Sterling Real Estate Trust 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2012

or

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from                  to                 

Commission File Number: 000-54295

INREIT Real Estate Investment Trust

(Exact name of registrant as specified in its charter)

North Dakota	90-0115411
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1711 Gold Drive South, Suite 100, Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

216 South Broadway, Suite 202, Minot, North Dakota, 58701

(Former name, former address and formal fiscal year, if changed since last report)

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  ¨

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

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

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

Class	Outstanding at November 7, 2012
Common Shares of Beneficial Interest, $0.01 par value per share	5,321,379.737

INREIT REAL ESTATE INVESTMENT TRUST

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1.     Financial Statements (unaudited):
Consolidated Balance Sheets – as of September 30, 2012 and December 31, 2011		3
Consolidated Statements of Operations and Other Comprehensive Income –
Three and nine months ended September 30, 2012 and 2011		5
Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2012 and 2011		7
Consolidated Statements of Cash Flows – Nine months ended September 30, 2012 and 2011		9
Notes to Consolidated Financial Statements		11
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations.		37
Item 4.     Controls and Procedures		48
PART II. OTHER INFORMATION
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 6.     Exhibits		50
Signatures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

	September 30, 2012		December 31, 2011
	(unaudited)
ASSETS
Property and equipment, less accumulated depreciation	$	352,016,194	$	355,661,993
Cash and cash equivalents		3,068,846		3,192,785
Restricted deposits and funded reserves		6,407,888		3,397,991
Investment in unconsolidated affiliates		4,376,857		1,506,776
Due from related party		253,593		367,642
Receivables		2,568,596		2,629,452
Prepaid expenses		128,348		709,061
Notes receivable		226,869		1,807,159
Financing costs, less accumulated amortization of $1,373,885 in 2012 and $1,011,602 in 2011		2,050,648		2,359,556
Assets held for sale		—		449,734
Rent Incentive, less accumulated amortization of $291,667 in 2012 and $216,667 in 2011		1,208,333		1,283,333
Intangible assets, less accumulated amortization of $2,340,606 in 2012 and $1,660,688 in 2011		8,981,968		7,177,854
Other assets		141,429		724,229
	$	381,429,569	$	381,267,565

See Notes to Consolidated Financial Statements

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3

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

	September 30, 2012			December 31, 2011
	(unaudited)
LIABILITIES
Mortgage notes payable	$	202,287,592		$	217,479,862
Notes payable		4,050,000			8,000,000
Special assessments payable		1,791,219			1,574,376
Dividends payable		3,335,785			2,945,560
Due to related party		143,074			66,734
Tenant security deposits payable		1,698,905			1,529,891
Investment certificates		1,371,898			1,443,899
Unfavorable leases, net		909,829			519,305
Accounts payable - trade		106,592			9,151
Liabilities related to assets held for sale		—			6,324
Fair value of interest rate swap		516,950			452,586
Deferred insurance proceeds		49,490			49,189
Accrued expenses		5,014,375			2,964,421
Total Liabilities		221,275,709			237,041,298
Commitments - Note 15
SHAREHOLDERS’ EQUITY
Noncontrolling interest in operating partnership		108,792,104			108,542,389
Beneficial interest		51,878,706			36,136,464
Accumulated comprehensive loss		(516,950	)		(452,586	)
		160,153,860			144,226,267
	$	381,429,569		$	381,267,565

See Notes to Consolidated Financial Statements

4

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Income from rental operations
Real estate rental income	$	12,470,032	$	11,288,230	$	37,407,256	$	33,095,410
Tenant reimbursements		914,197		1,069,034		2,787,402		3,215,933
		13,384,229		12,357,264		40,194,658		36,311,343
Expenses
Expenses from rental operations
Interest		2,856,550		2,987,208		8,769,953		8,883,543
Depreciation and amortization		2,802,545		2,532,477		8,294,408		7,368,615
Real estate taxes		1,559,294		1,468,726		4,651,859		4,302,909
Property management fees		1,079,409		982,637		3,233,070		2,862,544
Utilities		806,163		719,369		2,709,021		2,513,399
Repairs and maintenance		1,422,266		1,355,165		3,825,979		3,713,278
Insurance		215,177		211,544		647,218		556,611
		10,741,404		10,257,126		32,131,508		30,200,899
Administration of REIT
Administration expenses		63,737		25,094		216,235		75,260
Advisory fees		328,599		192,282		975,009		565,561
Acquisition and disposition expenses		435,459		84,541		595,272		539,798
Trustee fees		10,000		10,200		41,400		32,200
Legal and accounting		79,922		130,439		360,097		515,812
		917,717		442,556		2,188,013		1,728,631
Total expenses		11,659,121		10,699,682		34,319,521		31,929,530
Income from operations		1,725,108		1,657,582		5,875,137		4,381,813

See Notes to Consolidated Financial Statements

(continued on next page)

5

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Income from operations		1,725,108			1,657,582			5,875,137			4,381,813
Other income
Equity in income of unconsolidated affiliates		222,514			22,347			618,971			22,347
Interest income		15,207			59,299			60,868			189,880
		237,721			81,646			679,839			212,227
Income from continuing operations		1,962,829			1,739,228			6,554,976			4,594,040
Discontinued operations - Note 16		(945	)		(169,011	)		(971	)		89,541
Net income	$	1,961,884		$	1,570,217		$	6,554,005		$	4,683,581
Net income attributable to the noncontrolling interest		1,353,968			1,162,317			4,661,313			3,453,448
Net income attributable to INREIT Real Estate Investment Trust	$	607,916		$	407,900		$	1,892,692		$	1,230,133
Net income per common share, basic and diluted	$	0.12		$	0.11		$	0.42		$	0.33
Comprehensive income:
Net income		1,961,884			1,570,217			6,554,005			4,683,581
Other comprehensive income (loss) - increase (decrease) in fair value of interest rate swap		(15,926	)		(214,802	)		(64,364	)		(246,176	)
Comprehensive income		1,945,958			1,355,415			6,489,641			4,437,405
Comprehensive income attributable to noncontrolling interest		1,343,162			1,003,530			4,615,762			3,271,497
Comprehensive income attributable to INREIT Real Estate Investment Trust	$	602,796		$	351,885		$	1,873,879		$	1,165,908

See Notes to Consolidated Financial Statements

6

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 (UNAUDITED)

	Common Shares			Common Shares Amount			Accumulated Earnings (Deficit)			Total Beneficial Interest			Noncontrolling Interest			Accumulated Comprehensive Loss			Total
BALANCE, DECEMBER 31, 2010		3,602,853		$	42,284,483		$	(7,439,249	)	$	34,845,234		$	105,012,439		$	(194,499	)	$	139,663,174
Issuance of common shares		150,824			2,075,445						2,075,445									2,075,445
Contribution of assets in exchange for the issuance of noncontrolling interest shares														7,109,332						7,109,332
Repurchase of shares		(146,620	)		(1,847,406	)					(1,847,406	)								(1,847,406	)
Dividends								(1,506,605	)		(1,506,605	)		(4,247,264	)					(5,753,869	)
Dividends declared								(759,762	)		(759,762	)		(2,172,538	)					(2,932,300	)
Dividends reinvested - stock dividend		104,157			1,385,267						1,385,267									1,385,267
UPREIT units converted to REIT common shares		64,003			806,449						806,449			(806,449	)					—
Syndication costs								(130,798	)		(130,798	)		(67,942	)					(198,740	)
Decrease in fair value of interest rate swap																	(246,176	)		(246,176	)
Net income								1,230,133			1,230,133			3,453,448						4,683,581
BALANCE, SEPTEMBER 30, 2011		3,775,217		$	44,704,238		$	(8,606,281	)	$	36,097,957		$	108,281,026		$	(440,675	)	$	143,938,308

See Notes to Consolidated Financial Statements

7

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 (UNAUDITED)

	Common Shares			Common Shares Amount			Accumulated Earnings (Deficit)			Total Beneficial Interest			Noncontrolling Interest			Accumulated Comprehensive Loss			Total
BALANCE, DECEMBER 31, 2011		3,796,223		$	45,009,577		$	(8,873,113	)	$	36,136,464		$	108,542,389		$	(452,586	)	$	144,226,267
Issuance of common shares		1,331,680			18,266,125						18,266,125									18,266,125
Contribution of assets in exchange for the issuance of noncontrolling interest shares														4,058,618						4,058,618
Repurchase of shares		(288,564	)		(3,658,636	)					(3,658,636	)								(3,658,636	)
Dividends								(1,876,560	)		(1,876,560	)		(4,518,642	)					(6,395,202	)
Dividends declared								(1,050,398	)		(1,050,398	)		(2,285,387	)					(3,335,785	)
Dividends reinvested - stock dividend		125,084			1,661,236						1,661,236									1,661,236
UPREIT units converted to REIT common shares		122,251			1,590,961						1,590,961			(1,590,961	)					—
Syndication costs								(1,083,178	)		(1,083,178	)		(75,226	)					(1,158,404	)
Decrease in fair value of interest rate swap																	(64,364	)		(64,364	)
Net income								1,892,692			1,892,692			4,661,313						6,554,005
BALANCE, SEPTEMBER 30, 2012		5,086,674		$	62,869,263		$	(10,990,557	)	$	51,878,706		$	108,792,104		$	(516,950	)	$	160,153,860

See Notes to Consolidated Financial Statements

8

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

	Nine Months Ended September 30,
	2012			2011
OPERATING ACTIVITIES
Net income	$	6,554,005		$	4,683,581
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of property and equipment		(114,307	)		(366,990	)
Loss on sale of property and equipment		87,971			66,921
Equity in income of unconsolidated affiliates		(618,971	)		(22,347	)
Depreciation		7,154,638			6,607,536
Amortization		1,140,887			785,989
Effects on operating cash flows due to changes in
Tenant security deposits		(104,339	)		(117,124	)
Due from related party		114,049			65,892
Receivables		(332,330	)		(301,991	)
Prepaid expenses		570,260			400,509
Other assets		582,800			(748,935	)
Due to related party		76,340			(128,202	)
Tenant security deposits payable		169,014			162,175
Accounts payable		97,441			(123,247	)
Accrued expenses		2,396,425			2,082,994
NET CASH FROM OPERATING ACTIVITIES		17,773,883			13,046,761
INVESTING ACTIVITIES
Purchase of property and equipment		(9,618,113	)		(4,867,970	)
Purchase of intangible assets		(683,836	)		(1,483,434	)
Proceeds from sale of property and equipment		932,513			2,819,355
Investment in unconsolidated affiliates		(80,726	)		(284,335	)
Distributions received from unconsolidated affiliates		794,700			7,000
Real estate tax and insurance escrows		(3,011,389	)		(1,911,266	)
Notes receivable payments received		1,580,290			39,301
Notes receivable issued for tenant improvements		—			(33,000	)
Payments for earnest money deposits		(150,000	)		—
Deferred insurance proceeds		301			395,750
Net deposits to replacement reserve		(9,513	)		(137,263	)
Net payments from exchange escrow		—			2,312,927
NET CASH (USED FOR) INVESTING ACTIVITIES		(10,245,773	)		(3,142,935	)

