Sterling Real Estate Trust 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-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, 2013

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)

N/A

(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 11, 2013
Common Shares of Beneficial Interest, $0.01 par value per share	5,474,587.408

INREIT REAL ESTATE INVESTMENT TRUST

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets – as of September 30, 2013 and December 31, 2012		3
Consolidated Statements of Operations and Other Comprehensive Income – Three and Nine months ended September 30, 2013 and 2012		4
Consolidated Statement of Shareholders’ Equity – Nine months ended September 30, 2013		6
Consolidated Statements of Cash Flows – Nine months ended September 30, 2013 and 2012		7
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 4. Controls and Procedures		50
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 6. Exhibits		51
Signatures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2013 AND DECEMBER 31, 2012

	September 30, 2013			December 31, 2012
	(unaudited)
	(in thousands)
ASSETS
Real estate investments	$	372,181		$	355,966
Cash and cash equivalents		3,602			4,556
Restricted deposits and funded reserves		7,705			3,471
Investment in unconsolidated affiliates		4,292			4,338
Due from related party		—			337
Receivables		3,537			2,664
Prepaid expenses		153			860
Notes receivable		—			4
Financing costs, less accumulated amortization of $2,034 in 2013 and $1,556 in 2012		2,747			2,436
Assets held for sale		21,821			—
Rent incentive, less accumulated amortization of $-0- in 2013 and $317 in 2012		—			1,183
Intangible assets, less accumulated amortization of $3,415 in 2013 and $2,606 in 2012		9,004			9,135
Other assets		3,616			145
Total assets	$	428,658		$	385,095
LIABILITIES
Mortgage notes payable	$	213,323		$	208,961
Special assessments payable		1,626			1,644
Dividends payable		3,823			3,395
Due to related party		128			112
Tenant security deposits payable		2,127			1,759
Investment certificates		1,038			1,417
Unfavorable leases, less accumulated amortization of $395 in 2013 and $287 in 2012		989			1,191
Accounts payable – trade		538			114
Retainage payable		35			—
Liabilities related to assets held for sale		14,740			—
Fair value of interest rate swap		347			492
Deferred insurance proceeds		14			105
Accrued expenses		5,177			2,714
Total liabilities		243,905			221,904
COMMITMENTS and CONTINGENCIES – Note 17
SHAREHOLDERS’ EQUITY
Noncontrolling interest in operating partnership		130,189			109,166
Beneficial interest		54,911			54,517
Accumulated comprehensive loss		(347	)		(492	)
Total shareholders’ equity		184,753			163,191
Total liabilities and shareholders’ equity	$	428,658		$	385,095

See Notes to Consolidated Financial Statements

3

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Income from rental operations
Real estate rental income	$	14,540	$	11,930	$	42,219	$	35,787
Tenant reimbursements		948		845		2,801		2,580
		15,488		12,775		45,020		38,367
Expenses
Expenses from rental operations
Interest		2,683		2,639		8,036		8,123
Depreciation and amortization		3,047		2,622		8,848		7,752
Real estate taxes		1,697		1,490		4,921		4,440
Property management fees		1,342		1,079		3,776		3,233
Utilities		967		806		3,239		2,709
Repairs and maintenance		1,788		1,422		4,688		3,826
Insurance		359		215		858		647
Loss on impairment of property		226		—		226		—
		12,109		10,273		34,592		30,730
Administration of REIT
Administrative expenses		40		64		183		216
Advisory fees		367		329		1,068		976
Acquisition expenses		620		435		2,182		595
Board of Trustee fees		15		10		38		41
Legal and accounting		115		80		455		360
		1,157		918		3,926		2,188
Total expenses		13,266		11,191		38,518		32,918
Income from operations	$	2,222	$	1,584	$	6,502	$	5,449

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, 2013 AND 2012 (Continued)

(UNAUDITED)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
	(in thousands, except per share data)					(in thousands, except per share data)
Income from operations	$	2,222	$	1,584		$	6,502	$	5,449
Gain on involuntary conversion		17		—			17		—
Other income
Equity in income of unconsolidated affiliates		243		223			604		619
Interest income		7		15			21		61
		250		238			625		680
Income from continuing operations		2,489		1,822			7,144		6,129
Discontinued operations		265		139			797		425
Net income	$	2,754	$	1,961		$	7,941	$	6,554
Net income attributable to noncontrolling interest		1,917		1,354			5,523		4,661
Net income attributable to INREIT Real Estate Investment Trust	$	837	$	607		$	2,418	$	1,893
Net income per common share, basic and diluted	$	0.16	$	0.12		$	0.45	$	0.42
Comprehensive income:
Net income	$	2,754	$	1,961		$	7,941	$	6,554
Other comprehensive income – increase (decrease) in fair value of interest rate swap		2		(16	)		145		(64	)
Comprehensive income		2,756		1,945			8,086		6,490
Comprehensive income attributable to noncontrolling interest		1,918		1,343			5,623		4,616
Comprehensive income attributable to INREIT Real Estate Investment Trust	$	838	$	602		$	2,463	$	1,874

