balance of $6.1 million (the “BOA Windsor Mortgage Portfolio Loan”) to the lender in full satisfaction of the debt and other obligations due under the loan; transferred a GKK Property that secured a mortgage loan the Company assumed pursuant to the Settlement Agreement with an outstanding principal balance of $37.6 million (the “801 Market Street Mortgage Loan”) to the lender in connection with a foreclosure; and transferred a GKK Property that secured a mortgage loan the Company assumed pursuant to the Settlement Agreement with an outstanding principal balance of $14.6 million (the “Jenkins Court Mortgage Loan”) to the lender in connection with a foreclosure. During the year ended December 31, 2014, the Company recorded gain from extinguishment of debt of $21.3 million.

Bridgeway Technology Center Mortgage Loan

Beginning in June 2013, the Company failed to meet the monthly debt service payment requirements of the Bridgeway Technology Center Mortgage Loan and defaulted on this loan. As a result of the default, on June 12, 2013, the lender declared the total outstanding principal amount of $26.8 million together with any accrued interest, applicable default interest and any other interest and late charges immediately due and payable. The Bridgeway Technology Center Mortgage Loan matured on August 1, 2013. On April 14, 2014, the Company entered into an agreement with the lender to satisfy all amounts owed under the Bridgeway Technology Center Mortgage Loan, including the outstanding principal balance of $26.8 million and accrued and unpaid interest of $2.1 million, at a discounted payoff amount of $25.6 million, resulting in a gain on extinguishment of debt of $3.3 million.

BOA Windsor Mortgage Portfolio Loan

The BOA Windsor Mortgage Portfolio Loan matured on October 31, 2012 and on February 14, 2013, proceedings relating to the foreclosure of the properties securing the loan were commenced. On February 21, 2014, the Company entered into agreements for deed-in-lieu of foreclosure and transferred the properties securing the BOA Windsor Mortgage Portfolio Loan to the lender in full satisfaction of the debt and other obligations due under the loan.

As a result of the deed-in-lieu of foreclosure, the Company recorded a gain on extinguishment of debt of $1.8 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $7.0 million and the carrying value of the real estate properties and other assets which secured the loan of approximately $5.2 million, upon transfer of the properties securing the loan. Included in this gain on extinguishment of debt is a gain on the settlement of debt of $0.4 million, which represents the difference between the carrying value of the liabilities and the estimated fair value of the assets transferred to the lender, and a gain on the transfer of real estate assets of $1.4 million, which represents the difference between the estimated fair value and the carrying value of the real estate assets as of the date of transfer.

801 Market Street Mortgage Loan

The 801 Market Street Mortgage Loan matured on February 1, 2013 and as a result of the maturity, the lender commenced foreclosure proceedings and sought a judgment against the Company in the amount of $35.3 million, together with additional interest, fees, charges and costs recoverable under the loan documents. Effective as of June 17, 2013, the Company and the lender agreed to the appointment of a receiver to manage the property securing the 801 Market Street Mortgage Loan (“801 Market Street”) during the foreclosure proceedings. Upon the appointment of a receiver, the Company was precluded from any participation in the management of, or access to income or any financial information with respect to, 801 Market Street. The foreclosure sale of 801 Market Street took place on July 1, 2014 and title to the property transferred to the purchaser as of August 9, 2014, at which point the Company derecognized the property. In connection with the transfer of title to 801 Market Street to the purchaser, the lender released the Company from all debt and other obligations due under the 801 Market Street Mortgage Loan, with the exception of certain obligations of the Company described in the transaction documents which survived the transfer of title to 801 Market Street to the purchaser.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

During the years ended December 31, 2014, 2013 and 2012, the Company recorded revenues of $4.1 million, $8.6 million and $8.1 million, respectively, related to 801 Market Street. During the years ended December 31, 2014, 2013 and 2012, the Company recorded expenses of $5.0 million, $10.8 million and $20.2 million, respectively, related to 801 Market Street. The Company was not involved in the management of, and was unable to obtain any financial information related to, 801 Market Street between the time the receiver was appointed and the time title to the property transferred to the purchaser. Revenues and expenses during this period were estimated primarily based on historical operations of 801 Market Street prior to the appointment of the receiver.

As a result of the foreclosure sale, the Company recorded a gain on extinguishment of debt of $12.6 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $43.8 million and the carrying value of 801 Market Street and the other assets which secured the loan of approximately $31.2 million, upon transfer of the assets securing the loan. Included in this gain on extinguishment of debt is a gain on the settlement of debt of $11.0 million, which represents the difference between the carrying value of the liabilities and the estimated fair value of the assets transferred, and a gain on the transfer of real estate of $1.6 million, which represents the difference between the estimated fair value and the carrying value of 801 Market Street and other assets securing the 801 Market Street Mortgage Loan as of the date of transfer.

Jenkins Court Mortgage Loan

Beginning in June 2013, the Company failed to meet the monthly debt service payment requirements of the Jenkins Court Mortgage Loan and defaulted on this loan. On or about August 20, 2013, the lender commenced foreclosure proceedings and sought a judgment against the Company in the amount of $13.2 million, together with additional interest, fees, charges and costs recoverable under the loan documents. Effective as of September 24, 2013, the Company and the lender agreed to the appointment of a receiver to manage the property securing the loan (the “Jenkins Court”) during the foreclosure proceedings. Upon the appointment of a receiver, the Company was precluded from any participation in the management of, or access to income or any financial information with respect to, Jenkins Court. The foreclosure sale of Jenkins Court took place on June 3, 2014 and title to Jenkins Court transferred to the purchaser as of July 24, 2014, at which point, the Company derecognized Jenkins Court. In connection with the transfer of title to the purchaser, the lender released the Company from all debt and other obligations related to the Jenkins Court Mortgage Loan, with the exception of certain obligations of the Company described in the transaction documents which survived the transfer of title to Jenkins Court to the purchaser.

During the years ended December 31, 2014, 2013 and 2012, the Company recorded revenues of $1.3 million, $2.3 million and $2.7 million, respectively, related to Jenkins Court. During the years ended December 31, 2014, 2013 and 2012, the Company recorded expenses of $2.6 million, $4.5 million and $3.9 million, respectively, related to Jenkins Court. The Company was not involved in the management of, and was unable to obtain any financial information related to, Jenkins Court between the time the receiver was appointed and the time title to Jenkins Court transferred to the purchaser. Revenues and expenses during this period were estimated primarily based on historical operations of Jenkins Court prior to the appointment of the receiver.

As a result of the foreclosure sale, the Company recorded a gain on extinguishment of debt of $3.6 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $12.2 million and the carrying value of Jenkins Court and the other assets which secured the loan of approximately $8.6 million, upon transfer of the assets securing the loan. Included in this gain on extinguishment of debt is a gain on the settlement of debt of $0.8 million, which represents the difference between the carrying value of the liabilities and the estimated fair value of the assets transferred, and a gain on the transfer of real estate of $2.8 million, which represents the difference between the estimated fair value and the carrying value of the real estate property and other assets securing the Jenkins Court Mortgage Loan as of the date of transfer.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Debt Covenants

The documents evidencing the Company’s outstanding debt obligations typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties. A breach of the financial covenants in these documents may result in the lender imposing additional restrictions on the Company’s operations, such as restrictions on the Company’s ability to incur additional debt, or may allow the lender to impose “cash traps” with respect to cash flow from the property securing the loan. In addition, such a breach may constitute an event of default and the lender could require the Company to repay the debt immediately. If the Company fails to make such repayment in a timely manner, the lender may be entitled to take possession of any property securing the loan. As of December 31, 2014, the Company was in compliance with these debt covenants.


10.	FAIR VALUE DISCLOSURES


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other 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 assets and liabilities for which it is practicable to estimate the fair value:

Cash and cash equivalents, restricted cash, rent and other receivables, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

Real estate loans receivable: These instruments are presented in the accompanying consolidated balance sheets at their amortized cost net of recorded loan loss reserves and not at fair value. The fair values of real estate loans receivable were estimated using an internal valuation model that considered the expected cash flows for the loans, underlying collateral values (for collateral-dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.

Notes payable: The fair values of the Company’s notes payable are 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 a liability 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The following were the face values, carrying amounts and fair values of the Company’s real estate loans receivable and notes payable as of December 31, 2014 and 2013, which carrying amounts generally do not approximate the fair values (in thousands):



	December 31, 2014						December 31, 2013
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial assets:
Real estate loans receivable ⁽¹⁾	$	35,966	$	28,922	$	25,818	$	35,814	$	29,768	$	25,754
Financial liabilities:
Notes payable	$	664,628	$	658,098	$	688,374	$	976,493	$	962,282	$	965,463

_____________________

⁽¹⁾ Carrying amount of real estate loans receivable includes loan loss reserves.

Disclosure of the fair values of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. The actual value of these investments could be materially different from the Company’s estimate of value.


11.	RELATED PARTY TRANSACTIONS

The Company has entered into an Advisory Agreement with the Advisor and a Dealer Manager Agreement with the Dealer Manager. These agreements entitled the Advisor and/or the Dealer Manager to specified fees upon the provision of certain services with regard to the Offering and entitled the Advisor and Dealer Manager to reimbursement of organization and offering costs that were incurred by the Advisor and the Dealer Manager on behalf of the Company in connection with the Company’s now terminated Offering. In addition, the Advisory Agreement entitles the Advisor to specified fees for the management and disposition of investments, among other services, as well as to reimbursement for certain costs incurred by the Advisor in providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. For information related to a January 15, 2015 amendment to the Advisory Agreement, see Note 16, “Subsequent Events – Advisory Agreement Amendment.” The Company has also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with the Dealer Manager pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the DTCC Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor also serves, and the Dealer Manager also serves or served, as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust II, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc. and KBS Strategic Opportunity REIT II, Inc.

On January 6, 2014, the Company, together with KBS Real Estate Investment Trust II, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc., the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance.

During the years ended December 31, 2014, 2013 and 2012, no other transactions occurred between the Company and the other KBS-sponsored programs, except that on May 18, 2012, KBS Strategic Opportunity REIT, Inc. made an $8.0 million investment in a joint venture in which the Company indirectly owns a participation interest through another joint venture investment.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

Pursuant to the terms of the Advisory Agreement, Dealer Manager Agreement and the AIP Reimbursement Agreement, summarized below are the related-party costs incurred by the Company for the years ended December 31, 2014, 2013 and 2012, respectively, and any related amounts payable as of December 31, 2014 and 2013 (in thousands):



	Incurred						Payable as of
	Year Ended December 31,						December 31,
	2014		2013		2012		2014		2013
Expensed
Asset management fees⁽¹⁾	$	9,992	$	11,034	$	12,211	$	—	$	—
Reimbursement of operating expenses⁽²⁾	261		187		212		45		—
Disposition fees^{(3) (4)}	1,174		3,315		8,260		399		—
Additional Paid-in Capital
Selling commissions	—		—		262		—		—
	$	11,427	$	14,536	$	20,945	$	444	$	—

_____________________

⁽¹⁾ Amounts include asset management fees from discontinued operations totaling $17,000, $0.9 million and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. On March 20, 2012, pursuant to the Advisory Agreement, the Advisor agreed to forgive debt related to $1.6 million of advances from the Advisor to the Company related to distributions and the Advisor agreed to waive the approximately $5.4 million of performance fees related to the National Industrial Portfolio.

⁽²⁾ The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company reimburses the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively, and were the only types of employee costs reimbursed under the Advisory Agreement for the years ended December 31, 2014, 2013 and 2012. The Company will not reimburse for employee costs in connection with services for which the Advisor earns disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers.

⁽³⁾ Disposition fees with respect to real estate sold are included in the gain (loss) on sales of real estate in the accompanying consolidated statements of operations. Disposition fees with respect to real estate loans receivable sold are reflected in the provision for loan losses in the accompanying consolidated statements of operations. Disposition fees with respect to real estate securities sold are included in the gain on sales of real estate securities in the accompanying consolidated statements of operations. Also see Note 8, “Foreclosed Real Estate Held for Sale” with respect to disposition fees on foreclosed real estate held for sale.

⁽⁴⁾ As of December 31, 2014, the Company had sold 158 GKK Properties for an aggregate contract sales price of $211.5 million for which the Company had not paid or accrued a disposition fee. If the conflicts committee of the Company’s board of directors determines the Company has recovered its entire investment related to the GKK Mezzanine Loan and the GKK Properties upon the sale of the final GKK Property, the conflicts committee may authorize the Company to pay the Advisor a disposition fee of up to 1% of the aggregate contract sales price of these 158 GKK Properties sold as of December 31, 2014, which amount would be determined by the conflicts committee in its sole discretion. See Note 16, “Subsequent Events – Advisory Agreement Amendement.”