See Notes to Consolidated Financial Statements

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

	Nine Months Ended September 30,
	2012			2011
FINANCING ACTIVITIES
Payments for financing costs		(164,037	)		(719,349	)
Payments on investment certificates		(72,001	)		(823,089	)
Principal payments on special assessments payable		(662	)		—
Proceeds from issuance of mortgage notes payable		5,346,337			7,603,199
Principal payments on mortgage notes payable		(14,581,245	)		(11,362,049	)
Net change in short-term notes payable		(3,950,000	)		—
Proceeds from issuance of shares		18,266,125			2,075,445
Repurchase of shares		(3,658,636	)		(1,847,406	)
Dividends paid		(7,679,526	)		(6,974,635	)
Payment of syndication costs		(1,158,404	)		(510,634	)
NET CASH FLOWS (USED FOR) FINANCING ACTIVITIES		(7,652,049	)		(12,558,518	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(123,939	)		(2,654,692	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		3,192,785			10,010,564
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,068,846		$	7,355,872
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest		8,883,142			8,949,256
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested		1,661,236			1,385,267
Dividends declared and not paid		1,050,398			759,762
UPREIT distributions declared and not paid		2,285,387			2,172,538
UPREIT units converted to REIT common shares		1,590,961			806,449
Acquisition of assets in exchange for the issuance of noncontrolling interest shares in UPREIT		4,058,618			7,109,332
Increase in land improvements due to increase in special assessments payable		315,607			77,337
Unrealized (gain) loss on interest rate swap		64,364			246,176
Acquisition of assets with reduction of notes receivable		—			89,349
Acquisition of assets through assumption of debt and property purchased with financing		5,070,054			10,972,257

See Notes to Consolidated Financial Statements

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION

INREIT Real Estate Investment Trust (“INREIT”) is a registered, but unincorporated business trust organized in North Dakota in November 2002. INREIT has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.

INREIT previously established an operating partnership (INREIT Properties, LLLP) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, INREIT has management responsibility for all activities of the operating partnership. As of September 30, 2012 and December 31, 2011, INREIT owned approximately 31.5% and 25.8%, respectively, of the operating partnership. The operating partnership is the 100% owner of 25 single asset limited liability companies and the 81.25% owner, the 50% owner, and the 40.26 % owner in 3 additional single asset LLLPs or LLCs.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2012 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine month periods ended September 30, 2012 and 2011, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2012 and our consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity and our consolidated cash flows for the three and nine month periods ended September 30, 2012 and 2011, as applicable. These adjustments are of a normal recurring nature.

Principles of Consolidation

The consolidated financial statements include the accounts of INREIT, INREIT Properties, LLLP and 25 single asset limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders as well as whether the entity is a variable interest entity for which we are the primary beneficiary.

(Continued on next page)

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Principal Business Activity

INREIT is the sole general partner of the operating partnership, which owns and operates the following property:

Residential Property

• 2,392 and 204 units respectively in Fargo and West Fargo, North Dakota.

• 551 units in Grand Forks, North Dakota.

• 470 units in Bismarck, North Dakota.

• 316 units in Omaha, Nebraska.

• 14 units in Hawley, Minnesota.

• 414 units in Eagan, Minnesota.

• 116 units in Moorhead, Minnesota.

• 193 unit assisted living facility in Bismarck, North Dakota.

Commercial Property

• 15,010 square foot office building in Minot, North Dakota.

• 8,000 square foot office building in Norfolk, Nebraska.

• 15,000 square foot office and retail complex in Fargo, North Dakota.

• 28,500 square foot office and retail complex in Fargo, North Dakota.

• 30,200 square foot retail facility in Waite Park, Minnesota.

• 17,000 square foot office building in Fargo, North Dakota.

• 124,306 square foot office complex in Fargo, North Dakota.

• 10,810 square foot office building in St. Cloud, Minnesota.

• 95,961 square foot office building in Duluth, Minnesota.

• 11,973 square foot office building in Fargo, North Dakota.

• 21,492 square foot office building and 1,625 square foot storage area in Grand Forks, North Dakota.

• 102,448 square foot office building in Edina, Minnesota.

• 5,043 square foot restaurant in Bloomington, Minnesota.

• 5,576 square foot restaurant in Coon Rapids, Minnesota.

• 4,936 square foot restaurant in Savage, Minnesota.

• 7,296 square foot restaurant in Austin, Texas.

• 15,400 square foot commercial building in Mandan, North Dakota.

• 4,997 square foot restaurant in Apple Valley, Minnesota.

• 2,712 square foot restaurant in Moorhead, Minnesota.

• 3,510 square foot office building in Moorhead, Minnesota.

• 2,811 square foot restaurant in Dickinson, North Dakota.

• 42,000 square foot retail building in Marshall, Minnesota.

• 17,760 square foot retail building in Dickinson, North Dakota.

• 23,690 square foot retail building in Minot, North Dakota.

• 100,600 square foot office building in Fargo, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a commercial building with approximately 31,000 square feet of rental space in Fargo, North Dakota.

(Continued on next page)

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The operating partnership is the owner of a single asset limited liability company which owns and leases two 36 unit residential apartment buildings in Grand Forks, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 136 unit residential apartment complex in Bismarck, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases two commercial buildings with approximately 75,000 square feet of rental space in Bismarck, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 168 unit residential apartment complex in Omaha, Nebraska.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 75 unit residential apartment complex in Fargo, North Dakota.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 148 unit residential apartment complex in Omaha, Nebraska.

The operating partnership is the owner of a single asset limited liability company which owns and leases a 179 unit residential apartment complex in Bismarck, North Dakota.

The operating partnership is the owner of five single asset limited liability companies which own five separate commercial properties totaling 72,140 square feet, located in Alexandria, Louisiana; Batesville, Arkansas; Fayetteville, Arkansas; Laurel, Mississippi; and Denver, Colorado.

The operating partnership is the owner of ten single asset limited liability companies which own ten separate commercial properties totaling 124,686 square feet, located in Mankato, Minnesota; Janesville, Wisconsin; Eau Claire, Wisconsin; Stevens Point, Wisconsin; Sheboygan, Wisconsin; Oshkosh, Wisconsin; Onalaska, Wisconsin; Grand Forks, North Dakota; Marquette, Michigan; and Bismarck, North Dakota.

The operating partnership is also a 81.25% owner of single asset partnership which owns and leases a 144 unit residential apartment complex in West Fargo, North Dakota. The remaining owners consist of Kenneth Regan, James Wieland and James Echtenkamp, related parties.

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the three and nine months ended September 30, 2012 and 2011.

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13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Through December 31, 2011, we accounted for our investment in unconsolidated affiliates using the proportional method as defined in ASC 970. We have not restated prior periods’ financial statements as we believe the accounting change does not have a material effect on those statements.

Investment in unconsolidated affiliates as of September 30, 2012 consists of our 40.26% interest in a single asset limited liability company which owns a 144 unit residential, multi-tenant apartment complex in Bismarck, North Dakota; our 50.00% interest in a single asset limited liability company which owns a 183,000 square feet of commercial space in Grand Forks, North Dakota; and our 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial space in Fargo, North Dakota. Consolidation of these investments are not required as the entities do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. We and the respective affiliate partners must approve significant decisions about the applicable entities activities. As of September 30, 2012, the unconsolidated affiliates held total assets of $29.0 million and mortgage notes payable of $21.7 million.

The operating partnership holds a 50.00% interest in the Grand Forks Marketplace Retail Center, located in Grand Forks, North Dakota, through 100% ownership in a limited liability company, which owns a 1/3 interest in the Retail Center, and a 50% ownership in a separate limited liability company, which owns a 1/3 interest in the Retail Center.

Concentration of Credit Risk

Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include appraisals of the properties by a certified independent appraiser at the time of acquisition.

Equipment, furniture and fixtures purchased are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:

Buildings and improvements	40 years
Furniture and fixtures	9 years

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14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation expense for the three months ended September 30, 2012 and 2011 totaled $2,412,438 and $2,244,627, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 totaled $7,154,638 and $6,607,536, respectively.

Annually, we evaluate our real estate investments for significant operational changes to assess whether any impairment indications are present, including recurring operating losses or significant adverse changes in legal factors or business climate that affect the recovery of the recorded value. If any real estate investment is considered impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value. There have been no impairment losses during the nine month periods ended September 30, 2012 and 2011, respectively.

Cash and Cash Equivalents

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.

Receivables

Receivables consist primarily of amounts due for rent and real estate taxes. The receivables are non-interest bearing. The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected. As of September 30, 2012 and December 31, 2011, management determined that no allowance was necessary for uncollectible receivables.

Other assets

Lease intangibles represent a proportional purchase price allocation of a property acquisition. The lease intangibles represent the estimated value of in-place leases and above-market lease terms. Intangible assets are comprised of finite-lived and indefinite-lived assets. Indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined that impairment was unnecessary at September 30, 2012 or September 30, 2011.

Rental Incentives

Rental incentives consist of up-front cash payments to lessees to sign the lease. Rental incentives are amortized against rental income over the term of the lease.

Noncontrolling Interest

Interests in the operating partnership held by limited partners are represented by limited partnership units. The operating partnerships’ income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.

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15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financing Costs

Financing costs incurred in connection with financing have been capitalized and are being amortized over the life of the financing using the effective interest method.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to equity and noncontrolling interest.

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being that a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.

We intend to continue to qualify as a REIT and, as such, will not be taxed on the portion of the income that is distributed to the shareholders. In addition, we intend to distribute all of our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the financial statements.

The operating partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for partnership interest. The conversion of partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We have adopted the provisions of FASB Accounting Standards Codification Topic ASC 740-10Accounting for Income Tax Uncertainties, on January 1, 2009. The implementation of this standard had no impact on the financial statements. As of both the date of adoption and as of September 30, 2012, the unrecognized tax benefit accrual was zero. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2008.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Effective for periods beginning after December 15, 2011, ASU No. 2011-04 clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks and the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. ASU No. 2011-04 will only apply to our disclosures in Note 9 related to fair value assets and liabilities and is not expected to have a significant impact on our footnote disclosures.