See Notes to Consolidated Financial Statements

5

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

(UNAUDITED)

	Common Shares			Common Shares Amount			Accumulated Earnings (Deficit)			Total Beneficial Interest			Noncontrolling Interest			Accumulated Comprehensive Loss			Total
	(in thousands)
BALANCE, DECEMBER 31, 2012		5,310		$	66,040		$	(11,523	)	$	54,517		$	109,166		$	(492	)	$	163,191
Contribution of assets in exchange for the issuance of noncontrolling interest shares														25,109						25,109
Repurchase of shares/units		(121	)		(1,547	)					(1,547	)		(1,531	)					(3,078	)
Dividends declared								(3,369	)		(3,369	)		(7,814	)					(11,183	)
Dividends reinvested – stock dividend		153			2,034						2,034									2,034
Issuance of shares under optional purchase plan		56			789						789									789
UPREIT units converted to REIT common shares		5			69						69			(69	)					—
Syndication costs								—			—			(67	)					(67	)
Increase in fair value of interest rate swap																	145			145
Distributions paid to consolidated real estate entity noncontrolling interests														(128	)					(128	)
Net income								2,418			2,418			5,523						7,941
BALANCE, SEPTEMBER 30, 2013		5,403		$	67,385		$	(12,474	)	$	54,911		$	130,189		$	(347	)	$	184,753

See Notes to Consolidated Financial Statements

6

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

	Nine Months Ended September 30,
	2013			2012
	(in thousands)
OPERATING ACTIVITIES
Net income	$	7,941		$	6,554
Adjustments to reconcile net income to adjust net cash from operating activities
Gain on sale of real estate, land, other investments and discontinued operations		(37	)		(114	)
Loss on sale of real estate investments		—			88
Gain on involuntary conversion		(17	)		—
Loss on impairment of property		226			—
Equity in income of unconsolidated affiliates		(604	)		(619	)
Depreciation		8,047			7,155
Amortization		1,370			1,141
Effects on operating cash flows due to changes in
Tenant security deposits		(295	)		(104	)
Due from related party		337			114
Receivables		(1,074	)		(332	)
Prepaid expenses		707			570
Other assets		(3,471	)		583
Due to related party		16			76
Tenant security deposits payable		368			169
Accounts payable		111			97
Accrued expenses		2,688			2,396
NET CASH PROVIDED BY OPERATING ACTIVITIES		16,313			17,774
INVESTING ACTIVITIES
Purchase of real estate investments		(17,044	)		(10,301	)
Proceeds from sale of real estate investments		276			933
Proceeds from involuntary conversion		252			—
Contributions to unconsolidated affiliates		(199	)		(81	)
Distributions received from unconsolidated affiliates		849			795
Real estate tax, insurance and replacement reserve escrows		(3,939	)		(3,021	)
Notes receivable payments received		4			1,580
Payments for earnest money deposits		—			(150	)
Deferred insurance proceeds		(91	)		—
NET CASH USED IN INVESTING ACTIVITIES		(19,892	)		(10,245	)

See Notes to Consolidated Financial Statements

7

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (Continued)

(UNAUDITED)

	Nine Months Ended September 30,
	2013			2012
FINANCING ACTIVITIES
Payments for financing costs		—			(164	)
Payments on investment certificates		(379	)		(72	)
Principal payments on special assessments payable		(6	)		(1	)
Proceeds from issuance of mortgage notes payable		29,054			5,346
Principal payments on mortgage notes payable		(14,838	)		(14,581	)
Net change in short-term notes payable		—			(3,950	)
Proceeds from issuance of shares		—			18,266
Proceeds from issuance of shares under optional purchase plan		789			—
Repurchase of shares/units		(3,078	)		(3,659	)
Dividends paid		(8,850	)		(7,680	)
Payment of syndication costs		(67	)		(1,158	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		2,625			(7,653	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(954	)		(124	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,556			3,193
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,602		$	3,069
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	8,476		$	8,883
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	2,034		$	1,661
Dividends declared and not paid		1,134			1,050
UPREIT distributions declared and not paid		2,689			2,285
UPREIT units converted to REIT common shares		69			1,591
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		25,109			4,059
Increase in land improvements due to increase in special assessments payable		147			316
Unrealized (gain) loss on interest rate swap		(145	)		64
Acquisition of assets through assumption of debt and property property purchased with financing		4,500			5,070
Acquisition of assets with accounts payable		348			—