12.	SUPPLEMENTAL CASH FLOW AND SIGNIFICANT NONCASH TRANSACTION DISCLOSURES

Supplemental cash flow and significant noncash transaction disclosures were as follows (in thousands):



	For the Years Ended December 31,
	2014		2013		2012
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	47,095	$	60,598	$	108,801
Supplemental Disclosure of Significant Noncash Investing and Financing Activities:
Mortgage loans extinguished in connection with foreclosures and deed in lieu of foreclosure	$	54,028	$	—	$	207,189
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	—	$	—	$	11,131
Increase in distributions payable	$	4,699	$	—	$	—
Increase in capital accruals	$	6,004	$	1,319	$	—

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014


13.	SEGMENT INFORMATION

The Company presently operates in three business segments based on its investment types: real estate, real estate-related and commercial properties primarily leased to financial institutions received under the Settlement Agreement, or the GKK Properties. Under the real estate segment, the Company has invested primarily in office and industrial properties located throughout the United States. The real estate segment excludes all real estate properties that were classified as discontinued operations as of December 31, 2014. Under the real estate-related segment, the Company has invested in or originated mortgage loans, mezzanine loans and other real estate-related assets, including real estate securities. The GKK Properties segment consists of primarily office properties, bank branch properties, operations centers and other properties located in 30 states but excludes GKK Properties that were classified as discontinued operations as of December 31, 2014. All revenues earned from the Company’s three reporting segments were from external customers and there were no intersegment sales or transfers. The Company does not allocate corporate-level accounts to its reporting segments. Corporate-level accounts include corporate general and administrative expenses, asset management fees, non-operating interest income and other corporate-level expenses. The accounting policies of the reporting segments are consistent with those described in Note 2, “Summary of Significant Accounting Policies.”

The Company evaluates the performance of its segments based upon net operating income from continuing operations (“NOI”), which is a non-GAAP supplemental financial measure. The Company defines NOI for its real estate segment and the GKK Properties segment as operating revenues (rental income, tenant reimbursements and other operating income) less property and related expenses (property operating expenses, real estate taxes, insurance and provision for bad debt) less interest expense. The Company defines NOI for its real estate-related segment as interest income and income from its unconsolidated joint venture investment less loan servicing costs (if applicable) and interest expense (if applicable). NOI excludes certain items that are not considered to be controllable in connection with the management of an asset such as non-property income and expenses, depreciation and amortization, asset management fees and corporate general and administrative expenses. The Company uses NOI to evaluate the operating performance of the Company’s real estate investments, real estate-related investments and the GKK Properties and to make decisions about resource allocations. The Company believes that net income is the GAAP measure that is most directly comparable to NOI; however, NOI should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes the items described above. Additionally, NOI as defined above may not be comparable to other REITs or companies as their definitions of NOI may differ from the Company’s definition. During the year ended December 31, 2014, the Company revised its definition of NOI to exclude asset management fees, which the Company does not consider to be controllable in connection with the management of each property or real estate-related asset and is viewed by the chief operating decision makers as a corporate-level administrative expense. NOI for all prior periods presented has been adjusted to conform to the current period definition.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The following tables summarize total revenues, interest expense and NOI for each reportable segment for the years ended December 31, 2014, 2013 and 2012, and total assets and total liabilities for each reportable segment as of December 31, 2014 and 2013 (in thousands):



	Years Ended December 31,
	2014		2013		2012
Revenues:
Real estate segment⁽¹⁾	$	71,965	$	76,087	$	76,626
Real estate-related segment	3,077		3,258		3,878
GKK Properties segment	137,423		138,959		137,589
Total revenues	$	212,465	$	218,304	$	218,093
Interest expense:
Real estate segment⁽¹⁾	$	9,613	$	18,001	$	20,953
Real estate-related segment	—		—		24
GKK Properties segment	36,310		43,681		46,058
Total interest expense	$	45,923	$	61,682	$	67,035
NOI:
Real estate segment⁽¹⁾	$	29,437	$	24,545	$	22,192
Real estate-related segment	2,940		3,255		4,602
GKK Properties segment	22,634		13,629		15,994
Total NOI	$	55,011	$	41,429	$	42,788

	December 31,
	2014		2013
Assets:
Real estate segment	$	569,380	$	580,472
Real estate-related segment	29,096		38,333
GKK Properties segment	717,680		816,110
Total segment assets	1,316,156		1,434,915
Real estate held for sale	13,175		103,807
Foreclosed real estate held for sale	12,045		19,064
Corporate-level⁽²⁾	34,791		187,111
Total assets	$	1,376,167	$	1,744,897
Liabilities:
Real estate segment	$	251,840	$	339,512
Real estate-related segment	—		3
GKK Properties segment	499,908		691,723
Total segment liabilities	751,748		1,031,238
Real estate held for sale	6,008		56,425
Corporate-level⁽³⁾	5,638		1,341
Total liabilities	$	763,394	$	1,089,004

_____________________

⁽¹⁾ Amounts include certain properties in continuing operations that were sold or held for sale as of December 31, 2014. See Note 7, “Real Estate Held for Sale and Discontinued Operations” for more information.

⁽²⁾ Total corporate-level assets consisted primarily of cash and cash equivalents of approximately $34.2 million and $186.7 million as of December 31, 2014 and 2013, respectively.

⁽³⁾ As of December 31, 2014, corporate-level liabilities consisted primarily of distributions payable. As of December 31, 2013, corporate-level liabilities consisted primarily of accounts payable and accrued liabilities for general and administrative expenses.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014

The following table reconciles the Company’s net loss to its NOI for the years ended December 31, 2014, 2013 and 2012 (amounts in thousands):



	Years Ended December 31,
	2014			2013			2012
Net loss	$	(21,266	)	$	(46,495	)	$	(43,142	)
Gain on sales of real estate	(2,282		)	—			—
Gain on sales of real estate securities	(4,410		)	(10,470		)	(25,456		)
Gain from extinguishment of debt	(21,328		)	—			—
Gain on sales of foreclosed real estate held for sale	(1,108		)	(378		)	(127		)
Other income and interest income	(938		)	(3,389		)	(44		)
Asset management fees to affiliate	9,975			10,110			10,355
General and administrative expenses	18,788			17,861			22,439
Depreciation and amortization	71,613			75,745			81,964
Impairment charges on real estate held for investment	10,117			40,190			31,882
Provision for loan losses	1,973			—			142
Total income from discontinued operations	(6,123		)	(41,745		)	(35,225		)
NOI ⁽¹⁾	$	55,011		$	41,429		$	42,788

_____________________


14.	SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2014 and 2013 (in thousands, except per share amounts):



	2014
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Revenues	$	54,006		$	54,462		$	52,885		$	51,112
Total income from discontinued operations	$	3,152		$	9		$	298		$	2,664
Net loss attributable to common stockholders	$	(4,515	)	$	(7,652	)	$	(249	)	$	(8,850	)
Loss per common share, basic and diluted	$	(0.02	)	$	(0.04	)	$	—		$	(0.05	)
Distributions declared per common share ⁽¹⁾	$	—		$	—		$	0.025		$	0.025



	2013
	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Revenues	$	54,482	$	55,436		$	54,113		$	54,273
Total income (loss) from discontinued operations	$	28,890	$	1,046		$	(916	)	$	12,725
Net income (loss) attributable to common stockholders	$	11,254	$	(40,885	)	$	(14,915	)	$	(1,949	)
Income (loss) per common share, basic and diluted	$	0.06	$	(0.21	)	$	(0.08	)	$	(0.01	)
Distributions declared per common share ⁽²⁾	$	—	$	—		$	—		$	0.395

____________________

⁽¹⁾ On September 30, 2014, the Company’s board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on September 30, 2014. On December 9, 2014, the Company’s board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on December 29, 2014.

⁽²⁾On November 6, 2013, the Company’s board of directors declared a one-time distribution in the amount of $0.3950 per share of common stock, or an aggregate amount of $75.0 million, to stockholders of record as of the close of business on November 8, 2013.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014


15.	COMMITMENTS AND CONTINGENCIES

Lease Obligations

Pursuant to the Settlement Agreement, the Company indirectly received leasehold interests in certain commercial properties, pursuant to leases between the owner of the property, as landlord, and the Company, as tenant. The ground leases have expiration dates between 2017 and 2101 and the building leases have expiration dates during the remainder of 2015 through 2085. These lease obligations generally contain rent increases and renewal options. In certain instances, the rent owed by the Company to the owner of the property under the lease is greater than the revenue received by the Company from the tenants occupying the property.

Future minimum lease payments owed by the Company under non-cancelable operating building and ground leases as of December 31, 2014 were as follows (in thousands):



2015	$	17,185
2016	16,733
2017	12,819
2018	2,621
2019	2,236
Thereafter	34,612
	$	86,206

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the management of the Company’s real estate and real estate-related investment portfolio; the disposition of real estate and real estate-related investments; and other general and administrative responsibilities. In the event that the Advisor is unable to provide any of these services, the Company will be required to obtain such services from other sources. The Company is also dependent on the Property Manager for the Services under the Amended Services Agreement, including the operations, leasing and eventual dispositions of the GKK Properties.

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 properties could result in future environmental liabilities.

Under the Settlement Agreement, the Company indirectly took title to or, with respect to a limited number of the GKK Properties, indirectly took a leasehold interest in, the GKK Properties on an “as is” basis. As such, the Company was not able to inspect the GKK Properties or conduct standard due diligence on certain of the GKK Properties before the transfers of the properties. Additionally, the Company did not receive representations, warranties and indemnities relating to the GKK Properties from Gramercy and/or its affiliates. Thus, the value of the GKK Properties may decline if the Company subsequently discovers environmental problems with the GKK Properties.

Legal Matters

From time to time, the Company is party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings the outcome of which is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2014


16.	SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Distribution Paid

On January 2, 2015, the Company paid distributions of $4.7 million, which related to a distribution declared by the Company’s board of directors in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on December 29, 2014.

Distributions Declared

On March 6, 2015, the Company’s board of directors declared a distribution in the amount of $0.025 per share of common stock to stockholders of record as of the close of business on March 20, 2015. The Company expects to pay this distribution on or about March 26, 2015.

Advisory Agreement Amendment

On January 15, 2015, the Company and the Advisor entered into an amendment to the Advisory Agreement between the parties to amend certain terms related to the disposition fee payable to the Advisor by the Company. In accordance with the Advisory Agreement, for substantial assistance in connection with the sale of properties, loans or other investments as determined by the conflicts committee of the Company’s board of directors, the Company pays the Advisor or its affiliates a disposition fee of 1% of the contract sales price of the properties, loans or other investments sold. However, in no event may the total commissions (including such disposition fees) paid to the Advisor, its affiliates and unaffiliated third parties exceed 6% of the contract sales price of the property, loan or other investment sold or exceed a competitive real estate commission. Pursuant to the amendment, the disposition fee related to the sales of GKK Properties has been modified to provide that the conflicts committee will determine in its sole discretion the amount of the disposition fee related to the sale of GKK Properties upon the terms set forth below, which disposition fee may be an amount not to exceed 1% of the contract sales price, which maximum amount is consistent with the fixed percentage applicable to the sales of other properties, loans and other investments under the advisory agreement.

The amendment provides that with respect to sales of the GKK Properties, and provided that the Conflicts Committee determines that the Advisor has provided a substantial amount of services in connection with the sale of each GKK Property for which the payment of a disposition fee is requested by the Advisor, then:

(a)

With respect to portfolio or single asset sales of GKK Properties designated by the conflicts committee in its sole discretion at or about the time of the sale, the Company will pay the Advisor a fee in an amount not to exceed 1% of the contract sales price and subject to other limitations and conditions set forth in the advisory agreement, as determined by the conflicts committee in its sole discretion, which fee will be payable upon the respective closing; and

(b)

With respect to sales of all other GKK Properties for which a disposition fee has not yet been paid, if, upon the sale of the final GKK Property, the conflicts committee determines in its sole discretion that the Company has recovered its entire investment related to the GKK Mezzanine Loan and the GKK Properties subsequent to the Settlement Agreement, after taking into consideration the net cash flow received by the Company from the investment, whether in the form of (i) net proceeds from the sales or other dispositions or transfers of the GKK Properties, (ii) the net cash flow related to the GKK Mezzanine Loan, (iii) the net cash flow related to the GKK Properties subsequent to the Settlement Agreement and/or (iv) other proceeds related to the assets and liabilities received under the Settlement Agreement, then the Company will pay the Advisor a fee in an amount not to exceed 1% of the contract sales price and subject to other conditions set forth in the advisory agreement, as determined by the conflicts committee in its sole discretion, which fee will be payable promptly upon such determination by the conflicts committee.