Revenue Recognition

Generally, housing units are rented under short-term lease agreements. Generally, commercial space is rented under long-term lease agreements.

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16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We derive over 95% of our revenues from tenant rents and other tenant-related activities. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and straight-line rents. We record base rents on a straight-line basis, which means that the monthly base rent income according to the terms of our leases with tenants is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $69,641 and $58,527 for the three months ended September 30, 2012 and 2011, respectively. The straight-line rent adjustment increased revenue by $202,396 and $183,231 for the nine months ended September 30, 2012 and 2011, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheet as of September 30, 2012 and December 31, 2011 was $1,812,732 and $1,718,527, respectively. We receive payments for these reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. INREIT had no dilutive potential common shares as of September 30, 2012 or 2011, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the three months ended September 30, 2012 and 2011, INREIT’s denominators for the basic and diluted earnings per common share were approximately 4,958,416 and 3,781,982, respectively. For the nine months ended September 30, 2012 and 2011, INREIT’s denominators for the basic and diluted earnings per common share were approximately 4,538,247 and 3,761,159 shares, respectively.

Reclassifications

Certain amounts previously reported in our 2011 financial statements have been reclassified to conform to the fiscal 2012 presentation.

NOTE 3 – SEGMENT REPORTING

Commencing January 1, 2012, we began reporting our results in two reportable segments: residential and commercial properties. Our residential properties include multi-family and assisted senior living properties. Our commercial properties include retail, office, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and other general and administrative expenses.

The accounting policies of each segment are consistent with those described in Note 2 of this report.

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17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Revenues and Net Income

The revenues and net operating income for these reportable segments are summarized as follows for the three and nine month periods ended September 30, 2012 and 2011, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.

Three months ended September 30, 2012	Residential		Commercial		Total
(unaudited)
Income from rental operations	$	9,203,449	$	4,180,780	$	13,384,229
Expenses from rental operations		4,012,436		1,069,873		5,082,309
Net operating income	$	5,191,013	$	3,110,907	$	8,301,920
Interest						2,856,550
Depreciation and amortization						2,802,545
Administration of REIT						917,717
Other (income)/expense						(237,721	)
Income from continuing operations					$	1,962,829
Discontinued operations						(945	)
Net income					$	1,961,884
Three months ended September 30, 2011	Residential		Commercial		Total
(unaudited)
Income from rental operations	$	8,010,204	$	4,347,060	$	12,357,264
Expenses from rental operations		3,567,696		1,169,745		4,737,441
Net operating income	$	4,442,508	$	3,177,315	$	7,619,823
Interest						2,987,208
Depreciation and amortization						2,532,477
Administration of REIT						442,556
Other (income)/expense						(81,646	)
Income from continuing operations					$	1,739,228
Discontinued operations						(169,011	)
Net income					$	1,570,217

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18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine months ended September 30, 2012	Residential		Commercial		Total
(unaudited)
Income from rental operations	$	27,845,598	$	12,349,060	$	40,194,658
Expenses from rental operations		11,878,699		3,188,448		15,067,147
Net operating income	$	15,966,899	$	9,160,612	$	25,127,511
Interest						8,769,953
Depreciation and amortization						8,294,408
Administration of REIT						2,188,013
Other (income)/expense						(679,839	)
Income from continuing operations					$	6,554,976
Discontinued operations						(971	)
Net income					$	6,554,005
Nine months ended September 30, 2011	Residential		Commercial		Total
(unaudited)
Income from rental operations	$	23,675,019	$	12,636,324	$	36,311,343
Expenses from rental operations		10,448,577		3,500,164		13,948,741
Net operating income	$	13,226,442	$	9,136,160	$	22,362,602
Interest						8,883,543
Depreciation and amortization						7,368,615
Administration of REIT						1,728,631
Other (income)/expense						(212,227	)
Income from continuing operations					$	4,594,040
Discontinued operations						89,541
Net income					$	4,683,581

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19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Assets and Accumulated Depreciation

As of September 30, 2012 (Unaudited)	Residential			Commercial			Total
Property and Equipment	$	242,798,951		$	145,501,292		$	388,300,243
Accumulated Depreciation		(23,447,128	)		(12,836,921	)		(36,284,049	)
	$	219,351,823		$	132,664,371		$	352,016,194
Cash and cash equivalents								3,068,846
Restricted deposits and funded reserves								6,407,888
Investment in unconsolidated affiliates								4,376,857
Receivables and other assets								3,318,834
Financing costs, less accumulated amortization								2,050,648
Rent incentive, less accumulated amortization								1,208,333
Intangible assets, less accumulated amortization								8,981,968
Total Assets							$	381,429,569
As of December 31, 2011	Residential			Commercial			Total
Property and Equipment	$	235,230,167		$	152,152,404		$	387,382,571
Accumulated Depreciation		(18,538,328	)		(12,743,162	)		(31,281,490	)
Property and equipment included in assets held for sale		—			(439,088	)		(439,088	)
	$	216,691,839		$	138,970,154		$	355,661,993
Cash and cash equivalents								3,192,785
Restricted deposits and funded reserves								3,397,991
Investment in unconsolidated affiliates								1,506,776
Receivables and other assets								6,237,543
Financing costs, less accumulated amortization								2,359,556
Assets held for sale								449,734
Rent incentive, less accumulated amortization								1,283,333
Intangible assets, less accumulated amortization								7,177,854
Total Assets							$	381,267,565

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20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – PROPERTY AND EQUIPMENT

As of September 30, 2012 (unaudited)	Residential			Commercial			Total
Land and land improvements	$	24,564,565		$	29,676,805		$	54,241,370
Building and improvements		203,989,559			114,358,066			318,347,625
Furniture and fixtures		14,244,827			1,466,421			15,711,248
		242,798,951			145,501,292			388,300,243
Less accumulated depreciation		(23,447,128	)		(12,836,921	)		(36,284,049	)
	$	219,351,823		$	132,664,371		$	352,016,194
Less: property and equipment included in assets held for sale		—			—			—
	$	219,351,823		$	132,664,371		$	352,016,194
As of December 31, 2011	Residential			Commercial			Total
Land and land improvements	$	23,131,323		$	27,800,822		$	50,932,145
Building and improvements		198,289,967			122,885,161			321,175,128
Furniture and fixtures		13,808,877			1,466,421			15,275,298
		235,230,167			152,152,404			387,382,571
Less accumulated depreciation		(18,538,328	)		(12,743,162	)		(31,281,490	)
	$	216,691,839		$	139,409,242		$	356,101,081
Less: property and equipment included in assets held for sale		—			(439,088	)		(439,088	)
	$	216,691,839		$	138,970,154		$	355,661,993

During 2011, we received insurance proceeds in the amount of $491,676 for damages caused by a wind storm. The proceeds were used in 2011 and 2012 to repair damages to the buildings.

There were no insurance proceeds received during the first nine months of 2012.

NOTE 5 - HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we use a derivative instrument to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings. To meet these objectives, we have entered into interest rate swaps in the amount of $1,293,900 and $2,429,044 to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature on April 15, 2020 and December 2017, respectively. The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception. The carrying amount of the swaps have been adjusted to their fair values at the end of the quarter, which because of changes in forecasted levels of LIBOR resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps. The interest rate swaps are accounted for as effective hedges in accordance with ASC 815-20 whereby they are recorded at fair value and changes in fair value are recorded to comprehensive income. As of September 30, 2012 and December 31, 2011, we have recorded a liability and other comprehensive loss of $516,950 and $452,586, respectively.

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21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – LEASE INTANGIBLES

The following table summarizes the net value of other intangible assets and the accumulated amortization for each class of intangible asset:

As of September 30, 2012	Lease Intangibles			Accumulated Amortization			Lease Intangibles, net
In-place leases	$	9,616,754		$	(2,133,701	)	$	7,483,053
Above-market leases		1,705,820			(206,905	)		1,498,915
Below-market leases		(1,153,421	)		243,592			(909,829	)
	$	10,169,153		$	(2,097,014	)	$	8,072,139
As of December 31, 2011	Lease Intangibles			Accumulated Amortization			Lease Intangibles, net
In-place leases	$	7,250,261		$	(1,523,986	)	$	5,726,275
Above-market leases		1,588,281			(136,702	)		1,451,579
Below-market leases		(688,844	)		169,539			(519,305	)
	$	8,149,698		$	(1,491,149	)	$	6,658,549

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

Years ending September 30,	Amount
2013	$	886,240
2014		886,240
2015		886,240
2016		886,240
2017		886,240
Thereafter		3,640,939
	$	8,072,139

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 2012 was 10.5 years.

NOTE 7 – SHORT TERM NOTES PAYABLE

We have a $11,000,000 variable rate (1-month LIBOR plus 2.50%) line of credit agreement with Wells Fargo Bank, which expires in November 2013; a $1,925,000 fixed rate (4.50%) line of credit agreement with Bremer Bank, which expires in June 2016; and a $2,000,000 variable rate (prime rate) line of credit agreement with Bell State Bank and Trust, which expires in June 2013. The lines of credit are secured by properties in Duluth, Minnesota; St. Cloud, Minnesota; and Fargo, North Dakota, respectively. At September 30, 2012, the cumulative balance outstanding on the lines of credit was $4,050,000, leaving $10,875,000 unused under the agreements. At December 31, 2011, the cumulative balance outstanding on the lines of credit was $8,000,000, leaving $6,925,000 unused under the agreements.