See Notes to Consolidated Financial Statements

8

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

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, 2013 and December 31, 2012, INREIT owned approximately 29.7% and 32.3%, respectively, of the operating partnership. The operating partnership is the 100% owner of 36 single asset limited liability companies and the 81.25% owner, and the 40.26% owner in 2 additional single asset entities, an LLP and LLC, respectively.

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, 2012, 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, 2013 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, 2013 and 2012, 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 unaudited consolidated financial position as of September 30, 2013 and our unaudited consolidated statements of operations and other comprehensive income, unaudited consolidated statements of shareholders’ equity and our unaudited consolidated statements of cash flows for the three and nine month periods ended September 30, 2013 and 2012, 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, 36 single asset limited liability companies and a single asset LLC that the operating partnership is the 81.25% owner. 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 requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (VIE) for which we have both a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

(Continued on next page)

9

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Principal Business Activity

INREIT currently owns directly and indirectly 116 properties. The trust’s residential properties are located in North Dakota, Minnesota, and Nebraska and are principally multi-family and assisted senior living apartment buildings. The trust owns 47 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. The commercial properties include retail, office, restaurant and medical properties. Presently, the trust’s mix of properties are 65.1% residential and 34.9% commercial (based on cost) and total $372 million at September 30, 2013.

Residential Property	Location	No. of Properties		Units
	North Dakota		62		4,449
	Minnesota		5		827
	Nebraska		2		316
			69		5,592
Commercial Property	Location	No. of Properties		Sq Ft
	North Dakota		20		808,389
	Arkansas		2		29,370
	Colorado		1		13,390
	Louisiana		1		14,560
	Michigan		1		11,737
	Minnesota		13		382,666
	Mississippi		1		14,820
	Nebraska		1		14,736
	Texas		1		7,296
	Wisconsin		6		74,916
			47		1,371,880

The consolidated financial statements include the accounts of the operating partnership and the following subsidiaries in which the operating partnership has a controlling financial interest, including a partnership in which the operating partnership is the managing member with an 81.25% ownership interest:

Subsidiary	Ownership %			Units/Sq Ft	Location
32nd Avenue INREIT, LLC		100.00	%	31,000 Sq Ft	Fargo, ND
Autumn Ridge INREIT, LLC		100.00	%	36 units	Grand Forks, ND
Bayview Apartments, LLC		100.00	%	100 units	Fargo, ND
Bismarck Interstate INREIT, LLC		100.00	%	75,000 Sq Ft	Bismarck, ND
Candlelight Apartments, LLC		100.00	%	66 units	Fargo, ND
Courtyard Apartments, LLC		100.00	%	151 units	St. Louis Park, MN
Dellwood Estates Apartments, LLC		100.00	%	132 Units	Anoka, MN
Eagle Run Apartments, LLP		81.25	%	144 units	West Fargo, ND
Flickertail Apartments, LLC		100.00	%	180 units	Fargo, ND
Grand Forks INREIT, LLC		100.00	%	183,000 Sq Ft	Grand Forks, ND

(Continued on next page)