As of January 15, 2015, the Company had sold 158 GKK Properties for an aggregate contract sales price of $211.5 million for which the Company had not paid or accrued a disposition fee. If the conflicts committee determines the Company has recovered its entire investment related to the GKK Mezzanine Loan and the GKK Properties upon the sale of the final GKK Property, the conflicts committee may authorize the Company to pay the Advisor a disposition fee of up to 1% of the aggregate contract sales price of these GKK Properties sold as of January 15, 2015, which amount would be determined by the conflicts committee in its sole discretion.

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



Description	Balance at Beginning of Year		Additions Charged Against Operations		Uncollectible Accounts Written-off			Balance at End of Year
Year Ended December 31, 2014
Allowance for doubtful accounts	$	6,385	$	683	$	(6,017	)	$	1,051
Reserve for loan losses	2,090		1,973		(69		)	3,994

Year Ended December 31, 2013
Allowance for doubtful accounts	$	5,297	$	2,490	$	(1,402	)	$	6,385
Reserve for loan losses	2,222		—		(132		)	2,090

Year Ended December 31, 2012
Allowance for doubtful accounts	$	5,007	$	835	$	(545	)	$	5,297
Reserve for loan losses	74,134		142		(72,054		)	2,222

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2014

(dollar amounts in thousands)



						Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances		Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Properties Held for Investment
Plaza in Clayton	Saint Louis, MO	100	%	$	62,200	$	2,793	$	91,162	$	93,955	$	(2,562	)	$	2,793	$	88,600	$	91,393	$	(20,146	)	2001	09/27/2006
825 University Avenue Building	Norwood, MA	100	%	—		4,165		27,087		31,252		(8,683		)	3,676		18,893		22,569		(3,578		)	2004/2006	12/05/2006
Royal Ridge Building	Alpharetta, GA	100	%	⁽⁴⁾		3,500		33,166		36,666		(10,787		)	3,313		22,566		25,879		(1,593		)	2001	06/21/2007
Bridgeway Technology Center	Newark, CA	100	%	—		11,299		34,705		46,004		(21,942		)	7,044		17,018		24,062		(800		)	1996	06/27/2007
Plainfield Business Center	Plainfield, IN	100	%	—		2,270		15,089		17,359		(4,697		)	2,136		10,526		12,662		(324		)	Various	07/25/2007
ADP Plaza	Portland, OR	100	%	⁽⁴⁾		5,100		28,755		33,855		2,855			5,100		31,610		36,710		(6,233		)	1981	11/07/2007
Woodfield Preserve Office Center	Schaumburg, IL	100	%	⁽⁴⁾		7,001		121,603		128,604		(13,352		)	7,001		108,251		115,252		(21,749		)	2001	11/13/2007
Rivertech I and II	Billerica, MA	100	%	⁽⁴⁾		3,931		42,111		46,042		(4,847		)	3,931		37,264		41,195		(8,467		)	1983/2001,2007	02/20/2008
Tysons Dulles Plaza	McLean, VA	100	%	—		38,839		121,210		160,049		(42,146		)	31,701		86,202		117,903		(910		)	1986-1990	06/06/2008
Great Oaks Center	Alpharetta, GA	100	%	⁽⁴⁾		7,743		28,330		36,073		(17,918		)	3,349		14,806		18,155		(178		)	1999	07/18/2008
University Park Buildings	Sacramento, CA	100	%	⁽⁴⁾		4,520		22,029		26,549		(6,716		)	3,739		16,094		19,833		(818		)	1981	07/31/2008
Meridian Tower	Tulsa, OK	100	%	⁽⁴⁾		2,050		16,728		18,778		1,483			2,050		18,211		20,261		(4,166		)	1982	08/18/2008
North Creek Parkway Center	Bothell, WA	100	%	⁽⁴⁾		11,200		30,755		41,955		(5,055		)	9,941		26,959		36,900		(2,533		)	1986-1987	08/28/2008
City Gate Plaza	Sacramento, CA	100	%	⁽⁴⁾		2,880		18,895		21,775		(7,094		)	2,505		12,176		14,681		(389		)	1988-1990	11/25/2008
Bentonville	Benton, AR	100	%	⁽⁵⁾		167		607		774		(9		)	167		598		765		(156		)	1973 / 1981	09/01/2011
Mountain Home - Main Building	Mountain Home, AR	100	%	⁽⁵⁾		380		438		818		(54		)	380		384		764		(153		)	1980	09/01/2011
RH Johnson - Main Building	Sun City, AZ	100	%	⁽⁵⁾		949		546		1,495		28			949		574		1,523		(208		)	1981	09/01/2011
Arnold	Arnold, CA	100	%	⁽⁵⁾		213		684		897		(65		)	213		619		832		(160		)	1981	09/01/2011
Bay - Fair	San Leandro, CA	100	%	⁽⁵⁾		913		594		1,507		(90		)	913		504		1,417		(157		)	1981	09/01/2011
Burlingame - Main Building	Burlingame, CA	100	%	⁽⁵⁾		671		467		1,138		(87		)	671		380		1,051		(134		)	1961	09/01/2011
Canoga Park Branch	Canoga Park, CA	100	%	⁽⁵⁾		886		467		1,353		(45		)	886		422		1,308		(142		)	1957	09/01/2011
College Heights	Bakersfield, CA	100	%	⁽⁵⁾		582		523		1,105		(90		)	582		433		1,015		(144		)	1979	09/01/2011
Dinuba	Dinuba, CA	100	%	⁽⁵⁾		496		357		853		(21		)	496		336		832		(118		)	1972	09/01/2011
East Fresno	Fresno, CA	100	%	⁽⁵⁾		373		463		836		(37		)	373		426		799		(140		)	1959	09/01/2011
Eureka Main	Eureka, CA	100	%	⁽⁵⁾		427		482		909		(87		)	427		395		822		(226		)	1900	09/01/2011
Folsum	Folsum, CA	100	%	⁽⁵⁾		506		402		908		(78		)	506		324		830		(112		)	1981	09/01/2011
Fort Bragg	Fort Bragg, CA	100	%	⁽⁵⁾		332		528		860		(85		)	332		443		775		(138		)	1975	09/01/2011
Hanford - Main Building	Hanford, CA	100	%	⁽⁵⁾		466		614		1,080		(36		)	466		578		1,044		(179		)	1976	09/01/2011
Healdsburg	Healdsburg, CA	100	%	⁽⁵⁾		850		407		1,257		(33		)	850		374		1,224		(117		)	1979	09/01/2011
Hemet Branch	Hemet, CA	100	%	⁽⁵⁾		1,200		780		1,980		—			1,200		780		1,980		(313		)	1982	09/01/2011
Hilltop	Redding, CA	100	%	⁽⁵⁾		773		437		1,210		(44		)	773		393		1,166		(132		)	1982	09/01/2011
Lemoore	Lemoore, CA	100	%	⁽⁵⁾		175		407		582		108			175		515		690		(157		)	1959	09/01/2011
Lincoln Village	Stockton, CA	100	%	⁽⁵⁾		642		484		1,126		(36		)	642		448		1,090		(158		)	1980	09/01/2011

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction		Date Acquired
Livermore	Livermore, CA	100	%	⁽⁵⁾	$	755	$	655	$	1,410	$	(35	)	$	755	$	620	$	1,375	$	(195	)	1982		09/01/2011
Martin Luther King Jr.	Los Angeles, CA	100	%	⁽⁵⁾	1,278		626		1,904		(43		)	1,278		583		1,861		(197		)	1971		09/01/2011
Mission-23rd	San Francisco, CA	100	%	⁽⁵⁾	618		471		1,089		—			618		471		1,089		(166		)	1925		09/01/2011
Montrose Branch	Montrose, CA	100	%	⁽⁵⁾	906		402		1,308		(18		)	906		384		1,290		(128		)	1952		09/01/2011
Ontario Plaza Branch	Ontario, CA	100	%	⁽⁵⁾	370		439		809		—			370		439		809		(148		)	1982	��	09/01/2011
Orangevale Branch	Orangevale, CA	100	%	⁽⁵⁾	469		798		1,267		(121		)	469		677		1,146		(161		)	1978		09/01/2011
Oroville	Oroville, CA	100	%	⁽⁵⁾	669		381		1,050		(69		)	669		312		981		(98		)	1981		09/01/2011
Pleasanton	Pleasanton, CA	100	%	⁽⁵⁾	944		448		1,392		(24		)	944		424		1,368		(126		)	1981		09/01/2011
Porterville - Main Building	Porterville, CA	100	%	⁽⁵⁾	729		457		1,186		(58		)	729		399		1,128		(137		)	1974		09/01/2011
Reedley	Reedley, CA	100	%	⁽⁵⁾	450		541		991		(89		)	450		452		902		(142		)	1964		09/01/2011
Reseda Branch	Reseda, CA	100	%	⁽⁵⁾	449		388		837		(35		)	449		353		802		(128		)	1958		09/01/2011
Ridgecrest	Ridgecrest, CA	100	%	⁽⁵⁾	634		478		1,112		(53		)	634		425		1,059		(149		)	1973		09/01/2011
Sherman Oaks	Sherman Oaks, CA	100	%	⁽⁵⁾	957		483		1,440		(49		)	957		434		1,391		(147		)	1958		09/01/2011
Slauson - Vermont	Los Angeles, CA	100	%	⁽⁵⁾	1,159		609		1,768		(23		)	1,159		586		1,745		(198		)	1971		09/01/2011
St. Helena	St. Helena, CA	100	%	⁽⁵⁾	824		763		1,587		(26		)	824		737		1,561		(255		)	1976		09/01/2011
Stockton Agri-Center	Stockton, CA	100	%	⁽⁵⁾	591		508		1,099		(28		)	591		480		1,071		(162		)	1982		09/01/2011
Susanville	Susanville, CA	100	%	⁽⁵⁾	182		317		499		6			182		323		505		(110		)	1979		09/01/2011
Toluca Lake	Burbank, CA	100	%	⁽⁵⁾	522		869		1,391		(10		)	522		859		1,381		(229		)	1978		09/01/2011
Turlock - Main Building	Turlock, CA	100	%	⁽⁵⁾	805		556		1,361		(45		)	805		511		1,316		(207		)	1971		09/01/2011
Vacaville Financial Center	Vacaville, CA	100	%	⁽⁵⁾	577		489		1,066		(31		)	577		458		1,035		(161		)	1980		09/01/2011
Vernon Branch	Vernon, CA	100	%	⁽⁵⁾	1,102		566		1,668		(53		)	1,102		513		1,615		(173		)	1960		09/01/2011
West Los Angeles Branch	W. Los Angeles, CA	100	%	⁽⁵⁾	991		570		1,561		—			991		570		1,561		(224		)	1957		09/01/2011
Williow Glenn	San Jose, CA	100	%	⁽⁵⁾	353		295		648		(44		)	353		251		604		(101		)	1955		09/01/2011
Batterson	Farmington, CT	100	%	⁽⁵⁾	3,390		7,113		10,503		652			3,390		7,765		11,155		(3,230		)	1970		09/01/2011
Greenwich	Greenwich, CT	100	%	⁽⁵⁾	1,353		5,675		7,028		103			1,353		5,778		7,131		(1,436		)	1927		09/01/2011
North Wakefield Drive	Newark, DE	100	%	⁽⁵⁾	1,662		10,166		11,828		—			1,662		10,166		11,828		(2,382		)	1996		09/01/2011
Baypoint	Miami, FL	100	%	⁽⁵⁾	246		619		865		(52		)	246		567		813		(226		)	1958		09/01/2011
Bayshore - Main Building	Bradentown, FL	100	%	⁽⁵⁾	391		445		836		72			391		517		908		(157		)	1971		09/01/2011
Blountstown - Main Building	Blountstown, FL	100	%	⁽⁵⁾	69		365		434		(11		)	69		354		423		(98		)	1981		09/01/2011
Charlotte Harbor - Main Building	Port Charlotte, FL	100	%	⁽⁵⁾	272		500		772		(297		)	272		203		475		(23		)	1990		09/01/2011
Coral Ridge - Main Building	Ft. Lauderdale, FL	100	%	⁽⁵⁾	835		1,099		1,934		(54		)	835		1,045		1,880		(559		)	1969		09/01/2011
Crystal River - Main Building	Crystal River, FL	100	%	⁽⁵⁾	119		329		448		(38		)	119		291		410		(93		)	1970		09/01/2011
Ft. Myers Beach - Main Building	Ft. Myers Beach, FL	100	%	⁽⁵⁾	230		407		637		(183		)	230		224		454		(50		)	1968		09/01/2011
Ft. Walton Beach - Main Building	Ft. Walton Beach, FL	100	%	⁽⁵⁾	427		478		905		(153		)	427		325		752		(99		)	1975		09/01/2011