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22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - MORTGAGE NOTES PAYABLE

Mortgage notes payable consist of:

Maturity Date	Property Name (a)	Interest Rate Per Annum			Principal Balance At
					September 30, 2012		December 31, 2011
Residential Properties
October-17	Auburn II (Arneson)		6.30	%	$	638,279	$	645,938
October-17	Hunter's Run I (Arneson)		6.30	%		306,982		310,665
July-16	Autumn Ridge 3 &4		4.50	%		3,467,019		3,551,730
January-16	Autumn Ridge 1 & 2		5.74	%		2,940,485		2,981,073
December-13	Bayview		6.73	%		2,049,872		2,100,796
June-18	Berkshire		5.25	%		330,301		337,723
September-21	Brookfield		3.75	%		1,551,590		1,657,972
September-36	Carling Manor		4.40	%		554,993		564,533
December-13	Carlton 1 - 3		5.60	%		2,202,579		2,241,563
June-13	Carlton Place		6.96	%		1,936,723		1,986,250
January-16	Colony Manor		5.96	%		—		869,372
February-17	Colony Manor		3.63	%		860,903		—
September-14	Columbia West		7.80	%		1,456,992		1,487,005
November-24	Country Club		4.37	%		674,032		705,271
October-19	Danbury		5.03	%		3,129,953		3,182,862
March-17	Eagle Run		3.95	%		4,868,768		4,955,117
June-18	Emerald Court		5.25	%		675,636		690,771
March-17	Fairview		3.95	%		3,341,952		3,386,596
June-13	Flickertail		6.96	%		2,848,125		2,920,958
December-17	Galleria III		4.75	%		649,578		660,752
August-16	Glen Pond		6.30	%		16,478,712		16,694,344
March-17	Hunter		3.95	%		1,244,538		1,266,694
September-14	Islander		6.00	%		510,109		522,787
December-17	Library Lane		6.10	%		1,957,780		1,981,723
May-21	Maple Ridge		5.69	%		4,427,791		4,469,145
March-17	Maplewood Bend		3.95	%		3,535,403		3,597,985
September-17	Oak Court		5.98	%		1,899,516		1,919,916
October-15	Parkwood		5.96	%		—		977,791
February-17	Parkwood		3.63	%		1,264,878		—
January-13	Pebble Creek		5.72	%		2,547,087		2,595,793
June-18	Prairiewood Courts		5.25	%		1,632,406		1,668,991
October-20	Prairiewood Meadows		6.17	%		2,435,869		—
December-13	Richfield/Harrison		6.67	%		2,599,833		2,664,804
September-17	Rosegate		5.93	%		2,420,609		2,446,864
September-36	Saddlebrook		4.40	%		1,141,669		1,161,291
August-19	Sierra Ridge Phase I		5.46	%		2,746,181		2,790,426
November-19	Sierra Ridge Phase II		5.92	%		3,444,619		3,491,138	(b)
December-12	Somerset		5.60	%		—		1,889,144
July-21	Southgate		5.96	%		3,095,884		3,139,094

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23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturity Date	Property Name (a)	Interest Rate Per Annum			Principal Balance At
					September 30, 2012			December 31, 2011
August-16	Southview III		4.50	%	$	243,449		$	247,617
December-17	Southview Villages		6.10	%		2,140,226			2,166,400
April-15	Stonybrook		5.40	%		5,710,409			5,786,446
January-22	Sunset Ridge		4.44	%		9,337,876			9,435,000
May-19	Sunview		5.75	%		1,268,264			1,289,752
January-13	Sunwood Estates		7.18	%		—			1,858,047
June-19	Terrace on the Green		6.53	%		2,196,837			—
March-14	Twin Parks		5.75	%		—			1,660,966	(d)
May-19	Village		5.75	%		1,119,023			1,137,984
July-16	Village Park		6.15	%		917,180			936,141
June-18	Westwind		5.25	%		375,751			384,163
March-17	Westwood		3.95	%		5,279,631			5,409,723
July-13	Willow Park		6.96	%		2,551,722			2,616,412
June-15	EV-Bismarck		5.64	%		15,051,113			15,327,299
Commercial Properties
September-17	Guardian Building Products		3.45	%		2,415,000			—
November-16	Titan Machinery - Dickinson, ND		4.23	%		423,719			—
January-17	Titan Machinery - Marshall, MN		4.55	%		2,385,871			2,445,391
August-17	Titan Machinery - Minot, ND		3.29	%		1,833,863			—
March-16	Bio-life Properties - ND, MN, WI (9 total)		7.56	%		10,199,470			10,942,103
December-16	Bio-life Properties - Marquette, MI		7.06	%		1,458,742			1,566,954
August-17	Aetna		5.93	%		7,095,207			7,178,722
August-22	Banner Building		7.04	%		See	(e)		5,052,762
December-13	CFB		4.00	%		2,356,988			2,401,144
February-15	Echelon		4.25	%		1,238,693			1,286,104
April-18	Gate City		3.97	%		1,093,396			1,114,788	(c)
September-20	Goldmark Office Park		5.33	%		5,358,848			5,753,990
August-13	Grand Forks Marketplace		5.26	%		See	(e)		5,974,655
April-20	Great American Building		7.25	%		1,113,412			1,136,368
April-16	Midtown Plaza		5.31	%		—			703,705
October-15	Regis		5.68	%		9,791,386			9,938,892
April-17	Dairy Queen - Dickinson, ND		3.63	%		758,719			—
January-16	Mandan Commercial		5.25	%		—			1,087,056
December-12	Moorhead Commercial		3.00	%		—			553,938
April-25	Walgreens -Alexandria		5.69	%		2,256,439			2,346,633
March-34	Walgreens -Batesville		6.85	%		6,636,586			6,735,726
June-21	Walgreens -Colorado		4.50	%		4,473,278			4,549,718
August-33	Walgreens -Fayetteville		6.85	%		5,105,129			5,185,468
October-24	Walgreens -Laurel		6.07	%		2,233,718			2,321,749
December-13	Westpointe Center		5.50	%		—			2,433,166
					$	202,287,592		$	217,479,862

(a) Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits with lender unless otherwise noted in (b) — (d).

(b) Mortgage is secured by the property and guaranty of owners.

(c) Variable rate mortgage notes payable, adjusted every three years.

(d) Secured by mortgage on property and corporate guaranty.

(e) Accounted for as an investment in unconsolidated affiliate as of January 1, 2012.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The mortgage note agreements may include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of September 30, 2012 and December 31, 2011, we were in compliance with all covenants with the exception of one loan on a retail property in Fargo, North Dakota for which we received a one year waiver on January 1, 2011 from the lender. The property was out of compliance with the lender’s debt service coverage ratio requirement as December 31, 2011. The note was paid off in March 2012.

We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:

Years ending December 31,	Amount
2012 (October 1, 2012 to December 31, 2012)	$	1,592,360
2013		22,692,534
2014		10,552,595
2015		36,059,837
2016		33,478,758
2017		42,344,932
Thereafter		55,566,576
Total Payments	$	202,287,592

NOTE 9 - FAIR VALUE MEASUREMENT

FASB issued ASC 820-10 in September 2006 and ASC 825-10 in February 2007. Both standards address the aspects of the expanding application of fair value accounting. Effective January 1, 2008, we adopted ASC 820-10 and ASC 825-10. There were no adjustments to accumulated deficit as a result of the adoption of ASC 820-10. ASC 825-10 permits a company to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have elected not to measure any financial assets or financial liabilities at fair value which were not previously required to be measured at fair value.

ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions. These two types of inputs create the following fair value hierarchy:

• Level 1 – Quoted prices for identical instruments in active markets;

• Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable;

• Level 3 – Instruments whose significant inputs are unobservable.

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25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets measured at fair value on a recurring basis in accordance with ASC 820-10:

Liabilities	Total as of 09/30/12		Quoted Prices: Level 1		Significant Other Inputs: Level 2		Significant Nonobservable Inputs: Level 3
Fair value of interest rate swaps	$	516,950	$	—	$	516,950	$	—
Liabilities	Total as of 2/31/10		Quoted Prices: Level 1		Significant Other Inputs: Level 2		Significant Nonobservable Inputs: Level 3
Fair value of interest rate swap	$	452,586	$	—	$	452,586	$	—

NOTE 10 - NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of September 30, 2012 and December 31, 2011, outstanding limited partnership units totaled 11,067,247 and 10,899,598, respectively. As of September 30, 2012 and 2011, the operating partnership declared distributions of $2,285,387 and $2,172,538, respectively, to limited partners to be paid in October 2012 and 2011. Distributions per unit were $0.61950 and $0.60375 during the first nine months of 2012 and 2011, respectively.

During the first nine months of 2012 and 2011, limited partners exchanged 122,251 and 64,003 limited partnership units for 122,251 and 64,003 INREIT common shares valued at $1,590,961 and $806,449, respectively, pursuant to redemption requests.

Limited partners in the operating partnership have the right to require the operating partnership to redeem their limited partnership units for cash. Upon such a redemption request, INREIT has the right to purchase the limited partnership units in lieu of the operating partnership either with cash or INREIT common shares, in its discretion, on the basis of one limited partnership unit for one INREIT common share. However, payment will be in cash if the issuance of INREIT common shares will cause the shareholder to exceed the ownership limitations, among other reasons. No limited partner will be permitted more than two redemptions during any calendar year, and no redemptions may be made for less than 1,000 limited partnership units or, if such limited partner owns less than 1,000 limited partnership units, all of the limited partnership units held by such limited partner.

NOTE 11 - BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the beneficial interest of INREIT. As of September 30, 2012 and December 31, 2011, there were 5,086,674 and 3,796,223, respectively, common shares outstanding. We had no preferred shares outstanding as of either date.

Dividends paid to holders of common shares were $0.61950 per share and $0.60375 per share for the nine months ending September 30, 2012 and 2011, respectively.

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26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - RELATED PARTY TRANSACTIONS

Property Management Fee

During 2011, we paid property management fees to INREIT Management, LLC, our Advisor, for properties managed by INREIT Management, LLC in an amount equal to 5% of rents on the properties managed. The management team of INREIT Management, LLC includes Kenneth P. Regan, our Chief Executive Officer and Board of Trustee Member; Bradley J. Swenson, our President; James Wieland, our Board of Trustee member and Peter J. Winger, our Chief Financial Officer. For the nine month period ended September 30, 2011, we paid management fees of $3,175 to INREIT Management, LLC. We did not pay management fees to INREIT Management, LLC for the nine month period ended September 30, 2012.

During 2012 and 2011, we paid property management fees to Goldmark Property Management in an amount equal to 5% of rents of the properties managed. The management team of Goldmark Property Management includes Kenneth Regan and James Wieland. For the nine month period ended September 30, 2012 and 2011, we paid management fees of $3,167,898 and $2,778,250, respectively, to Goldmark Property Management.

Board of Trustee Fees

We paid Trustee fees of $41,400 and $32,200 during the nine month period ended September 30, 2012 and 2011, respectively.

Advisory Agreement

We are an externally advised trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The following is a brief description of the current fees and compensation that may be received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees.

Management Fee: 0.35% of our total assets, annually. Total assets are our gross assets as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375,000 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by the majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

Disposition Fee: If the Advisor provides a substantial amount of services in the effort to sell any investment, the Advisor receives a disposition fee of 3% of the sales price of each investment. However, the disposition fee and other real estate commissions paid to unaffiliated parties cannot in the aggregate exceed the lesser of 6% of the sales price or a competitive real estate commission (which is reasonable, customary and competitive in light of the size, type and location of the property), unless approved by the majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility.