10

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Subsidiary	Ownership %			Units/Sq Ft	Location
INREIT Alexandria, LLC		100.00	%	14,560 Sq Ft	Alexandria, LA
INREIT Batesville, LLC		100.00	%	14,820 Sq Ft	Batesville, AR
INREIT BL Bismarck, LLC		100.00	%	11,671 Sq Ft	Bismarck, ND
INREIT BL Eau Claire, LLC		100.00	%	11,900 Sq Ft	Eau Claire, WI
INREIT BL Grand Forks, LLC		100.00	%	13,190 Sq Ft	Grand Forks, ND
INREIT BL Janesville, LLC		100.00	%	12,225 Sq Ft	Janesville, WI
INREIT BL Mankato, LLC		100.00	%	13,181 Sq Ft	Mankato, MN
INREIT BL Marquette, LLC		100.00	%	11,737 Sq Ft	Marquette, MI
INREIT BL Onalaska, LLC		100.00	%	12,180 Sq Ft	Onalaska, WI
INREIT BL Oshkosh, LLC		100.00	%	12,191 Sq Ft	Oshkosh, WI
INREIT BL Sheboygan, LLC		100.00	%	13,230 Sq Ft	Sheboygan, WI
INREIT BL Stevens Point, LLC		100.00	%	13,190 Sq Ft	Stevens Point, WI
INREIT Fayetteville, LLC		100.00	%	14,550 Sq Ft	Fayetteville, AR
INREIT Fed-3 LLC		100.00	%	13,390 Sq Ft	Denver, CO
INREIT Laurel, LLC		100.00	%	14,820 Sq Ft	Laurel, MS
INREIT Maple Ridge, LLC		100.00	%	168 units	Omaha, NE
INREIT Stonybrook, LLC		100.00	%	148 units	Omaha, NE
INREIT Sunset Ridge, LLC		100.00	%	179 units	Bismarck, ND
Maplewood Bend Apartments, LLC		100.00	%	182 units	Fargo, ND
Prairiewood Meadows Apartments, LLC		100.00	%	85 units	Fargo, ND
Sierra Ridge, LLC		100.00	%	136 units	Bismarck, ND
Somerset, LLC		100.00	%	75 units	Fargo, ND
Sunwood Estates, LLC		100.00	%	81 units	Fargo, ND
Terrace on the Green Apartments, LLC		100.00	%	116 units	Moorhead, MN
Twin Parks, LLC		100.00	%	66 units	Fargo, ND
Willow Park Apartments, LLC		100.00	%	102 units	Fargo, ND

The consolidated financial statements include 100% of each subsidiary’s assets, liabilities, operations and cash flows, with the interests not owned by the operating partnership reflected as “noncontrolling interests in operating partnership”. All significant intercompany accounts have been eliminated in consolidation.

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 the financial condition of the investment. 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, 2013 and 2012.

(Continued on next page)

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Investment in unconsolidated affiliates as of September 30, 2013 consists of the operating partnership’s 40.26% interest in a single asset limited liability company which owns a 144 unit residential, multi-tenant apartment complex in Bismarck, North Dakota; the operating partnership’s 100.00% interest in a single asset limited liability company which holds a 50.00% interest in a 183,000 square feet of commercial space in Grand Forks, North Dakota; and the operating partnership’s 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial space in Fargo, North Dakota. These investments are not consolidated as the entities do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. The operating partnership and the respective affiliate partners must approve significant decisions about the applicable entities activities. As of September 30, 2013, the unconsolidated affiliates held total assets of $28.4 million and mortgage notes payable of $21.3 million.

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.

Real Estate Investments

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.

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

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

Depreciation expense for the three months ended September 30, 2013 and 2012 totaled $2.7 million and $2.4 million, respectively. Depreciation expense for the nine months ended September 30, 2013 and 2012 totaled $8.0 million and $7.2 million, respectively.

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

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12

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

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

• A substantial decline or continued low occupancy rate;

• Continued difficulty in leasing space;

• Significant financial troubled tenants;

• a change in plan to sell a property prior to the end of its useful life or holding period;

• a significant decrease in market price not in line with general market trends; and

• any other quantitative or qualitative events or factors deemed significant by the Company’s management or board of trustees.

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

• projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;

• projected capital expenditures and lease origination costs;

• projected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;

• comparable selling prices; and

• property specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. Based on evaluation, management recorded loss on impairment of property of $226,000 for the nine month period ending September 30, 2013. There have been no impairment losses during the nine month period ended September 30, 2012.

Properties Held for Sale

We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires that, in a period in which a component of an entity either has been disposed of or is classified as held for sale, the statements of operations for current and prior periods shall report the results of operations of the component as discontinued operations.

In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as properties held for sale in the period in which all of the following criteria are met:

• management, having the authority to approve the action, commits to a plan to sell the asset;

• the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

• an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

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13

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

• the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

• the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

• given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

There was one property classified as held for sale at September 30, 2013, and no properties classified as held for sale at December 31, 2012. See Note 20.

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, 2013 and December 31, 2012, management determined that no allowance was necessary for uncollectible receivables.

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.

Intangible Assets

Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases at above or below market lease terms. Lease intangibles are amortized over the term of the related lease.

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered 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 no impairment charges were necessary at September 30, 2013 or December 31, 2012.

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.