F-46

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Homestead - Main Building	Homestead, FL	100	%	⁽⁵⁾	$	1,113	$	578	$	1,691	$	(87	)	$	1,113	$	491	$	1,604	$	(166	)	1973	09/01/2011
Live Oak - Main Building	Live Oak, FL	100	%	⁽⁵⁾	679		942		1,621		—			679		942		1,621		(554		)	1965	09/01/2011
Midway - Main Building	Miami, FL	100	%	⁽⁵⁾	1,401		826		2,227		106			1,401		932		2,333		(387		)	1974	09/01/2011
Plantation - Main Building	Plantation, FL	100	%	⁽⁵⁾	1,189		1,092		2,281		6			1,189		1,098		2,287		(229		)	1976/2002	09/01/2011
Trouble Creek - Main Building	New Port Richey, FL	100	%	⁽⁵⁾	453		478		931		(141		)	453		337		790		(120		)	1970	09/01/2011
West Sunrise - Main Building	Plantation, FL	100	%	⁽⁵⁾	1,060		1,146		2,206		123			1,060		1,269		2,329		(570		)	1976	09/01/2011
Weeki Wachee - Main Building	Brooksville, FL	100	%	⁽⁵⁾	407		813		1,220		17			407		830		1,237		(358		)	1970	09/01/2011
Westside - Main Building	Bradenton, FL	100	%	⁽⁵⁾	608		388		996		(43		)	608		345		953		(106		)	1964	09/01/2011
Aberdeen Village - Main Building	Peachtree City, GA	100	%	⁽⁵⁾	564		1,830		2,394		—			564		1,830		2,394		(452		)	1981	09/01/2011
East Point - Main Building	East Point, GA	100	%	⁽⁵⁾	319		337		656		(69		)	319		268		587		(84		)	1981	09/01/2011
Exchange Street	Malden, MA	100	%	⁽⁵⁾	6,856		10,795		17,651		(2,192		)	6,856		8,603		15,459		(2,484		)	1984	09/01/2011
Waltham Main (I & II)	Waltham, MA	100	%	⁽⁵⁾	8,971		13,064		22,035		(2,925		)	8,971		10,139		19,110		(3,739		)	1968/1976	09/01/2011
Wheaton - Main Building	Wheaton, MD	100	%	⁽⁵⁾	1,245		939		2,184		(98		)	1,245		841		2,086		(196		)	1960/2003	09/01/2011
Court Street	Auburn, ME	100	%	⁽⁵⁾	149		352		501		(82		)	149		270		419		(100		)	1969	09/01/2011
Gannett Drive	South Portland, ME	100	%	⁽⁵⁾	953		1,905		2,858		—			953		1,905		2,858		(558		)	1997	09/01/2011
Ballwin Facility - Main Building	Ballwin, MO	100	%	⁽⁵⁾	114		464		578		(57		)	114		407		521		(134		)	1972	09/01/2011
Belton Facility - Main Building	Belton, MO	100	%	⁽⁵⁾	454		574		1,028		(82		)	454		492		946		(146		)	1976	09/01/2011
Forsyth Facility - Main Building	Forsyth, MO	100	%	⁽⁵⁾	83		239		322		15			83		254		337		(78		)	1960	09/01/2011
I-70 & Noland Facility - Main Bldg	Independence, MO	100	%	⁽⁵⁾	598		640		1,238		(136		)	598		504		1,102		(137		)	1981	09/01/2011
Metropolitan/Holmes - Main Bldg	Kansas City, MO	100	%	⁽⁵⁾	339		426		765		(52		)	339		374		713		(109		)	1981	09/01/2011
Gateway Center - Charlotte	Charlotte, NC	100	%	⁽⁵⁾	6,334		22,712		29,046		225			6,334		22,937		29,271		(5,624		)	1987/1988	09/01/2011
Nashua Main	Nashua, NH	100	%	⁽⁵⁾	334		2,639		2,973		(88		)	334		2,551		2,885		(691		)	1800	09/01/2011
Portsmouth Pleasant	Portsmouth, NH	100	%	⁽⁵⁾	317		673		990		(31		)	317		642		959		(192		)	1860s	09/01/2011
Arthur Street	East Brunswick, NJ	100	%	⁽⁵⁾	1,010		941		1,951		(60		)	1,010		881		1,891		(265		)	1972	09/01/2011
Beechwood Road	Summit, NJ	100	%	⁽⁵⁾	465		651		1,116		(353		)	465		298		763		(84		)	1957	09/01/2011
Bellevue Avenue	Hammonton, NJ	100	%	⁽⁵⁾	382		2,200		2,582		(447		)	382		1,753		2,135		(454		)	1964	09/01/2011
Bergenline Avenue	Union City, NJ	100	%	⁽⁵⁾	179		370		549		(104		)	179		266		445		(84		)	1970	09/01/2011
Bridgewater	Bridgewater, NJ	100	%	⁽⁵⁾	1,493		2,530		4,023		(758		)	1,493		1,772		3,265		(520		)	1974/1980	09/01/2011
Lakewood Route 70	Lakewood, NJ	100	%	⁽⁵⁾	1,328		953		2,281		34			1,328		987		2,315		(385		)	1988	09/01/2011
Maplewood Avenue	Maplewood, NJ	100	%	⁽⁵⁾	406		497		903		(173		)	406		324		730		(116		)	1926/1983	09/01/2011
Pennsauken	Pennsauken, NJ	100	%	⁽⁵⁾	750		794		1,544		—			750		794		1,544		(347		)	1966	09/01/2011
South Orange Avenue	South Orange, NJ	100	%	⁽⁵⁾	110		316		426		20			110		336		446		(122		)	1944	09/01/2011
Springfield Avenue	Summit, NJ	100	%	⁽⁵⁾	2,166		769		2,935		51			2,166		820		2,986		(263		)	1929	09/01/2011
Wood Avenue	Linden, NJ	100	%	⁽⁵⁾	1,657		1,043		2,700		—			1,657		1,043		2,700		(407		)	1955/1970	09/01/2011

F-47

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽²⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Amador (Las Cruces) - Main Bldg	Las Cruces, NM	100	%	⁽⁵⁾	$	120	$	634	$	754	$	(114	)	$	120	$	520	$	640	$	(150	)	1970/1991	09/01/2011
Santa Fe-Metro Bank - Main Bldg	Santa Fe, NM	100	%	⁽⁵⁾	—		1,646		1,646		(115		)	—		1,531		1,531		(368		)	1972 / 1985	09/01/2011
Genesee Street	Auburn, NY	100	%	⁽⁵⁾	284		1,241		1,525		18			284		1,259		1,543		(364		)	1928	09/01/2011
Hempstead Tpke	East Meadow, NY	100	%	⁽⁵⁾	169		464		633		(20		)	169		444		613		(50		)	1955/1990	09/01/2011
Jamaica	Jamaica, NY	100	%	⁽⁵⁾	185		953		1,138		(5		)	185		948		1,133		(165		)	1960/2001	09/01/2011
Levittown	Levittown, NY	100	%	⁽⁵⁾	543		389		932		125			543		514		1,057		(133		)	1962	09/01/2011
Merrick Avenue	Merrick, NY	100	%	⁽⁵⁾	259		1,846		2,105		(161		)	259		1,685		1,944		(476		)	1952	09/01/2011
Middle Neck Road	Great Neck, NY	100	%	⁽⁵⁾	349		281		630		9			349		290		639		(81		)	1956	09/01/2011
Park Avenue	Wantagh, NY	100	%	⁽⁵⁾	213		360		573		(42		)	213		318		531		(87		)	1953	09/01/2011
State Street	Allbany, NY	100	%	⁽⁵⁾	865		7,631		8,496		862			865		8,493		9,358		(2,193		)	1927/1980s	09/01/2011
Transit Road	West Seneca, NY	100	%	⁽⁵⁾	665		6,065		6,730		391			665		6,456		7,121		(2,252		)	1972	09/01/2011
Wantagh	West Hempstead, NY	100	%	⁽⁵⁾	928		1,787		2,715		(82		)	928		1,705		2,633		(342		)	1940/2002	09/01/2011
31st Street - Main Building	Tulsa, OK	100	%	⁽⁵⁾	400		591		991		(38		)	400		553		953		(144		)	1972/1979	09/01/2011
Broken Arrow - Main Building	Broken Arrow, OK	100	%	⁽⁵⁾	357		463		820		(67		)	357		396		753		(101		)	1972/1979	09/01/2011
Catoosa - Main Building	Catoosa, OK	100	%	⁽⁵⁾	174		354		528		(83		)	174		271		445		(85		)	1964/1972	09/01/2011
Gresham - Main Building	Gresham, OR	100	%	⁽⁵⁾	374		668		1,042		(67		)	374		601		975		(149		)	1978	09/01/2011
Parkrose - Main Building	Portland, OR	100	%	⁽⁵⁾	216		326		542		2			216		328		544		(108		)	1967	09/01/2011
Blair Mill Road	Horsham, PA	100	%	⁽⁵⁾	1,171		1,794		2,965		2,638			1,171		4,432		5,603		(888		)	1985	09/01/2011
Bustleton Avenue	Philadelphia, PA	100	%	⁽⁵⁾	188		788		976		—			188		788		976		(234		)	1953	09/01/2011
Dupont Drive	Providence, RI	100	%	⁽⁵⁾	1,330		8,737		10,067		722			1,330		9,459		10,789		(3,345		)	1963	09/01/2011
Post Road	North Kingstown, RI	100	%	⁽⁵⁾	825		1,527		2,352		—			825		1,527		2,352		(580		)	1988	09/01/2011
Hilton Head-Pope Ave - Main Bldg	Hilton Head, SC	100	%	⁽⁵⁾	527		646		1,173		46			527		692		1,219		(373		)	1981	09/01/2011
Rock Hill MO - Main Building	Rock Hill, SC	100	%	⁽⁵⁾	553		538		1,091		(299		)	553		239		792		(85		)	1986	09/01/2011
Lebanon Main - Main Building	Lebanon, TN	100	%	⁽⁵⁾	125		237		362		(190		)	125		47		172		(10		)	1962	09/01/2011
Beaumont - Main Building	Beaumont, TX	100	%	⁽⁵⁾	181		369		550		—			181		369		550		(179		)	1958	09/01/2011
Harlandale - Main Building	San Antonio, TX	100	%	⁽⁵⁾	282		418		700		(45		)	282		373		655		(120		)	1970	09/01/2011
Nederland - Main Building	Nederland, TX	100	%	⁽⁵⁾	49		510		559		(104		)	49		406		455		(119		)	1946	09/01/2011
Northern Hills - Main Building	San Antonio, TX	100	%	⁽⁵⁾	342		449		791		—			342		449		791		(226		)	1979	09/01/2011
Steeplechase - Main Building	Houston, TX	100	%	⁽⁵⁾	286		637		923		(301		)	286		336		622		(112		)	1981	09/01/2011
Witchita Falls - Main Building	Wichita Falls, TX	100	%	⁽⁵⁾	566		780		1,346		(111		)	566		669		1,235		(330		)	1978	09/01/2011
Abingdon - Main Building	Abingdon, VA	100	%	⁽⁵⁾	375		295		670		(22		)	375		273		648		(93		)	1964/1980	09/01/2011
Coliseum-Riverdale - Main Bldg	Hampton, VA	100	%	⁽⁵⁾	352		403		755		43			352		446		798		(165		)	1974/1998	09/01/2011
Fairfax Courthouse	Fairfax, VA	100	%	⁽⁵⁾	590		968		1,558		(8		)	590		960		1,550		(196		)	1932/2000	09/01/2011
Orange - Main Building	Orange, VA	100	%	⁽⁵⁾	48		266		314		(71		)	48		195		243		(70		)	1925	09/01/2011