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27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Development Fee: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.

Management Fees

During the nine months ended September 30, 2012 and 2011, we incurred $975,009 and $565,561 to INREIT Management, LLC, our Advisor, for advisory management fees. As of September 30, 2012 and December 31, 2011, we owed our Advisor $111,250 and $66,733, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations, and the amount payable based on 0.35% of Total Assets in 2012 and 0.50% of net invested assets in 2011.

Acquisition Fees

During the nine months ended September 30, 2012 and 2011, we incurred $463,013 and $724,078, respectively, to our Advisor for acquisition fees. These fees are for performing due diligence on properties acquired and were based on 2.5% of the purchase price up to a maximum of $375,000 per individual property in 2012 and 3% of the purchase price up to a maximum of $300,000 per individual property in 2011. During 2011, half of the acquisition fee was allocated to the cost of ongoing financing activities required during the life of the acquisition. There were no acquisition fees owed to our Advisor as of September 30, 2012 and December 31, 2011, respectively.

Financing Fees

During the nine months ended September 30, 2012, we incurred $30,659 in financing fees to our Advisor for loan financing and refinancing activities. This fee was based on 0.25% of loan activity. There were no financing fees owed to our Advisor as of September 30, 2012 and December 31, 2011.

Disposition Fees

During the nine months ended September 30, 2012 and 2011, we incurred $27,975 and $84,750 in disposition fees to our Advisor, respectively. See Note 16. There were no disposition fees owed to our Advisor as of September 30, 2012 and December 31, 2011, respectively.

Development Fees

We did not incur any development fees during the nine months ended September 30, 2012 and 2011, respectively.

Investments in Affiliates

In July 2011, we purchased 40.26% interest in a single asset limited liability company which owns a 144 unit apartment complex in Bismarck, North Dakota. Our proportional share of the purchase was $2,325,861, with the remaining interest in the property held by Messrs. Regan and Wieland.

Commissions

During the nine month period ended September 30, 2011, we incurred brokerage fees of $82,833 to Roger Domres, or entities owned by Roger Domres, then a shareholder of INREIT and a former governor and member of our Advisor. Brokerage fees were based on 4% of the purchase price of limited partnership units and 8% of the purchase price of INREIT common shares sold. During the nine month period ended September 30, 2011, we incurred marketing fees of $19,063 to HSC Partner, LLC, an entity owned by Roger Domres. Marketing fees were

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28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

based on 2% of the purchase price of INREIT common shares sold. We did not incur any brokerage or marketing fees to Roger Domres or entities owned by Roger Domres for the nine month period ended September 30, 2012. As of September 30, 2012 and December 31, 2011, there were no outstanding brokerages or marketing fees owed to Roger Domres or entities owned by Roger Domres.

During the nine month period ended September 30, 2012 and 2011, we incurred brokerage fees of $771,353 and $54,704, respectively, to a broker-dealer benefitting Dale Lian, a shareholder of INREIT and a member of our Advisor. Brokerage fees were based on 8% of the purchase price of INREIT common shares sold. As of September 30, 2012 and December 31, 2011, there were no outstanding brokerage fees owed to Dale Lian or entities benefitting Dale Lian.

During the nine month periods ended September 30, 2012 and 2011, we incurred brokerage fees of $91,626 and $15,968, respectively, to a broker-dealer benefitting Larry O’Callaghan, a member of the Board of Trustees. Brokerage fees were based on 8% of the purchase price of INREIT common shares sold. As of September 30, 2012, we owed $31,824 outstanding brokerage fees to the broker-dealer. As of December 31, 2011, there were no outstanding brokerage fees owed to the broker-dealer.

During the nine month periods ended September 30, 2012 and 2011, we incurred real estate commissions of $82,416 and $251,912, respectively, to Goldmark Schlossman Commercial Real Estate Services, Inc., which is controlled by Kenneth Regan and James Wieland. There were no outstanding commissions owed as of September 30, 2012 and December 31, 2011.

Rental Income

During each of the nine month periods ended September 30, 2012 and 2011, we received rental income of $1,620,052 under various lease agreements with Edgewood Vista Senior Living, Inc., an entity affiliated with Philip Gisi and Rex Carlson, former members of the Board of Trustees. As of September 30, 2012 and December 31, 2011, we were owed $207,527, and $263,526, respectively, from Edgewood Vista Senior Living, Inc. for real estate taxes related to the properties.

During each of the nine month periods ended September 30, 2012 and 2011, we received rental income of $76,687 under a lease agreement for an office building with EMG Investment Group, an entity affiliated with Philip Gisi and Rex Carlson, former members of the Board of Trustees. Gate City Bank, a tenant in the building, is an entity affiliated with Lance Wolfe, current member of the Board of Trustees and the Executive Vice President of the Bank. As of September 30, 2012 and December 31, 2011, we were owed $34,683 and $44,042 respectively, from EMG Investment Group for real estate taxes related to the property.

During each of the nine month periods ended September 30, 2012 and 2011, we received rental income of $134,288 under an operating lease agreement with GOLDMARK Property Management.

During the nine month periods ended September 30, 2012 and 2011, we received rental income of $30,898 and $38,782, respectively, under operating lease agreements with our Advisor.

Rental Incentive

During 2009, we provided a rent incentive to a property owned by Edgewood Development Group, an entity affiliated with Philip Gisi, a former member of the Board of Trustees. The rent incentive is being amortized against rental income over the term of the lease. During each of the nine month periods ended September 30, 2012 and 2011, we amortized $75,000 against income.

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29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - RENTALS UNDER OPERATING LEASES / RENTAL INCOME

Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $27,845,598 and $23,675,019 for the nine months ended September 30, 2012 and 2011, respectively.

Commercial properties are leased to tenants under terms expiring at various dates through 2036. Lease terms often include renewal options. For the nine months ended September 30, 2012 and 2011, gross revenues from commercial property rentals, including CAM (common area maintenance) income of $2,579,876 and $3,007,068, respectively, totaled $12,349,060 and $12,636,324, respectively.

NOTE 14 - PROPERTY MANAGEMENT FEES

We have entered into various property management agreements with unrelated management companies. The agreements provide for the payment of property management fees based on a percentage of rental income (generally 5%). During the nine month periods ended September 30, 2012 and 2011, we incurred property management fees of $55,257 and $87,494, respectively, to unrelated management companies.

During the nine month periods ended September 30, 2012 and 2011, we incurred property management fees of 5% of rents to GOLDMARK Property Management, related party. Also, during the nine month period ended September 30, 2011, we incurred property management fees of 5% of rents to our Advisor, related party. See Note 12.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property. There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.

Risk of Uninsured Property Losses

We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.

Investment in Unconsolidated Affiliates

The operating partnership owns 40.26% interest in a single asset limited liability company which owns a 144 unit multi-tenant apartment complex in Bismarck, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2012 and December 31, 2011 of $2,454,897 and $2,495,298, respectively. We owed $988,341 and $1,004,607 of our respective share of the mortgage loan balance as of September 30, 2012 and December 31, 2011, respectively. The property was purchased in July 2011.

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30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The operating partnership is a 50% owner of Grand Forks Marketplace Retail Center through 100% ownership in a limited liability company, which owns a 1/3 interest in the Retail Center, and a 50% ownership in a separate limited liability company, which owns a 1/3 interest in the Retail Center. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2012 and December 31, 2011 of $11,736,552 and $11,949,310, respectively. We owed $5,868,276 and $5,974,655 for our respective share of the mortgage loan balance as of September 30, 2012 and December 31, 2011, respectively.

The operating partnership owns a 2/3 interest in a commercial building with approximately 75,000 square feet of rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2012 and December 31, 2011 of $7,496,446 and $7,579,143, respectively. We owed $4,997,631 and $5,052,762 for our respective share of the mortgage loan balance on September 30, 2012 and December 31, 2011, respectively.

NOTE 16 – DISCONTINUED OPERATIONS

We report in discontinued operations the results of operations for properties that have either been sold or are classified as held for sale. We also report any gains or losses from the sale of properties in discontinued operations.

2012

During the first quarter of 2012, the operating partnership sold a 4,500 square foot retail property in Norfolk, Nebraska for approximately $350,000 and recognized a loss of approximately $88,000.

During the second quarter of 2012, the operating partnership sold vacant land in Minot, North Dakota for approximately $583,000 and recognized a gain of approximately $114,300.

During the third quarter of 2012, there were no dispositions.

2011

During the first quarter of 2011, there were no dispositions.

During the second quarter of 2011, the operating partnership sold an assisted living facility in Williston, North Dakota for $1.45 million and recognized a gain of $366,990.

During the third quarter of 2011, the operating partnership sold a retail property in Norfolk, Nebraska for $1,375,000 and recognized a loss of $66,921.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the effect on net income and the gains or losses from the sale of properties classified as discontinued operations for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
INCOME FROM RENTAL OPERATIONS	$	—		$	11,836		$	—		$	109,294
EXPENSES FROM RENTAL OPERATIONS
Interest		—			14,130			—			66,041
Depreciation and amortization		—			13,188			1,117			50,375
Real estate taxes		945			1,581			945			27,044
Property management fees		—			800			—			6,375
Utilities		—			1,121			—			10,738
Repairs and maintenance		—			(4,040	)		—			5,340
Administrative		—			2,502			(1,427	)		9,313
		945			29,282			635			175,226
Administration of REIT
Administrative expenses		—			—			—			15,170
Disposition expenses		—			80,000			27,975			123,500
Legal and accounting		—			4,644			1,612			5,926
		—			84,644			29,587			144,596
Total expenses		945			113,926			30,222			319,822
OTHER INCOME
Interest income		—			—			2,915			—
		—			—			2,915			—
INCOME FROM DISCONTINUED OPERATIONS BEFORE GAIN (LOSS) ON SALE		(945	)		(102,090	)		(27,307	)		(210,528	)
GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS		—			(66,921	)		26,336			300,069
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	(945	)	$	(169,011	)	$	(971	)	$	89,541

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - BUSINESS COMBINATIONS AND ACQUISITIONS

We continue to implement our strategy of acquiring properties in desired markets. It is impractical for us to obtain historical financial information on acquired properties and accordingly, proforma statements have not been presented.

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition. Significant factors included in the independent appraisal include items such as current rent schedules, occupancy levels, and discount factors. Property valuations are completed primarily using the income capitalization approach, which anticipated benefits are converted to an indication of current value.

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

We estimate the in-place lease value for each lease acquired. This fair value estimate is calculated using factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, and the current economic climate.