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Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Robinson & Broad - Main Building	Richmond, VA	100	%	⁽⁵⁾	$	291	$	573	$	864	$	(27	)	$	291	$	546	$	837	$	(195	)	1947/1985	09/01/2011
Camas - Main Building	Camas, WA	100	%	⁽⁵⁾	386		243		629		(40		)	386		203		589		(68		)	1951	09/01/2011
Clarkston - Main Building	Clarkston, WA	100	%	⁽⁵⁾	205		610		815		(25		)	205		585		790		(165		)	1958	09/01/2011
Edmonds - Main Building	Edmonds, WA	100	%	⁽⁵⁾	367		348		715		27			367		375		742		(139		)	1956	09/01/2011
Greenwood - Main Building	Seattle, WA	100	%	⁽⁵⁾	104		221		325		12			104		233		337		(83		)	1948	09/01/2011
Kennewick - Main Building	Kennewick, WA	100	%	⁽⁵⁾	243		673		916		(37		)	243		636		879		(129		)	1977/1991	09/01/2011
Lynden - Main Building	Lynden, WA	100	%	⁽⁵⁾	—		186		186		(23		)	—		163		163		(55		)	1973	09/01/2011
Port Townsend	Port Townsend, WA	100	%	⁽⁵⁾	73		235		308		(17		)	73		218		291		(72		)	1974	09/01/2011
Quincy - Main Building	Quincy, WA	100	%	⁽⁵⁾	138		275		413		(14		)	138		261		399		(56		)	1977/1991	09/01/2011
Sequim - Main Building	Sequim, WA	100	%	⁽⁵⁾	377		370		747		8			377		378		755		(104		)	1979	09/01/2011
Wenatchee Valley - Main Building	Wenatchee, WA	100	%	⁽⁵⁾	19		456		475		163			19		619		638		(137		)	1965/1992	09/01/2011
Ballard - Main Building	Seattle, WA	100	%	⁽⁵⁾	270		326		596		77			270		403		673		(125		)	1951	09/01/2011
Daytona Beach Spdwy - Main Bldg	Daytona Beach, FL	100	%	⁽⁵⁾	1,060		638		1,698		13			1,060		651		1,711		(211		)	1974	09/01/2011
Palm Beach Vault	West Palm Beach, FL	100	%	⁽⁵⁾	854		533		1,387		(70		)	854		463		1,317		(149		)	1997	09/01/2011
Redmond - Main Building	Redmond, OR	100	%	⁽⁵⁾	50		206		256		(8		)	50		198		248		(57		)	1925/1982	09/01/2011
Las Vegas Ops Center	Las Vegas, NV	100	%	⁽⁵⁾	5,313		4,474		9,787		—			5,313		4,474		9,787		(1,609		)	1972/1990	09/01/2011
NBOC Operations Center	North Brunswick, NJ	100	%	—	30		40		70		56			30		96		126		(24		)	1950	09/01/2011
NBOC Operations Center	North Brunswick, NJ	100	%	—	1,701		3,999		5,700		(906		)	1,701		3,093		4,794		(819		)	1950/1959	09/01/2011
Barbee Chapel Road	Chapel Hill, NC	100	%	⁽⁶⁾	117		610		727		—			117		610		727		(92		)	2005	09/01/2011
Bernwood Park	Bonita Springs, FL	100	%	⁽⁶⁾	1,106		1,891		2,997		1			1,106		1,892		2,998		(279		)	2003	09/01/2011
Charlotte Harbor Office	Port Charlotte, FL	100	%	⁽⁶⁾	191		633		824		—			191		633		824		(176		)	1981	09/01/2011
Cypress Point	Palm Coast, FL	100	%	⁽⁶⁾	984		2,456		3,440		—			984		2,456		3,440		(387		)	1995	09/01/2011
Hudson Office	Hudson, FL	100	%	⁽⁶⁾	1,000		2,478		3,478		—			1,000		2,478		3,478		(490		)	1978	09/01/2011
Marco Island Office	Marco Island, FL	100	%	⁽⁶⁾	768		2,021		2,789		—			768		2,021		2,789		(525		)	1967	09/01/2011
North Lockwood Ridge	Sarasota, FL	100	%	⁽⁶⁾	468		1,231		1,699		(419		)	345		935		1,280		(153		)	2000	09/01/2011
West Bradenton	Bradenton, FL	100	%	⁽⁶⁾	382		1,368		1,750		—			382		1,368		1,750		(261		)	1989	09/01/2011
Cheshire Sheridan	Atlanta, GA	100	%	⁽⁶⁾	861		2,261		3,122		—			861		2,261		3,122		(593		)	1971	09/01/2011
Edgewood	Columbus, GA	100	%	⁽⁶⁾	146		387		533		—			146		387		533		(167		)	1974	09/01/2011
University Place Office	Charlotte, NC	100	%	⁽⁶⁾	862		1,990		2,852		—			862		1,990		2,852		(358		)	1993	09/01/2011
Forest Drive Office	Columbia, SC	100	%	⁽⁶⁾	363		1,035		1,398		—			363		1,035		1,398		(204		)	1996	09/01/2011
Land O’Lakes Office	Lutz, FL	100	%	⁽⁶⁾	431		1,764		2,195		—			431		1,764		2,195		(329		)	1988	09/01/2011
West Placerville Branch	Placerville, CA	100	%	⁽⁶⁾	388		873		1,261		—			388		873		1,261		(301		)	1984	09/01/2011
New Smyrna Beach East	New Smyrna Beach, FL	100	%	⁽⁷⁾	472		861		1,333		—			472		861		1,333		(192		)	1983	09/01/2011
Hamilton Square	Hamilton Square, NJ	100	%	⁽⁷⁾	361		1,251		1,612		(200		)	361		1,051		1,412		(274		)	1940	09/01/2011

F-49

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
East Commercial Blvd (Relo)	Fort Lauderdale, FL	100	%	⁽⁷⁾	$	523	$	1,857	$	2,380	$	—		$	523	$	1,857	$	2,380	$	(480	)	1975	09/01/2011
Largo Office	Largo, FL	100	%	⁽⁷⁾	757		1,577		2,334		—			757		1,577		2,334		(377		)	1980	09/01/2011
New Citrus Park	Tampa, FL	100	%	⁽⁷⁾	853		2,069		2,922		—			853		2,069		2,922		(278		)	2001	09/01/2011
Providence Square	Marietta, GA	100	%	⁽⁷⁾	536		1,573		2,109		—			536		1,573		2,109		(321		)	1982	09/01/2011
Ashley Village	Cary, NC	100	%	⁽⁷⁾	428		1,373		1,801		—			428		1,373		1,801		(226		)	1996	09/01/2011
West Market Street	Greensboro, NC	100	%	⁽⁷⁾	304		1,034		1,338		—			304		1,034		1,338		(161		)	1996	09/01/2011
Harbison Office	Irmo, SC	100	%	⁽⁷⁾	369		1,338		1,707		—			369		1,338		1,707		(234		)	1994	09/01/2011
Virginia Beach Shore Drive	Virginia Beach, VA	100	%	⁽⁷⁾	276		1,593		1,869		—			276		1,593		1,869		(308		)	1979	09/01/2011
Cypress Lake Drive	Fort Myers, FL	100	%	⁽⁷⁾	795		1,829		2,624		(8		)	787		1,829		2,616		(271		)	1998	09/01/2011
Woodstock Crossing	Woodstock, GA	100	%	⁽⁷⁾	606		1,376		1,982		—			606		1,376		1,982		(275		)	1994	09/01/2011
The Avenues	Jacksonville, FL	100	%	⁽⁷⁾	438		1,163		1,601		—			438		1,163		1,601		(180		)	1999	09/01/2011
Roseville Branch	Roseville, CA	100	%	⁽⁷⁾	655		1,870		2,525		—			655		1,870		2,525		(463		)	1987	09/01/2011
Valley Springs	Valley Springs, CA	100	%	⁽⁷⁾	123		886		1,009		—			123		886		1,009		(195		)	1992	09/01/2011
Lake Community Bank	Lakeport, CA	100	%	⁽⁷⁾	564		2,211		2,775		—			564		2,211		2,775		(536		)	1994	09/01/2011
Park Hill	N. Little Rock, AR	100	%	⁽⁸⁾	175		691		866		—			175		691		866		(269		)	1965	09/01/2011
Holiday	Holiday, FL	100	%	⁽⁸⁾	734		1,324		2,058		—			734		1,324		2,058		(464		)	1973	09/01/2011
Village Circle	Chapel Hill, NC	100	%	⁽⁸⁾	367		2,312		2,679		—			367		2,312		2,679		(526		)	2005	09/01/2011
Bloomingdale	Brandon, FL	100	%	⁽⁸⁾	379		787		1,166		—			379		787		1,166		(212		)	1980	09/01/2011
Cedar Shores Office	Ocala, FL	100	%	⁽⁸⁾	749		943		1,692		—			749		943		1,692		(182		)	1990	09/01/2011
Grove City Office	Grove City, FL	100	%	⁽⁸⁾	536		1,217		1,753		—			536		1,217		1,753		(242		)	1978	09/01/2011
Bluegrass Office	Alpharetta, GA	100	%	⁽⁸⁾	595		1,521		2,116		(120		)	475		1,521		1,996		(239		)	1997	09/01/2011
LaVista Road	Tucker, GA	100	%	⁽⁸⁾	659		1,225		1,884		—			659		1,225		1,884		(236		)	2002	09/01/2011
Garner Office	Garner, NC	100	%	⁽⁸⁾	526		1,372		1,898		—			526		1,372		1,898		(208		)	1998	09/01/2011
James Island	Charleston, SC	100	%	⁽⁸⁾	665		1,258		1,923		—			665		1,258		1,923		(197		)	1999	09/01/2011
Chester	Chester, VA	100	%	⁽⁸⁾	187		368		555		—			187		368		555		(124		)	1986	09/01/2011
Haddonfield - Kings	Haddonfield, NJ	100	%	⁽⁸⁾	196		914		1,110		—			196		914		1,110		(140		)	1986	09/01/2011
Staples Mill	Richmond, VA	100	%	⁽⁸⁾	368		737		1,105		—			368		737		1,105		(229		)	1974	09/01/2011
Cameron Park	Cameron Park, CA	100	%	⁽⁸⁾	454		1,566		2,020		—			454		1,566		2,020		(366		)	1993	09/01/2011
Sonora - Branch	Sonora, CA	100	%	⁽⁸⁾	27		1,284		1,311		—			27		1,284		1,311		(332		)	1980	09/01/2011
Simpsonville Main Office	Simpsonville, SC	100	%	⁽⁹⁾	292		677		969		—			292		677		969		(198		)	1981	09/01/2011
Banner Elk	Banner Elk, NC	100	%	⁽⁹⁾	221		492		713		—			221		492		713		(195		)	1985	09/01/2011
47th Terrace Office	Cape Coral, FL	100	%	⁽⁹⁾	567		1,509		2,076		—			567		1,509		2,076		(225		)	1986	09/01/2011
Altamonte Crossing Office	Altamonte Springs, FL	100	%	⁽⁹⁾	799		1,254		2,053		—			799		1,254		2,053		(247		)	1992	09/01/2011
Bradenton City	Bradenton, FL	100	%	⁽⁹⁾	674		1,097		1,771		(712		)	387		672		1,059		(127		)	1999	09/01/2011

F-50

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Brandon	Brandon, FL	100	%	⁽⁹⁾	$	373	$	1,022	$	1,395	$	(1	)	$	373	$	1,021	$	1,394	$	(231	)	1981	09/01/2011
Cordova Office - Pensacola	Pensacola, FL	100	%	⁽⁹⁾	270		759		1,029		—			270		759		1,029		(136		)	1986	09/01/2011
Deerfield Beach (H.S.)	Deerfield Beach, FL	100	%	⁽⁹⁾	1,239		2,278		3,517		—			1,239		2,278		3,517		(352		)	1986	09/01/2011
Holly Hill Office	Holly Hill, FL	100	%	⁽⁹⁾	301		756		1,057		—			301		756		1,057		(232		)	1961	09/01/2011
Sawgrass	Plantation, FL	100	%	⁽⁹⁾	1,094		1,345		2,439		—			1,094		1,345		2,439		(247		)	1995	09/01/2011
Vero-West (1st Am.)	Vero Beach, FL	100	%	⁽⁹⁾	344		1,011		1,355		—			344		1,011		1,355		(322		)	1984	09/01/2011
Lilburn Office	Lilburn, GA	100	%	⁽⁹⁾	493		870		1,363		—			493		870		1,363		(210		)	1986	09/01/2011
Stonehenge Office	Raleigh, NC	100	%	⁽⁹⁾	766		1,485		2,251		—			766		1,485		2,251		(227		)	1994	09/01/2011
Centerville	Manakin-Sabot, VA	100	%	⁽⁹⁾	797		832		1,629		—			797		832		1,629		(222		)	1973	09/01/2011
El Dorado Hills Branch	El Dorado Hills, CA	100	%	⁽⁹⁾	618		1,548		2,166		—			618		1,548		2,166		(377		)	2000	09/01/2011
Sutter Creek	Sutter Creek, CA	100	%	⁽⁹⁾	215		522		737		—			215		522		737		(163		)	1984	09/01/2011
Albemarle Road	Charlotte, NC	100	%	⁽¹⁰⁾	240		563		803		—			240		563		803		(157		)	1979	09/01/2011
Beatties Ford Road	Charlotte, NC	100	%	⁽¹⁰⁾	184		490		674		—			184		490		674		(142		)	1970	09/01/2011
Belhaven Boulevard	Charlotte, NC	100	%	⁽¹⁰⁾	240		501		741		—			240		501		741		(169		)	1966	09/01/2011
Boger City	Lincolnton, NC	100	%	⁽¹⁰⁾	182		588		770		—			182		588		770		(178		)	1971	09/01/2011
Boone Main Office	Boone, NC	100	%	⁽¹⁰⁾	128		753		881		—			128		753		881		(216		)	1970	09/01/2011
Burgaw Main Office	Burgaw, NC	100	%	⁽¹⁰⁾	106		382		488		(27		)	106		355		461		(86		)	1963	09/01/2011
Burlington Main Office	Burlington, NC	100	%	⁽¹⁰⁾	213		1,220		1,433		(41		)	213		1,179		1,392		(242		)	1982	09/01/2011
Cameron Village	Raleigh, NC	100	%	⁽¹⁰⁾	300		822		1,122		—			300		822		1,122		(222		)	1985	09/01/2011
Candler	Candler, NC	100	%	⁽¹⁰⁾	157		431		588		—			157		431		588		(126		)	1977	09/01/2011
Carmel Commons	Charlotte, NC	100	%	⁽¹⁰⁾	502		898		1,400		—			502		898		1,400		(233		)	1980	09/01/2011
Carolina Beach	Carolina Beach, NC	100	%	⁽¹⁰⁾	194		1,045		1,239		—			194		1,045		1,239		(263		)	1971	09/01/2011
Cary Village	Cary, NC	100	%	⁽¹⁰⁾	132		540		672		(1		)	132		539		671		(113		)	1997	09/01/2011
Cherryville	Cherryville, NC	100	%	⁽¹⁰⁾	96		468		564		—			96		468		564		(129		)	1965	09/01/2011
Columbus	Columbus, NC	100	%	⁽¹⁰⁾	58		307		365		—			58		307		365		(92		)	1971	09/01/2011
Cornelius	Cornelius, NC	100	%	⁽¹⁰⁾	983		989		1,972		—			983		989		1,972		(207		)	1989	09/01/2011
Cumberland	Fayetteville, NC	100	%	⁽¹⁰⁾	186		551		737		—			186		551		737		(147		)	1982	09/01/2011
Dallas	Dallas, NC	100	%	⁽¹⁰⁾	110		379		489		—			110		379		489		(117		)	1972	09/01/2011
Denver	Denver, NC	100	%	⁽¹⁰⁾	75		333		408		—			75		333		408		(104		)	1974	09/01/2011
Dixie Village	Gastonia, NC	100	%	⁽¹⁰⁾	137		513		650		—			137		513		650		(148		)	1972	09/01/2011
Eden Main Office	Eden, NC	100	%	⁽¹⁰⁾	219		662		881		—			219		662		881		(210		)	1980	09/01/2011
Elizabethtown Main	Elizabethtown, NC	100	%	⁽¹⁰⁾	71		592		663		—			71		592		663		(155		)	1962	09/01/2011
Farmville	Farmville, NC	100	%	⁽¹⁰⁾	112		892		1,004		—			112		892		1,004		(237		)	1965	09/01/2011
Fayetteville Dwntown	Fayetteville, NC	100	%	⁽¹⁰⁾	216		452		668		—			216		452		668		(160		)	1980	09/01/2011

F-51

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Garner	Garner, NC	100	%	⁽¹⁰⁾	$	126	$	704	$	830	$	—		$	126	$	704	$	830	$	(192	)	1971	09/01/2011
Gastonia Main Office	Gastonia, NC	100	%	⁽¹⁰⁾	313		1,277		1,590		(81		)	313		1,196		1,509		(245		)	1977	09/01/2011
Guilford College	Greensboro, NC	100	%	⁽¹⁰⁾	235		803		1,038		—			235		803		1,038		(191		)	1983	09/01/2011
Henderson Mo Relc	Henderson, NC	100	%	⁽¹⁰⁾	116		1,145		1,261		(1		)	116		1,144		1,260		(220		)	1994	09/01/2011
Hillsborough	Hillsborough, NC	100	%	⁽¹⁰⁾	55		383		438		—			55		383		438		(112		)	1920	09/01/2011
Hilltop Plaza	Monroe, NC	100	%	⁽¹⁰⁾	352		935		1,287		—			352		935		1,287		(188		)	1993	09/01/2011
Hospital - Greenville	Greenville, NC	100	%	⁽¹⁰⁾	407		737		1,144		—			407		737		1,144		(156		)	1991	09/01/2011
Kenansville	Kenansville, NC	100	%	⁽¹⁰⁾	90		463		553		—			90		463		553		(131		)	1970	09/01/2011
Kinston Main Office	Kinston, NC	100	%	⁽¹⁰⁾	136		1,121		1,257		—			136		1,121		1,257		(248		)	1982	09/01/2011
Landfall	Wilmington, NC	100	%	⁽¹⁰⁾	353		1,116		1,469		—			353		1,116		1,469		(229		)	1989	09/01/2011
Marion Main Office	Marion, NC	100	%	⁽¹⁰⁾	232		1,341		1,573		—			232		1,341		1,573		(272		)	1982	09/01/2011
Mooresville Main	Mooresville, NC	100	%	⁽¹⁰⁾	195		756		951		—			195		756		951		(219		)	1957	09/01/2011
Mt Olive Main Office	Mount Olive, NC	100	%	⁽¹⁰⁾	119		404		523		—			119		404		523		(134		)	1962	09/01/2011
Myers Park	Charlotte, NC	100	%	⁽¹⁰⁾	340		1,477		1,817		—			340		1,477		1,817		(381		)	1974	09/01/2011
North Asheville	Asheville, NC	100	%	⁽¹⁰⁾	73		430		503		—			73		430		503		(113		)	1973	09/01/2011
North Boulevard - Raleigh	Raleigh, NC	100	%	⁽¹⁰⁾	266		689		955		—			266		689		955		(152		)	1986	09/01/2011
North Durham	Durham, NC	100	%	⁽¹⁰⁾	202		429		631		—			202		429		631		(130		)	1982	09/01/2011
North Henderson	Henderson, NC	100	%	⁽¹⁰⁾	92		247		339		(39		)	92		208		300		(55		)	1969	09/01/2011
North Raleigh	Raleigh, NC	100	%	⁽¹⁰⁾	188		472		660		—			188		472		660		(126		)	1979	09/01/2011
Northeast	Charlotte, NC	100	%	⁽¹⁰⁾	538		766		1,304		—			538		766		1,304		(230		)	1962	09/01/2011
Northwood	High Point, NC	100	%	⁽¹⁰⁾	184		396		580		—			184		396		580		(127		)	1980	09/01/2011
Park Road	Charlotte, NC	100	%	⁽¹⁰⁾	376		766		1,142		—			376		766		1,142		(211		)	1971	09/01/2011
Pavilions	Winston-Salem, NC	100	%	⁽¹⁰⁾	574		1,284		1,858		—			574		1,284		1,858		(240		)	1989	09/01/2011
Pinehurst	Pinehurst, NC	100	%	⁽¹⁰⁾	214		602		816		—			214		602		816		(202		)	1904	09/01/2011
Pleasant Garden	Pleasant Garden, NC	100	%	⁽¹⁰⁾	97		235		332		—			97		235		332		(86		)	1935	09/01/2011
Reidsville Main Office	Reidsville, NC	100	%	⁽¹⁰⁾	160		349		509		(60		)	160		289		449		(76		)	1900	09/01/2011
Reynolda	Winston-Salem, NC	100	%	⁽¹⁰⁾	236		518		754		—			236		518		754		(162		)	1972	09/01/2011
Salisbury Main Office	Salisbury, NC	100	%	⁽¹⁰⁾	413		987		1,400		—			413		987		1,400		(233		)	1983	09/01/2011
Salisbury West	Salisbury, NC	100	%	⁽¹⁰⁾	351		189		540		—			351		189		540		(76		)	1994	09/01/2011
Sardis Village	Charlotte, NC	100	%	⁽¹⁰⁾	624		747		1,371		—			624		747		1,371		(219		)	1982	09/01/2011
Signal Hill	Statesville, NC	100	%	⁽¹⁰⁾	407		657		1,064		—			407		657		1,064		(203		)	1975	09/01/2011
Six Forks	Raleigh, NC	100	%	⁽¹⁰⁾	338		1,053		1,391		—			338		1,053		1,391		(218		)	1986	09/01/2011
South Elm	Greensboro, NC	100	%	⁽¹⁰⁾	220		575		795		—			220		575		795		(190		)	1969	09/01/2011
South Park Greenville	Greenville, NC	100	%	⁽¹⁰⁾	237		478		715		—			237		478		715		(140		)	1980	09/01/2011

F-52

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
South Square	Durham, NC	100	%	⁽¹⁰⁾	$	288	$	482	$	770	$	—		$	288	$	482	$	770	$	(137	)	1983	09/01/2011
South Pines Main Office	Southern Pines, NC	100	%	⁽¹⁰⁾	399		742		1,141		—			399		742		1,141		(248		)	1974	09/01/2011
Southwinds	Spring Lake, NC	100	%	⁽¹⁰⁾	395		886		1,281		—			395		886		1,281		(187		)	1994	09/01/2011
Southwood Square	High Point, NC	100	%	⁽¹⁰⁾	348		716		1,064		—			348		716		1,064		(226		)	1981	09/01/2011
Spruce Pine Main	Spruce Pine, NC	100	%	⁽¹⁰⁾	172		953		1,125		—			172		953		1,125		(263		)	1930	09/01/2011
Statesville Main Office	Statesville, NC	100	%	⁽¹⁰⁾	130		1,852		1,982		—			130		1,852		1,982		(454		)	1910	09/01/2011
Swansboro	Swansboro, NC	100	%	⁽¹⁰⁾	92		272		364		—			92		272		364		(82		)	1975	09/01/2011
Troutman	Troutman, NC	100	%	⁽¹⁰⁾	319		400		719		(133		)	319		267		586		(66		)	1975	09/01/2011
Tryon Main Office	Tryon, NC	100	%	⁽¹⁰⁾	87		1,067		1,154		—			87		1,067		1,154		(254		)	1966	09/01/2011
Twin Rivers	New Bern, NC	100	%	⁽¹⁰⁾	255		414		669		—			255		414		669		(138		)	1979	09/01/2011
Union Road	Gastonia, NC	100	%	⁽¹⁰⁾	203		750		953		—			203		750		953		(209		)	1981	09/01/2011
University	Wilmington, NC	100	%	⁽¹⁰⁾	397		852		1,249		(30		)	367		852		1,219		(254		)	1974	09/01/2011
Village Drive	Fayetteville, NC	100	%	⁽¹⁰⁾	293		406		699		—			293		406		699		(128		)	1973	09/01/2011
Combee	Lakeland, FL	100	%	⁽¹¹⁾	198		501		699		—			198		501		699		(158		)	1980	09/01/2011
Lantana	Lantana, FL	100	%	⁽¹¹⁾	604		781		1,385		—			604		781		1,385		(315		)	1963	09/01/2011
Monument Road	Jacksonville, FL	100	%	⁽¹¹⁾	947		2,475		3,422		—			947		2,475		3,422		(472		)	1986	09/01/2011
North Boca Raton	Boca Raton, FL	100	%	⁽¹¹⁾	276		806		1,082		—			276		806		1,082		(217		)	1981	09/01/2011
Ridge Road	New Port Richey, FL	100	%	⁽¹¹⁾	152		554		706		—			152		554		706		(155		)	1981	09/01/2011
Rockledge	Rockledge, FL	100	%	⁽¹¹⁾	230		627		857		—			230		627		857		(210		)	1982	09/01/2011
S. Mandarin	Jacksonville, FL	100	%	⁽¹¹⁾	241		613		854		—			241		613		854		(144		)	1986	09/01/2011
Westside	Jacksonville, FL	100	%	⁽¹¹⁾	495		2,057		2,552		—			495		2,057		2,552		(525		)	1962	09/01/2011
Hapeville	Hapeville, GA	100	%	⁽¹¹⁾	648		1,859		2,507		—			648		1,859		2,507		(472		)	1958	09/01/2011
Perimeter Center	Atlanta, GA	100	%	⁽¹¹⁾	756		2,523		3,279		—			756		2,523		3,279		(465		)	1994	09/01/2011
Stephenson	Savannah, GA	100	%	⁽¹¹⁾	305		621		926		—			305		621		926		(205		)	1967	09/01/2011
Toco Hills	Atlanta, GA	100	%	⁽¹¹⁾	230		692		922		—			230		692		922		(176		)	1986	09/01/2011
Walton Way	Augusta, GA	100	%	⁽¹¹⁾	431		1,144		1,575		—			431		1,144		1,575		(285		)	1985	09/01/2011
Washington Road	Augusta, GA	100	%	⁽¹¹⁾	395		1,421		1,816		—			395		1,421		1,816		(338		)	1984	09/01/2011
Clemmons	Clemmons, NC	100	%	⁽¹¹⁾	179		506		685		—			179		506		685		(169		)	1973	09/01/2011
King Main	King, NC	100	%	⁽¹¹⁾	133		600		733		—			133		600		733		(152		)	1978	09/01/2011
Marion Main	Marion, NC	100	%	⁽¹¹⁾	230		897		1,127		—			230		897		1,127		(247		)	1980	09/01/2011
Roxboro Main	Roxboro, NC	100	%	⁽¹¹⁾	424		1,307		1,731		—			424		1,307		1,731		(389		)	1980	09/01/2011
Russ Avenue	Waynesville, NC	100	%	⁽¹¹⁾	296		897		1,193		—			296		897		1,193		(343		)	1972	09/01/2011
Sardis Road	Charlotte, NC	100	%	⁽¹¹⁾	149		480		629		—			149		480		629		(118		)	1986	09/01/2011
Valdese Main	Valdese, NC	100	%	⁽¹¹⁾	198		1,218		1,416		—			198		1,218		1,416		(304		)	1952	09/01/2011