Our analysis results in three discrete financial items: assets for above market leases, liabilities for below market leases, and assets for the in-place lease value. The calculation of each of these components is performed in tandem to provide a complete intangible asset value.

Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, dark periods, direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

Purchases during the third quarter of 2012

In August 2012, the operating partnership purchased 23,690 square foot implement dealership in Minot, North Dakota for $2,630,000 with cash.

In August 2012, the operating partnership purchased 2.5 acres of land adjacent to an implement dealership in Dickinson, North Dakota for $400,000 with cash.

In August 2012, the operating partnership purchased approximately 12 acres of development land in Bismarck, North Dakota for $2,420,000 with cash.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2012, the operating partnership purchased 100,600 square foot commercial property in Fargo, North Dakota for $3,450,000. The purchase was financed with the issuance of limited partnership units valued at $964,641 and cash.

In September 2012, the operating partnership purchased a 85 unit apartment complex in Fargo, North Dakota for $3,450,000. The purchase was financed through assumption of $2,439,444 in mortgage debt and cash.

In September 2012, the operating partnership purchased a 116 unit apartment complex in Moorhead, Minnesota for $3,450,000. The purchase was financed with the issuance of limited partnership units valued at $795,596, the assumption of $2,199,325 in mortgage debt and cash.

The following table summarizes the fair value of the assets acquired and liabilities assumed during the nine months ended September 30, 2012:

	Property and Equipment		In Place Leases		Favorable Lease Terms		Unfavorable Lease Terms			Mortgages Assumed			Consideration Given
Dairy Queen, Dickinson, ND	$	986,845	$	225,616	$	117,539	$	—		$	—		$	1,330,000
Titan Machinery, Dickinson, ND		1,450,125		199,173		—		(258,998	)		(431,285	)		959,015
Titan Machinery, Minot, ND		2,271,946		358,054		—		—			—			2,630,000
Land, Dickinson, ND		400,000		—		—		—			—			400,000
Land, Bismarck, ND		2,420,000		—		—		—			—			2,420,000
Guardian Building, Fargo, ND		3,124,217		531,362		—		(205,579	)		—			3,450,000
Prairiewood Meadows, Fargo, ND		3,450,000		—		—		—			(2,439,444	)		1,010,556
Terrace on the Green, Moorhead, MN		3,450,000		—		—		—			(2,199,325	)		1,250,675
	$	17,553,133	$	1,314,205	$	117,539	$	(464,577	)	$	(5,070,054	)	$	13,450,246

Total consideration given for acquisitions in first nine months of 2012 was completed through issuing approximately $4.1 million in limited partnership units of the operating partnership, valued at $14.00 per unit, and cash of $9.4 million. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

Purchases during the third quarter of 2011

In July 2011, the operating partnership purchased a 24 unit apartment complex in Fargo, North Dakota for $1,044,000. The purchase was financed with the issuance of limited partnership units valued at $502,807, the assumption of $530,928 in mortgage debt, and cash.

In July 2011, the operating partnership purchased 40.26% interest in a 144 unit apartment building in Bismarck, North Dakota. The sales price was $2,325,861. The purchase was financed with the issuance of limited partnership units valued at $1,187,512, the assumption of $1,013,349 in mortgage debt and $125,000. The remaining ownership consists of Mr. Regan and Mr. Wieland, related parties. The investment is recorded under the equity method of accounting.

In August 2011, the operating partnership purchased an 18 unit apartment building in Grand Forks, North Dakota for $639,511. The purchase was financed with the issuance of limited partnership units valued at $381,608, new mortgage of $249,000 and cash.

In September 2011, the operating partnership purchased a single tenant 8,000 square foot office building in Norfolk, Nebraska for $600,000 for cash.

(Continued on next page)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the fair value of the assets acquired and liabilities assumed during the nine months ended September 30, 2011:

	Property and Equipment		In Place Leases		Favorable Lease Terms		Unfavorable Lease Terms			Mortgages Assumed			Consideration Given
Applebee’s, Apple Valley, MN	$	1,795,299	$	322,866	$	404,635	$	—		$	—		$	2,522,800
Sierra Ridge Apartments, Bismarck, ND		6,458,761		—		—		—			(4,264,480	)		2,194,281
Country Side Apartments, Fargo, ND		936,320		—		—		—			(286,083	)		650,237
Country Club Apartments, Fargo, ND		1,527,680		—		—		—			(466,766	)		1,060,914
Bank of the West, Moorhead, MN		922,187		77,813		—		—			(263,925	)		736,075
Dairy Queen, Moorhead, MN		1,027,324		151,810		1,866		—			(311,075	)		869,925
Walgreen's, Denver, CO		4,706,332		449,949		53,719		—			(4,062,030	)		1,147,970
Taco Bell Land, Denver, CO		669,224		20,122		654		—			(537,970	)		152,030
Islander Apartments, Fargo, ND		1,044,000		—		—		—			(530,928	)		513,072
Southview III, Grand Forks, ND		639,511		—		—		—			(249,000	)		390,511
Premiere Marketing, Norfolk, NE		495,296		111,051		—		(6,347	)		—			600,000
	$	20,221,934	$	1,133,611	$	460,874	$	(6,347	)	$	(10,972,257	)	$	10,837,815

Total consideration given for acquisitions in first nine months of 2011 was completed through issuing approximately $5.9 million in limited partnership units of the operating partnership, valued at $14.00 per unit, and cash of $4.9 million. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

The Board of Trustees, acting as general partner for the operating partnership, has determined an estimate of fair value for the limited partnership units issued in 2012 and 2011. In determining this value, the board relied upon their experience with, and knowledge about our real estate portfolio and debt obligations. The board also relied on valuation methodologies that are commonly used in the real estate industry, including, among others a discounted cash flow analysis, which projects a range of estimated future streams of cash flows reasonably likely to be generated by our portfolio of properties, and discounts the projected future cash flows reasonably likely to be generated by our portfolio of properties, and discounts the projected future cash flows to a present value.

The board also took into account the estimated value of our other assets and liabilities including a reasonable estimate of our debt obligations. Based on the results of the methodologies, the board determined the fair value of the limited partnership units to be $14.00 per unit for 2011 and 2012.

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

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

(Continued on next page)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 - SUBSEQUENT EVENTS

Subsequent to September 30, 2012 through the date of this filing, we sold 252,212 common shares to accredited investors in a private placement pursuant to an exemption under Rule 506 of Regulation D, which resulted in additional gross proceeds of $3,499,989.92.

In October 2012, we purchased a property occupied by an implement dealership in Fargo, North Dakota for approximately $2.8 million. The purchase was financed with the issuance of limited partnership units, assumption of a mortgage and cash. The purchase price allocation is not yet complete.

We have entered into a purchase agreement to acquire a 66 unit apartment complex in Fargo, North Dakota for approximately $1.95 million. The transaction is expected to close in November 2012 pending due diligence and other normal contingencies. There is no assurance the transaction will be completed.

We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.

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

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

Certain statements contained in this section and elsewhere in this Form 10-Q constitute“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our business and growth strategies; (iii) the real estate industry; (iv) our financing plans; and other risks detailed in the Company’s other periodic reports filed with the Securities and Exchange Commission. The words“believe”, “expect”, “anticipate”, “may”, “plan”, “should”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.

Overview

We operate as an Umbrella Partnership Real Estate Investment Trust (UPREIT), which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we hold all or substantially all of our assets through our operating partnership. We control the operating partnership as the sole general partner and own approximately 31.5% of the operating partnership as of September 30, 2012. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, our proportionate shares of the assets and income of our operating partnership are deemed to be assets and income of the trust.

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

Operating Partnership

Our operating partnership, INREIT Properties, LLLP, was formed as a North Dakota limited liability limited partnership on April 25, 2003 to acquire, own and operate properties on our behalf. The operating partnership holds a diversified portfolio of commercial properties and multi-family dwellings located principally in the upper and central Midwest United States.

As of September 30, 2012, approximately 62.3% of the properties were apartment communities and senior assisted living communities located primarily in North Dakota with others located in Minnesota and Nebraska. Most multi-family dwelling properties are leased to a variety of tenants under short-term leases.

As of September 30, 2012, approximately 37.7% of the properties were comprised of office, retail and medical commercial property located primarily in North Dakota with others located in Arkansas, Colorado, Louisiana, Michigan, Mississippi, Minnesota, Nebraska, Texas and Wisconsin. Most commercial properties are leased to a variety of tenants under long-term leases.

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Our real estate portfolio consisted of 95 properties containing approximately 4,477 apartments, 193 assisted living units and 1,026,643 square feet of leasable commercial space as of September 30, 2012. The portfolio has a gross book value of approximately $388.3 million, which includes assets held for sale, and book equity, including noncontrolling interests, of approximately $160.2 million as of September 30, 2012.

Our Advisor

Our external Advisor is INREIT Management, LLC, a North Dakota limited liability company formed on November 14, 2002. Our Advisor, with offices in Fargo, North Dakota, is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.

Critical Accounting Estimates

Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the period ended September 30, 2012 included elsewhere in this report.

Specific Achievements for the Nine Months Ended September 30, 2012

• Increased revenues from rental operations by $3,883,315 or 10.7% compared to same nine month period in 2011.

• Acquired six (6) properties totaling 144,861 commercial square feet and 201 residential apartment units for a total of $15.7 million.

• Purchased undeveloped land in two different locations for a total of $2.8 million.

• Declared and paid dividends totaling $0.61950 per common share.

• Raised gross proceeds of approximately $18.3 million from the sale of our common shares in private placements.

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Results of Operations for the Three Months Ended September 30, 2012 and 2011

	Three Months Ended September 30, 2012							Three Months Ended September 30, 2011
	Residential		Commercial		Total			Residential		Commercial		Total
Revenue from rental operations	$	9,203,449	$	4,180,780	$	13,384,229		$	8,010,204	$	4,347,060	$	12,357,264
Expenses from operations
Real Estate Taxes		960,153		599,141		1,559,294			809,963		658,763		1,468,726
Property Management Fees		1,015,450		63,959		1,079,409			910,776		71,861		982,637
Utilities		591,105		215,058		806,163			528,506		190,863		719,369
Repairs and Maintenance		1,245,667		176,599		1,422,266			1,125,794		229,371		1,355,165
Insurance		200,062		15,115		215,177			192,657		18,887		211,544
Total expenses from operations		4,012,437		1,069,872		5,082,309			3,567,696		1,169,745		4,737,441
Net operating income	$	5,191,012	$	3,110,908	$	8,301,920		$	4,442,508	$	3,177,315	$	7,619,823
Interest						2,856,550							2,987,208
Depreciation and amortization						2,802,545							2,532,477
Administration of REIT						917,717							442,556
Other (income)/expense						(237,721	)						(81,646	)
Income from continuing operations						1,962,829							1,739,228
Discontinued operations						(945	)						(169,011	)
Net Income					$	1,961,884						$	1,570,217
Net Income Attributed to:
Noncontrolling Interest					$	1,353,968						$	1,162,317
INREIT Real Estate Investment Trust					$	607,916						$	407,900
Dividends per share(1)					$	0.20650						$	0.20125

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

Revenues

Property revenues of approximately $13.4 million increased approximately $1.0 million or 8.3% for the three months ended September 30, 2012 in comparison to the same period in 2011. Approximately $0.9 million of the increase in property revenues was due to six residential properties acquired since September 30, 2011. Rental income from residential properties owned for more than one year increased approximately $0.2 million or 3.2% in comparison to the same period in 2011.