F-53

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Viewmont	Hickory, NC	100	%	⁽¹¹⁾	$	147	$	735	$	882	$	—		$	147	$	735	$	882	$	(199	)	1974	09/01/2011
Wilkesboro Main	Wilkesboro, NC	100	%	⁽¹¹⁾	130		645		775		—			130		645		775		(148		)	1986	09/01/2011
Champions	Houston, TX	100	%	⁽¹²⁾	390		1,935		2,325		—			390		1,935		2,325		(275		)	1997	09/01/2011
Clear Lake	Houston, TX	100	%	⁽¹²⁾	434		1,772		2,206		—			434		1,772		2,206		(292		)	1981/2005	09/01/2011
Cypress Station	Houston, TX	100	%	⁽¹²⁾	203		982		1,185		(22		)	203		960		1,163		(124		)	1996	09/01/2011
Deer Park	Deer Park, TX	100	%	⁽¹²⁾	191		646		837		—			191		646		837		(134		)	1990	09/01/2011
Duncanville	Duncanville, TX	100	%	⁽¹²⁾	65		322		387		(33		)	65		289		354		(106		)	1980	09/01/2011
Galleria	Dallas, TX	100	%	⁽¹²⁾	480		1,593		2,073		—			480		1,593		2,073		(332		)	1980	09/01/2011
Heights	Houston, TX	100	%	⁽¹²⁾	298		1,590		1,888		—			298		1,590		1,888		(222		)	1992	09/01/2011
Helotes	San Antonio, TX	100	%	⁽¹²⁾	201		522		723		—			201		522		723		(134		)	1982	09/01/2011
Highway 290	Houston, TX	100	%	⁽¹²⁾	1,822		3,466		5,288		(3,113		)	557		1,618		2,175		(505		)	1981	09/01/2011
Highway 6	Houston, TX	100	%	⁽¹²⁾	970		2,151		3,121		—			970		2,151		3,121		(301		)	1997	09/01/2011
Humble	Humble, TX	100	%	⁽¹²⁾	446		1,811		2,257		—			446		1,811		2,257		(284		)	1998	09/01/2011
Mangum	Houston, TX	100	%	⁽¹²⁾	271		1,383		1,654		—			271		1,383		1,654		(259		)	1988	09/01/2011
Northshore	Houston, TX	100	%	⁽¹²⁾	149		676		825		—			149		676		825		(115		)	1995	09/01/2011
Independence - Main Building - 0104	Charlotte, NC	100	%	65,780	6,112		66,908		73,020		8,187			6,112		75,095		81,207		(12,305		)	1983	09/01/2011
FS Wilmington, LP	Wilmington, DE	100	%	—	9,200		41,046		50,246		(4,435		)	9,200		36,611		45,811		(3,327		)	1995	09/01/2011
Inverness	Inverness, FL	100	%	—	—		—		—		—			—		—		—		—			1994	09/01/2011
Paoli	Paoli, PA	100	%	—	—		—		—		—			—		—		—		—			1989	09/01/2011
Forest Hill Banking Center	Germantown, TN	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Upper Montclair Drive Up	Upper Montclair, NJ	100	%	—	—		—		—		—			—		—		—		—			1941	09/01/2011
Ardmore	Ardmore, PA	100	%	—	—		—		—		—			—		—		—		—			1980	09/01/2011
Milltown	Milltown, NJ	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Fairgrounds	Allentown, PA	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
West Goshen	West Chester, PA	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Reading Airport	Reading Airport, PA	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
East Brunswick	East Brunswick, NJ	100	%	—	—		—		—		—			—		—		—		—			1972	09/01/2011
Concordia	Cranbury, NJ	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Thorndale	Thorndale, PA	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Wind Gap	Wind Gap, PA	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Harborside	Jersey City, NJ	100	%	—	—		—		—		—			—		—		—		—			2002	09/01/2011
Hickory Parking Lot	Hickory, NC	100	%	—	59		50		109		—			59		50		109		(6		)	1986	09/01/2011
Torrance	Torrance, CA	100	%	—	—		—		—		—			—		—		—		—			1975	09/01/2011
Chapel Hill	Chapel Hill, NC	100	%	—	—		—		—		—			—		—		—		—			1942/1993	09/01/2011

F-54

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Greenville Main	Greenville, SC	100	%	—	$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—		1997	09/01/2011
Del Prado	Cape Coral, FL	100	%	—	—		—		—		—			—		—		—		—			1990	09/01/2011
Parkside Marketplace	Glen Allen, VA	100	%	—	—		61		61		—			—		61		61		(27		)	1988	09/01/2011
Livingston	Livingston, NJ	100	%	—	—		—		—		—			—		—		—		—			1980	09/01/2011
Downtown St. Petersburg	St. Petersburg, FL	100	%	—	—		—		—		—			—		—		—		—			1912/1981	09/01/2011
Bank of America Finc - Sub-Lease	Spokane, WA	100	%	—	—		—		—		—			—		—		—		—			1981	09/01/2011
Gulfgate - Main Building	Sarasota, FL	100	%	—	—		1,165		1,165		(1,127		)	—		38		38		(213		)	1963	09/01/2011
Cocoa Village Dt	Cocoa, FL	100	%	—	483		2,167		2,650		(1,795		)	483		372		855		(282		)	1957/1991	09/01/2011
Citizens - Clinton East Main	Clinton, CT	100	%	⁽¹³⁾	172		641		813		—			172		641		813		(166		)	1972	10/24/2011
Citizens - Railroad Avenue	Plainfield, CT	100	%	⁽¹³⁾	232		426		658		(34		)	232		392		624		(102		)	1980	10/24/2011
Citizens - Shunpike Road	Cromwell, CT	100	%	⁽¹³⁾	281		484		765		(49		)	281		435		716		(96		)	1976	10/24/2011
Citizens - Whalley Avenue	New Haven, CT	100	%	⁽¹³⁾	186		416		602		—			186		416		602		(138		)	1943	10/24/2011
Citizens - Lockport	Lockport, IL	100	%	⁽¹³⁾	287		1,129		1,416		—			287		1,129		1,416		(258		)	1981/1996	10/24/2011
Citizens - Columbia Road	Dorchester, MA	100	%	⁽¹³⁾	370		1,433		1,803		(23		)	370		1,410		1,780		(383		)	1930	10/24/2011
Citizens - East Boston Square	East Boston, MA	100	%	⁽¹³⁾	192		785		977		—			192		785		977		(205		)	1928	10/24/2011
Citizens - Massachusetts Avenue	Arllington Heights, MA	100	%	⁽¹³⁾	401		395		796		(32		)	401		363		764		(87		)	1979	10/24/2011
Citizens - Rogers Road	Gloucester, MA	100	%	⁽¹³⁾	251		1,174		1,425		—			251		1,174		1,425		(312		)	1950	10/24/2011
Citizens - Union Sq - Somerville	Somerville, MA	100	%	⁽¹³⁾	647		952		1,599		—			647		952		1,599		(250		)	1970	10/24/2011
Citizens - 18 Mile Road	Sterling Height, MI	100	%	⁽¹³⁾	207		835		1,042		—			207		835		1,042		(202		)	1977	10/24/2011
Citizens - Allen Road - Southgate	Southgate, MI	100	%	⁽¹³⁾	422		2,949		3,371		—			422		2,949		3,371		(668		)	1973	10/24/2011
Citizens - Ford Road Heights	Dearborn Heights, MI	100	%	⁽¹³⁾	494		1,130		1,624		—			494		1,130		1,624		(247		)	1981	10/24/2011
Citizens - Grand River	Detroit, MI	100	%	⁽¹³⁾	52		611		663		—			52		611		663		(193		)	1920	10/24/2011
Citizens - Greater Mack	St. Clair Shores, MI	100	%	⁽¹³⁾	626		1,150		1,776		—			626		1,150		1,776		(319		)	1980	10/24/2011
Citizens - Grosse Pointe Woods	Grosse Pointe Woods, MI	100	%	⁽¹³⁾	249		572		821		—			249		572		821		(161		)	1955	10/24/2011
Citizens - Hoover Road	Warren, MI	100	%	⁽¹³⁾	133		741		874		(85		)	133		656		789		(95		)	1997	10/24/2011
Citizens - Joy Road	Detroit, MI	100	%	⁽¹³⁾	66		591		657		—			66		591		657		(185		)	1957	10/24/2011
Citizens - Main Street - Belleville	Belleville, MI	100	%	⁽¹³⁾	181		1,228		1,409		—			181		1,228		1,409		(193		)	1998	10/24/2011
Citizens - North Adams	Rochester, MI	100	%	⁽¹³⁾	227		1,417		1,644		—			227		1,417		1,644		(308		)	1976	10/24/2011
Citizens - Plymouth Road - Detroit	Detroit, MI	100	%	⁽¹³⁾	66		539		605		—			66		539		605		(176		)	Early 1960’s	10/24/2011
Citizens - Roseville	Roseville, MI	100	%	⁽¹³⁾	347		906		1,253		—			347		906		1,253		(227		)	1981	10/24/2011
Citizens - Schoenherr	Warren, MI	100	%	⁽¹³⁾	145		1,088		1,233		—			145		1,088		1,233		(261		)	1979	10/24/2011
Citizens - West Fort Street	Southgate, MI	100	%	⁽¹³⁾	122		1,315		1,437		—			122		1,315		1,437		(222		)	1984	10/24/2011
Citizens - West Maple	Bloomfield Hills, MI	100	%	⁽¹³⁾	317		1,675		1,992		—			317		1,675		1,992		(446		)	1962	10/24/2011
Citizens - Woodward - Ferndale	Ferndale, MI	100	%	⁽¹³⁾	313		798		1,111		—			313		798		1,111		(228		)	1960	10/24/2011

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Citizens - Barrington	Barrington, NH	100	%	⁽¹³⁾	$	176	$	335	$	511	$	(82	)	$	176	$	253	$	429	$	(56	)	1985	10/24/2011
Citizens - Coliseum Avenue	Nashua, NH	100	%	⁽¹³⁾	206		655		861		—			206		655		861		(174		)	1981	10/24/2011
Citizens - One Constitution Way	Somersworth, NH	100	%	⁽¹³⁾	135		1,013		1,148		—			135		1,013		1,148		(189		)	1985	10/24/2011
Citizens - Endicott	Endicott, NY	100	%	⁽¹³⁾	117		2,001		2,118		—			117		2,001		2,118		(546		)	1927	10/24/2011
Citizens - Genesee - Utica	Utica, NY	100	%	⁽¹³⁾	91		2,001		2,092		—			91		2,001		2,092		(560		)	1956/1968	10/24/2011
Citizens - Glens Falls	Glens Falls, NY	100	%	⁽¹³⁾	167		1,234		1,401		—			167		1,234		1,401		(332		)	1956	10/24/2011
Citizens - Main Street - Beacon	Beacon, NY	100	%	⁽¹³⁾	440		1,247		1,687		—			440		1,247		1,687		(349		)	1955	10/24/2011
Citizens - Meadow Avenue	Newburgh, NY	100	%	⁽¹³⁾	364		1,232		1,596		—			364		1,232		1,596		(335		)	1972	10/24/2011
Citizens - Montcalm Street	Ticonderoga, NY	100	%	⁽¹³⁾	16		607		623		—			16		607		623		(172		)	1920	10/24/2011
Citizens - Chagrin Falls	Chagrin Falls, OH	100	%	⁽¹³⁾	188		596		784		(123		)	177		484		661		(109		)	Pre 1884	10/24/2011
Citizens - Dover Center Road	Bay Village, OH	100	%	⁽¹³⁾	196		484		680		—			196		484		680		(146		)	1967	10/24/2011
Citizens - East Street - Euclid	Euclid, OH	100	%	⁽¹³⁾	86		708		794		—			86		708		794		(158		)	1975	10/24/2011
Citizens - Fairview Park	Fairview Park, OH	100	%	⁽¹³⁾	289		374		663		(44		)	289		330		619		(95		)	1966	10/24/2011
Citizens - Girard	Girard, OH	100	%	⁽¹³⁾	88		1,091		1,179		—			88		1,091		1,179		(233		)	1977/1983	10/24/2011
Citizens - Lake Shore Boulevard	Euclid, OH	100	%	⁽¹³⁾	234		622		856		—			234		622		856		(207		)	1971	10/24/2011
Citizens - Lorain Road	North Olmsted, OH	100	%	⁽¹³⁾	254		599		853		—			254		599		853		(119		)	1981	10/24/2011
Citizens - Mentor Avenue	Mentor, OH	100	%	⁽¹³⁾	690		1,283		1,973		(145		)	690		1,138		1,828		(294		)	1958	10/24/2011
Citizens - Navarre Avenue	Oregon, OH	100	%	⁽¹³⁾	107		1,015		1,122		—			107		1,015		1,122		(244		)	1980	10/24/2011
Citizens - Richmond Heights	Richmond Heights, OH	100	%	⁽¹³⁾	353		683		1,036		(122		)	353		561		914		(86		)	2002	10/24/2011
Citizens - Toledo Main	Toledo, OH	100	%	⁽¹³⁾	83		664		747		—			83		664		747		(199		)	1952	10/24/2011
Citizens - University Heights	University Heights, OH	100	%	⁽¹³⁾	426		505		931		(55		)	426		450		876		(70		)	1989/2002	10/24/2011
Citizens - Westlake	Westlake, OH	100	%	⁽¹³⁾	283		596		879		—			283		596		879		(147		)	1981	10/24/2011
Citizens - Burgettstown	Burgettstown, PA	100	%	⁽¹³⁾	68		1,165		1,233		—			68		1,165		1,233		(296		)	1921	10/24/2011
Citizens - Zelienople	Zelienople, PA	100	%	⁽¹³⁾	26		1,054		1,080		—			26		1,054		1,080		(264		)	1920/1971	10/24/2011
Citizens - Portsmouth East Main	Portsmouth, RI	100	%	⁽¹³⁾	446		518		964		(69		)	446		449		895		(111		)	1979	10/24/2011
Citizens - Pearl St - Essex Junction	Essex Junction, VT	100	%	⁽¹³⁾	170		415		585		—			170		415		585		(89		)	1986	10/24/2011
Feasterville	Feasterville, PA	100	%	—	319		1,401		1,720		—			319		1,401		1,720		—			1964	09/01/2011
	Total Properties Held for Investment				$	304,935	$	1,147,212	$	1,452,147	$	(153,385	)	$	284,079	$	1,014,683	$	1,298,762	$	(192,380	)

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



					Initial Cost to Company									Gross Amount at which Carried at Close of Period
Description	Location	Ownership Percent		Encumbrances	Land		Building and Improvements ⁽¹⁾		Total		Cost Capitalized Subsequent to Acquisition⁽²⁾			Land		Building and Improvements ⁽¹⁾		Total ⁽³⁾		Accumulated Depreciation and Amortization			Original Date of Construction	Date Acquired
Properties Held for Sale
Sabal VI Building	Tampa, FL	100	%	⁽⁴⁾	$	2,600	$	14,917	$	17,517	$	(5,355	)	$	2,316	$	9,846	$	12,162	$	(1,002	)	1988	03/05/2008
Deland Main	Deland, FL	100	%	—	473		669		1,142		(147		)	437		558		995		(26		)	1964	09/01/2011
	Total Properties Held for Sale				$	3,073	$	15,586	$	18,659	$	(5,502	)	$	2,753	$	10,404	$	13,157	$	(1,028	)
		TOTAL			$	308,008	$	1,162,798	$	1,470,806	$	(158,887	)	$	286,832	$	1,025,087	$	1,311,919	$	(193,408	)

F-57

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)

____________________

⁽¹⁾ Building and improvements include tenant origination and absorption costs.

⁽²⁾ Costs capitalized subsequent to acquisition is net of impairments and write-offs of fully depreciated/amortized assets.

⁽³⁾ The aggregate cost of real estate for federal income tax purposes was approximately $1.5 billion as of December 31, 2014.

⁽⁴⁾ These properties are security for the Portfolio Loan, which had an outstanding principal balance of $181.2 million as of December 31, 2014.

⁽⁵⁾ These properties are security for the BBD2 Mortgage Loan, which had an outstanding principal balance of $138.0 million as of December 31, 2014.

⁽⁶⁾ These properties are security for the FSI 6000A Mortgage Loan, which had an outstanding principal balance of $24.6 million as of December 31, 2014.

⁽⁷⁾ These properties are security for the FSI 6000B Mortgage Loan, which had an outstanding principal balance of $28.2 million as of December 31, 2014.

⁽⁸⁾ These properties are security for the FSI 6000C Mortgage Loan, which had an outstanding principal balance of $22.2 million as of December 31, 2014.

⁽⁹⁾ These properties are security for the FSI 6000D Mortgage Loan, which had an outstanding principal balance of $29.4 million as of December 31, 2014.

⁽¹⁰⁾These properties are security for the Pitney Bowes - Bank of America Mortgage Loan, which had an outstanding principal balance of $38.3 million as of December 31, 2014.

⁽¹¹⁾These properties are security for the Pitney Bowes - Wachovia A Mortgage Loan, which had an outstanding principal balance of $15.1 million as of December 31, 2014.

⁽¹²⁾These properties are security for the Sterling Bank Mortgage Loan, which had an outstanding principal balance of $19.6 million as of December 31, 2014.

⁽¹³⁾ These properties are security for the CRE Mortgage Loan, which had an outstanding principal balance of $40.0 million as of December 31, 2014.

F-58

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE III

REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



	2014			2013			2012
Real Estate ⁽¹⁾
Balance at the beginning of the year	$	1,460,838		$	1,953,615		$	3,129,561
Improvements	33,046			21,678			20,786
Transfer of real estate in connection with the extinguishment of debt	—			—			(209,200		)
Write-off of fully depreciated and fully amortized assets	(31,954		)	(29,166		)	(27,116		)
Impairments	(18,902		)	(80,609		)	(82,167		)
Sales	(94,562		)	(404,680		)	(878,249		)
Foreclosures	(36,547		)	—			—
Balance at the end of the year	$	1,311,919		$	1,460,838		$	1,953,615

Accumulated depreciation and amortization ⁽¹⁾
Balance at the beginning of the year	$	182,039		$	204,781		$	165,328
Depreciation and amortization expense	67,848			78,461			136,710
Write-off of fully depreciated and fully amortized assets	(31,954		)	(29,166		)	(27,116		)
Impairment	(8,885		)	(32,595		)	(14,436		)
Sales	(10,973		)	(39,442		)	(37,269		)
Foreclosures	(4,667		)	—			—
Transfer of real estate in connection with the extinguishment of debt	—			—			(18,436		)
Balance at the end of the year	$	193,408		$	182,039		$	204,781

____________________

⁽¹⁾ Amounts include properties held for sale.

F-59

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE IV

MORTGAGE LOANS ON REAL ESTATE

December 31, 2014

(dollar amounts in thousands)



	Interest Rate ⁽¹⁾	Interest Rate as of December 31, 2014 ⁽¹⁾	Final Maturity Date ⁽²⁾	Periodic Payment Terms	Prior Liens		Face Amount of Mortgages		Carrying Amount of Mortgages
Notes Payable
Plaza in Clayton Mortgage Loan	5.90%	5.90%	10/06/2016	Interest Only	$	—	$	62,200	$	62,200
Portfolio Loan	One-month LIBOR +1.80%	1.96%	01/01/2016	Interest Only	—		181,249		181,249
Total Notes Payable					—		243,449		243,449

GKK Properties Notes Payable
Bank of America - BBD2 Mortgage Loan	5.96%	5.96%	09/08/2019	Principal and interest	—		138,027		134,876
101 Independence Mortgage Loan	5.53%	5.53%	11/01/2016	Principal and interest	—		65,780		63,394
Citizens Bank Portfolio Mortgage Loan	One-month LIBOR + 3.00%	3.16%	06/01/2017	Interest Only	—		40,000		40,000
Pitney Bowes - Bank of America Mortgage Loan	5.33%	5.33%	10/10/2022	Principal and interest	—		38,261		37,614
FSI 6000D Mortgage Loan	5.80%	5.80%	06/05/2017	Principal and interest	—		29,419		28,526
FSI 6000B Mortgage Loan	5.80%	5.80%	06/05/2017	Principal and interest	—		28,228		27,780
FSI 6000A Mortgage Loan	6.80%	6.80%	10/05/2017	Principal and interest	—		24,551		25,034
FSI 6000C Mortgage Loan	6.80%	6.80%	10/05/2017	Principal and interest	—		22,219		22,888
Sterling Bank Mortgage Loan	5.57%	5.57%	01/11/2017	Interest Only	—		19,629		19,437
Pitney Bowes - Wachovia A Mortgage Loan	5.50%	5.50%	06/10/2023	Principal and interest	—		15,065		15,100
					—		421,179		414,649
Total Notes Payable, Net					$	—	$	664,628	$	658,098

____________________

⁽¹⁾ Interest rate represents the interest rate in effect under the loan as of December 31, 2014 and is calculated as the actual interest rate in effect as of December 31, 2014 (consisting of the contractual interest rate), using interest rate indices at December 31, 2014, where applicable.

⁽²⁾ Represents the initial maturity date or the maturity date as extended as of December 31, 2014; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

F-60

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KBS REAL ESTATE INVESTMENT TRUST, INC.

SCHEDULE IV

MORTGAGE LOANS ON REAL ESTATE (CONTINUED)

December 31, 2014

(dollar amounts in thousands)



Reconciliation of Mortgage Loans on Real Estate
Balance as of December 31, 2013	$	962,282
Additions during period:
New mortgage loans	42,500
Deferred interest payable	637
Deductions during period:
Principal repayments	(269,831		)
Extinguishment of mortgage loan due to discounted payoff	(26,824		)
Extinguishment of mortgage loans due to foreclosure	(54,037		)
Amortization of discount/premium on notes payable	3,371
Balance as of December 31, 2014	$	658,098

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, State of California, on March 9, 2015.



		KBS REAL ESTATE INVESTMENT TRUST, INC.

		By:	/s/ Charles J. Schreiber, Jr.
			Charles J. Schreiber, Jr.
			Chairman of the Board, Chief Executive Officer and Director
			(principal executive officer)

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



Name	Title	Date

/s/ CHARLES J. SCHREIBER, JR.	Chairman of the Board, Chief Executive Officer and Director (principal executive officer)	March 9, 2015
Charles J. Schreiber, Jr.
/s/ DAVID E. SNYDER	Chief Financial Officer (principal financial officer)	March 9, 2015
David E. Snyder
/s/ PETER MCMILLAN III	Executive Vice President, Treasurer, Secretary and Director	March 9, 2015
Peter McMillan III
/s/ STACIE K. YAMANE	Chief Accounting Officer (principal accounting officer)	March 9, 2015
Stacie K. Yamane
/s/ HANK ADLER	Director	March 9, 2015
Hank Adler
/s/ BARBARA R. CAMBON	Director	March 9, 2015
Barbara R. Cambon
/s/ STUART A. GABRIEL, PH.D.	Director	March 9, 2015
Stuart A. Gabriel, Ph.D.

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