The following table illustrates quarterly changes in rental occupancy for the periods indicated:

	30-Sep-12			30-Jun-12			30-Sep-11			30-Jun-11
Residential occupancy		98.6	%		98.0	%		96.9	%		97.9	%
Commercial occupancy		98.4	%		98.3	%		97.8	%		95.0	%

Residential and commercial occupancy have remained relatively consistent across reporting periods. Tenant concessions of 0.4% during the three month period ended September 30, 2011 improved to 0.2% in the same period of 2012.

Residential revenues comprised 68.8% of total revenues for the three month period ended September 30, 2012 compared to 64.8% of total revenues for the three month period ended September 30, 2011, as a result of residential acquisition activity.

Commercial revenues for the three month period ended September 30, 2012 remained relatively flat with the same period in 2011. However, commercial revenues comprised 31.2% of the total revenues for the three month period ended September 30, 2012 compared to 35.2% of total revenues for the three month period ended September 30, 2011, primarily because of the increase in residential properties.

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Expenses

Residential expenses from operations of $4.0 million during the three month period ended September 30, 2012 increased $0.4 million or 12.5% in comparison to the same period in 2011. This increase corresponds with a 14.9% increase in residential rental revenues and is attributed to increases in real estate tax expense, property management fees, utilities and insurance expense, all of which increased principally because of the increase in number of residential properties owned in 2012 versus 2011.

Commercial expenses from operations of $1.1 million during the three month period ended September 30, 2012 remained relatively consistent with the same period in 2011, which corresponds to relatively no change in commercial revenues.

Interest expense of $2.9 million during the three month period ended September 30, 2012 decreased $0.1 million in comparison to the same period in 2011. Interest expense was approximately 21.3% and 24.2% of rental income for three month periods ended September 30, 2012 and 2011, respectively. The decrease of interest expense as a percentage of rental income during the three month period ended September 30, 2012 was a result of lower interest rates for mortgage notes payable during this period in 2012 compared to the same period in 2011, reduced mortgage indebtedness and increased rental revenues from acquired properties unencumbered by mortgages.

Depreciation and amortization expense increased 10.7% from $2.5 million for the three months ended September 30, 2011 to approximately $2.8 million for the three months ended September 30, 2012. The $0.3 million increase was primarily a result of depreciation and amortization for the eleven properties added to our portfolio since September 30, 2011. Depreciation and amortization expense as a percentage of rental income for the three month periods ended September 30, 2012 and 2011 was relatively consistent at 20.9% and 20.5%, respectively.

REIT administration expenses increased from $0.4 million for the three months ended September 30, 2011 to $0.9 million for the three month periods ended September 30, 2012 due to $0.4 million increase in acquisition and disposition expenses and $0.1 million increase in advisory fees, each related to acquisition activity since September 30, 2011.

Net operating income

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

Residential NOI increased $0.7 million or 16.8% for the three month period ended September 30, 2012 in comparison to the same three month period in 2011 due primarily to acquisition activity in the residential segment. Commercial NOI remained relatively the same for the three month periods ended September 30, 2012 and 2011.

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Results of Operations for the Nine Months Ended September 30, 2012 and 2011

	Nine Months Ended September 30, 2012							Nine Months Ended September 30, 2011
	Residential		Commercial		Total			Residential		Commercial		Total
Revenue from rental operations	$	27,845,598	$	12,349,060	$	40,194,658		$	23,675,019	$	12,636,324	$	36,311,343
Expenses from operations
Real Estate Taxes		2,880,458		1,771,401		4,651,859			2,434,327		1,868,582		4,302,909
Property Management Fees		3,030,552		202,518		3,233,070			2,645,063		217,481		2,862,544
Utilities		2,110,350		598,671		2,709,021			1,924,471		588,928		2,513,399
Repairs and Maintenance		3,238,382		587,597		3,825,979			2,939,460		773,818		3,713,278
Insurance		620,383		26,835		647,218			505,256		51,355		556,611
Total expenses from operations		11,880,125		3,187,022		15,067,147			10,448,577		3,500,164		13,948,741
Net operating income	$	15,965,473	$	9,162,038	$	25,127,511		$	13,226,442	$	9,136,160	$	22,362,602
Interest						8,769,953							8,883,543
Depreciation and amortization						8,294,408							7,368,615
Administration of REIT						2,188,013							1,728,631
Other (income)/expense						(679,839	)						(212,227	)
Income from continuing operations						6,554,976							4,594,040
Discontinued operations						(971	)						89,541
Net Income					$	6,554,005						$	4,683,581
Net Income Attributed to:
Noncontrolling Interest					$	4,661,313						$	3,453,448
INREIT Real Estate Investment Trust					$	1,892,692						$	1,230,133
Dividends per share(1)					$	0.61950						$	0.60375

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

Revenues

Property revenues of approximately $40.2 million increased approximately $3.9 million or 10.7% for the nine months ended September 30, 2012 in comparison to the same period in 2011. Approximately $3.2 million of the increase in property revenues was due to the acquisition of six residential properties since September 30, 2011. Rental income from residential properties owned for more than one year increased approximately $0.7 million or 3.0% in comparison to the same period in 2011.

The following table illustrates quarterly changes in rental occupancy during the periods indicated:

	30-Sep-12			31-Dec-11			30-Sep-11			31-Dec-10
Residential occupancy		98.6	%		98.9	%		96.9	%		96.0	%
Commercial occupancy		98.4	%		97.4	%		97.8	%		93.9	%

Residential and commercial occupancy remained relatively consistent across reporting periods. Tenant concessions of 0.5% during the nine month period ended September 30, 2011 improved to 0.3% in the same period of 2012.

Residential revenues comprised 69.3% of total revenues for the nine month period ended September 30, 2012 compared to 65.2% of total revenues for the nine month period ended September 30, 2011, as a result of residential acquisition activity.

Commercial revenues for the nine month period ended September 30, 2012 remained relatively flat with the same period in 2011. However, commercial revenues comprised 30.7% of the total revenues for the nine month period ended September 30, 2012 compared to 34.8% of total revenues for the nine month period ended September 30, 2011, primarily because of the increase in the number of properties.

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Expenses

Residential expenses from operations of $11.9 million during the nine month period ended September 30, 2012 increased $1.4 or 13.7% in comparison to the same period in 2011. This increase corresponds with a 17.6% increase in residential rental revenues and is attributed to increases in real estate tax expense, property management fees, utilities and insurance expense due to the increase in number of properties owned during these periods in 2012 versus 2011.

Commercial expenses from operations of $3.2 million during the nine month period ended September 30, 2012 decreased $0.3 million from the same period in 2011. Repairs and maintenance expense decreased $0.2 million because of better weather conditions and fewer repairs for the nine months ended September 30, 2012 compared to the same nine month period in 2011.

Interest expense of $8.8 million during the nine month period ended September 30, 2012 decreased $0.1 million in comparison to the same period in 2011. Interest expense was approximately 21.8% and 24.5% of rental income for nine month periods ended September 30, 2012 and 2011, respectively. The decrease of interest expense as a percentage of rental income during the nine month period ended September 30, 2012 was a result of lower interest rates for mortgage notes payable during 2012 versus 2011, reduced mortgage indebtedness and increased rental revenues from acquired properties unencumbered by mortgages.

Depreciation and amortization expense increased 12.6% from $7.4 million for the nine months ended September 30, 2011 to approximately $8.3 million for the nine months ended September 30, 2012. The $0.9 million increase was primarily a result of depreciation and amortization for the eleven properties added to our portfolio since September 30, 2011. Depreciation and amortization expense as a percentage of rental income for the nine month periods ended September 30, 2012 and 2011 was consistent at 20.6% and 20.3%, respectively.

REIT administration expenses increased from $1.7 million for the nine months ended September 30, 2011 to $2.2 million for the nine month periods ended September 30, 2012 due to $0.4 million increase in advisory fees.

Net Operating Income

Residential NOI increased $2.7 million or 20.7% for the nine month period ended September 30, 2012 in comparison to the same nine month period in 2011 due primarily to acquisition activity in the residential segment. Commercial NOI remained relatively the same for the nine month periods ended September 30, 2012 and 2011.

Property Acquisitions and Dispositions

For the Nine Months Ended September 30, 2012

We acquired six properties for a total of $15.7 million during the nine month period ended September 30, 2012. Total consideration for the acquisitions was the issuance of approximately $4.1 million in limited partnership units of the operating partnership and cash of $6.5 million. We assumed $5.1 million in mortgage notes payable.

We acquired undeveloped land in two different locations for a total of $2.8 million in cash.

We sold two properties for a total of $0.9 million during the nine month period ended September 30, 2012 and recognized $26,000 gain on the sales.

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For the Nine Months Ended September 30, 2011

We acquired ten properties for a total of $21.8 million during the nine month period ended September 30, 2011. Total consideration for the acquisitions was the issuance of approximately $5.9 million in limited partnership units of the operating partnership and cash of $4.9 million. We assumed $11.0 million in mortgage notes payable.

We sold two properties for a total of $2.9 million during the nine month period ended September 30, 2011. We recognized $0.3 million loss on the sales.

See Notes 16 and 17 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the nine month periods ended September 30, 2012 and 2011.

Funds From Operations and Modified Funds From Operations (FFO and MFFO)

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

Historical cost accounting for real estate assets implicitly assumes 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 have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. The term Funds From Operations (FFO) was created to address this problem. It was intended to be a standard supplemental measure of REIT operating performance that excluded historical cost depreciation from — or “added it back” to — GAAP net income.

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

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

In addition to FFO, management also uses Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental performance measure. MFFO as defined by us excludes from FFO acquisition related costs which are required to be expensed in accordance with GAAP. Prior to 2009, acquisition costs for business combinations were capitalized; however, beginning in 2009, acquisition costs related to business combinations are now expensed. Our definition of MFFO also excludes disposition costs related to sales of investment properties. Acquisition and disposition related expenses include those paid to our Advisor and third parties. Management believes that excluding acquisition and disposition related costs from MFFO provides useful supplemental performance information that is comparable over the long-term and this is consistent with management’s analysis of the operating performance of the REIT.

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

The following tables include calculations of FFO and MFFO, and the reconciliations to net income, for the three and nine month periods ended September 30, 2012 and 2011, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

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

	Three Month Period Ending September 30, 2012						Three Month Period Ending September 30, 2011
	Amount		Weighted Avg Shares and  Units(1)		Per Share and Unit(2)		Amount		Weighted Avg Shares and  Units(1)		Per Share and Unit(2)
Net Income attributable to
INREIT Real Estate
Investment Trust	$	607,915		4,958,416	$	0.12	$	407,900		3,781,982	$	0.11
Add back:
Noncontrolling Interest - OPU		1,344,341		11,012,135				1,163,039		10,810,873
Depreciation & Amortization from continuing operations		2,802,545						2,532,477
Depreciation & Amortization from discontinued operations		—						13,188
Pro rata share of unconsolidated affiliate depreciation & amortization		97,018						10,757
Loss on depreciable asset sales		—						66,921
Subtract:
Gains on land and depreciable asset sales		—						—
Funds from operations applicable to common shares and limited partnership units	$	4,851,819		15,970,551	$	0.30	$	4,194,282		14,592,855	$	0.29
Add back:
Acquisition and disposition expenses		435,459						164,541
Modified Funds from operations (MFFO)	$	5,287,278		15,970,551	$	0.33	$	4,358,823		14,592,855	$	0.30

(1) Limited partnership units of the operating partnership may be exchanged for INREIT's common shares on a one-for-one basis pursuant to redemption requests. Please see Note 10 to the consolidated financial statements included above for more information.

(2) Net Income is calculated on a per share basis. FFO and MFFO are calculated on a per share and unit basis.

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

	Nine Month Period Ended September 30, 2012							Nine Month Period Ended September 30, 2011
	Amount			Weighted Avg Shares and  Units(1)		Per Share and Unit(2)		Amount			Weighted Avg Shares and  Units(1)		Per Share and Unit(2)
Net Income attributable to
INREIT Real Estate
Investment Trust	$	1,892,692			4,538,247	$	0.42	$	1,230,133			3,761,159	$	0.33
Add back:
Noncontrolling Interest - OPU		4,638,269			10,988,830				3,461,635			10,657,138
Depreciation & Amortization from continuing operations		8,294,408							7,368,615
Depreciation & Amortization from discontinued operations		1,117							50,375
Pro rata share of unconsolidated affiliate depreciation & amortization		293,276							10,757
Loss on depreciable asset sales		87,971							66,921
Subtract:
Gains on land and depreciable asset sales		(114,307	)						(366,990	)
Funds from operations (FFO) applicable to common shares and limited partnership units	$	15,093,426			15,527,077	$	0.97	$	11,821,446			14,418,297	$	0.82
Add back:
Acquisition and disposition expenses		623,247							663,298
Modified Funds from operations (MFFO)	$	15,716,673			15,527,077	$	1.01	$	12,484,744			14,418,297	$	0.87

(1) Limited partnership units of the operating partnership may be exchanged for INREIT's common shares on a one-for-one basis pursuant to redemption requests. Please see Note 10 to the consolidated financial statements included above for more information.

(2) Net Income is calculated on a per share basis. FFO and MFFO are calculated on a per share and unit basis.

Liquidity and Capital Resources

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

Evaluation of Liquidity

We continually evaluate our liquidity and ability to fund future operations, debt obligations and any redemption requests. As part of our analysis, we consider credit quality of tenants and lease expirations among other factors.

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Credit Quality of Tenants

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

Historically, the geographic location of our properties and credit-worthiness of our tenants have resulted in minimal to no property impairments or write-offs on uncollectible rental revenues. We anticipate the trend to continue. It is possible, however, that tenants may file for bankruptcy or default on their leases in the future and that economic conditions may again deteriorate.

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

Lease Expirations and Occupancy

No significant leases are scheduled to expire or renew in the next twelve months. The Advisor actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where tenants elect not to renew, we may seek replacement tenants or try to sell the property.

Share Rescission or Liquidation

We could be subjected to claims by shareholders that certain securities sales were not proper. However, we presently believe that few, if any, of our shareholders will request rescission due to several factors, including our strong operating performance over the last three years, earnings that cover dividends, increased dividends, and, we believe, the current value of our common shares, currently set at $14.00 per share, would exceed the amount a shareholder would receive pursuant to a rescission offer. In fact, based on limited utilization of our repurchase plan and known demand for our common shares at $14.00 per share, we believe that such claims will not exceed $1,000,000 and most likely would not exceed our cash and cash equivalents, which exceeded $3.0 million at September 30, 2012. Additionally, as of September 30, 2012, we had approximately $10,875,000 in unused lines of credit. The amount of any such claims, if asserted, however, is speculative at this time and the potential claims could approximate $33,000,000. If claims are greater than anticipated and such claims are found to be meritorious, our liquidity could be negatively affected and we could be required to sell additional securities or borrow additional funds. We believe we have ready access to any additional capital that might be required, but there is no assurance such funds will be available or, if available, on terms acceptable to us.

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Cash Flow Analysis

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

	For the nine months ended September 30,
	2012			2011
Net cash flows from operating activities	$	17,773,883		$	13,046,761
Net cash flows used for investing activities	$	(10,245,773	)	$	(3,142,935	)
Net cash flows used for financing activities	$	(7,652,049	)	$	(12,558,518	)

Operating Activities

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

Net cash provided by operating activities was $17.8 million and $13.0 million for the nine months ended September 30, 2012 and 2011, respectively. The funds generated for these periods in 2012 and 2011 were primarily from property operations of our real estate portfolio. The increase from 2011 to 2012 is due to the growth of our real estate portfolio and related, full period, property operations in 2012.

Investing Activities

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

Net cash flows used in investing activities were $10.2 million and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively. In each period, we used the cash for the purchase of properties and pay real estate taxes and insurance escrows.

Financing Activities

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

Net cash flows used in financing activities were $7.7 million and $12.6 million for the nine months ended September 30, 2012 and 2011, respectively. During 2012, we paid approximately $7.7 million in dividends to shareholders and made mortgage principal payments of approximately $14.6 million.

For the nine months ended September 30, 2011, cash used for financing activities was $12.6 million. We paid approximately $7.0 million in dividends and reduced mortgage notes payable by approximately $11.4 million.

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Cash Resources

At September 30, 2012, our cash resources consisted of cash and cash equivalents totaling approximately $3.0 million. In addition, we had unencumbered properties with a gross book value of $18.8 million, which could potentially be used as collateral to secure additional financing in future periods.

We also have three lines of credit: (i) a $11.0 million line of credit with Wells Fargo Bank secured by an office property in Duluth, Minnesota and four Applebees’ restaurants, (ii) a $1.925 million line of credit with Bremer Bank secured by an office property in St. Cloud, Minnesota and (iii) a $2.0 million line of credit with State Bank and Trust secured by a residential property in Fargo, North Dakota. As of September 30, 2012, there was $4.05 million outstanding on the lines of credit and $10.875 million available. As of December 31, 2011, there was $8.0 million outstanding on the lines of credit. Our cash resources can be used for working capital needs and other commitments.

The issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the nine month period ended September 30, 2012, we sold 1,331,683 common shares to accredited investors in private placements. These private placements raised gross proceeds of approximately $18.3 million.

During the nine month period ended September 30, 2012, we issued limited partnership units valued at approximately $4.1 million in connection with the acquisition of four properties.

During the nine month period ended September 30, 2011, we issued limited partnership units valued at approximately $5.9 million in connection with the acquisitions of seven properties.

Off-Balance Sheet Arrangements

As of September 30, 2012 and December 31, 2011, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2012, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the third fiscal quarter of 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Sale of Securities

Private Placements

During the three months ended September 30, 2012, we sold 567,563.143 common shares to accredited investors in a private placement pursuant to Regulation D and Rule 506. The private placement raised gross proceeds of $7,740,068 during the three months ended September 30, 2012 as set forth below:

Period	Total Number of Common Shares Sold		Gross Proceeds
July 1-31, 2012		61,181.428	$	843,100
August 1-31, 2012		506,381.715	$	6,896,968
September 1-30, 2012		None		None

Other Sales

During the three months ended September 30, 2012, we issued 11,600.000 common shares in exchange for limited partnership units of the operating partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Regulation D and Rule 506. The issuances during the three months ended September 30, 2012 were as set forth below:

Period	Total Number of Common Shares Exchanged
July 1-31, 2012		None
August 1-31, 2012		5,600.000
September 1-30, 2012		6,000.000

Repurchases of Securities

Set forth below is information regarding common shares repurchased during the three months ended September 30, 2012:

Period	Total Number of Common Shares Repurchased		Average Price Paid per Common Share		Total Number of Shares Repurchased as Part of Publically Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2012		6,710.014	$	12.75		162,165.658	$	4,830,046.34
August 1-31, 2012		122,699.855	$	12.75		284,865.513	$	3,265,623.18
September 1-30, 2012		10,322.740	$	12.75		295,188.253	$	3,125,083.24
Total		139,732.609

(1) On June 7, 2012, our Board of Trustees revised the original Share Repurchase Plan as previously disclosed in our Registration Statement on Form 10 filed with the SEC on March 11, 2011. The revised Share Repurchase Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by members of our operating partnership, up to a maximum amount of $10,000,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The repurchase price for such shares and units repurchased under the plan is fixed at $12.75 per share or unit. The repurchase plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the repurchase plan if it determines to do so is in our best interest.

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Item 6. Exhibits.

Exhibit Number	Title of Document
4.1	Share Repurchase Plan
31.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the of the Sarbanes-Oxley Act of 2002.
101	The following materials from INREIT Real Estate Investment Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended September 30, 2012 and 2011; (iii) Consolidated Statements of Shareholders’ Equity for three and nine months ended September 30, 2012 and 2011; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and; (v) Notes to Consolidated Financial Statements**.

** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 13, 2012

INREIT REAL ESTATE INVESTMENT TRUST
By:	/s/ Kenneth P. Regan
	Kenneth P. Regan
	Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Peter J. Winger
	Peter J. Winger
	Chief Financial Officer
	(Principal Financial and Accounting Officer)