Noncontrolling Interest

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

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14

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Syndication Costs

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

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.

INREIT conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership. 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 follow ASC Topic 740,Income Taxes,to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or except to take on a tax return. As of September 30, 2013 and December 31, 2012 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2010.

The operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.

Recent Accounting Pronouncements

As of September 30, 2013, the impact of recent accounting pronouncements is not considered to be material.

Revenue Recognition

We recognize revenue in accordance with ASC Topic 605, Revenue Recognition, or ASC Topic 605. ASC Topic 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.

We derive over 95% of our revenues from tenant rents and other tenant-related activities. We lease multifamily residential apartments under operating leases and substantially all of our apartment leases are for a term of one year or less. Rental income and other property revenues are recorded when due from tenants and is recognized monthly as it is earned pursuant to the terms of the underlying leases. Other property revenues consist primarily of laundry, application and other fees charged to tenants.

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15

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

We lease commercial space primarily under long-term lease agreements. 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. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $79,000 and $70,000 for the three months ended September 30, 2013 and 2012, respectively. The straight-line rent adjustment increased revenue by $304,000 and $202,000 for the nine months ended September 30, 2013 and 2012, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, 2013 and December 31, 2012 was $2.2 million and $1.9 million, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which 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, 2013 or 2012, 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, 2013 and 2012, INREIT’s denominators for the basic and diluted earnings per common share were approximately 5.4 million and 5.0 million, respectively. For the nine months ended September 30, 2013 and 2012, INREIT’s denominators for the basic and diluted earnings per common share were approximately 5.4 million and 4.5 million, respectively.

Reclassifications

Certain amounts previously reported in our quarterly report ended September 30, 2012 have been reclassified to conform to held for sale and discontinued operations presentations in 2013.

NOTE 3 – SEGMENT REPORTING

We report 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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16

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Segment Revenues and Net Operating 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, 2013 and 2012, 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, 2013	Residential		Commercial		Total
(unaudited)	(in thousands)
Income from rental operations	$	10,766	$	4,722	$	15,488
Expenses from rental operations		5,198		1,181		6,379
Net operating income	$	5,568	$	3,541		9,109
Interest						2,683
Depreciation and amortization						3,047
Administration of REIT						1,157
Gain on involuntary conversion						(17	)
Other (income)/expense						(250	)
Income from continuing operations						2,489
Discontinued operations						265
Net income					$	2,754
Three months ended September 30, 2012	Residential		Commercial		Total
(unaudited)	(in thousands)
Income from rental operations	$	8,594	$	4,181	$	12,775
Expenses from rental operations		3,942		1,070		5,012
Net operating income	$	4,652	$	3,111		7,763
Interest						2,639
Depreciation and amortization						2,622
Administration of REIT						918
Other (income)/expense						(238	)
Income from continuing operations						1,822
Discontinued operations						139
Net income					$	1,961

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17

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Nine months ended September 30, 2013	Residential		Commercial		Total
(unaudited)	(in thousands)
Income from rental operations	$	30,917	$	14,103	$	45,020
Expenses from rental operations		14,246		3,462		17,708
Net operating income	$	16,671	$	10,641		27,312
Interest						8,036
Depreciation and amortization						8,848
Administration of REIT						3,926
Gain on involuntary conversion						(17	)
Other (income)/expense						(625	)
Income from continuing operations						7,144
Discontinued operations						797
Net income					$	7,941
Nine months ended September 30, 2012	Residential		Commercial		Total
(unaudited)	(in thousands)
Income from rental operations	$	26,018	$	12,349	$	38,367
Expenses from rental operations		11,667		3,188		14,855
Net operating income	$	14,351	$	9,161		23,512
Interest						8,123
Depreciation and amortization						7,752
Administration of REIT						2,188
Other (income)/expense						(680	)
Income from continuing operations						6,129
Discontinued operations						425
Net income					$	6,554

Segment Assets and Accumulated Depreciation

As of September 30, 2013	Residential			Commercial			Total
(unaudited)	(in thousands)
Real estate investments	$	265,887		$	150,610		$	416,497
Accumulated depreciation		(28,165	)		(16,151	)		(44,316	)
	$	237,722		$	134,459			372,181
Cash and cash equivalents								3,602
Restricted deposits and funded reserves								7,705
Investment in unconsolidated affiliates								4,292
Receivables and other assets								7,306
Financing costs, less accumulated amortization								2,747
Assets held for sale								21,821
Intangible assets, less accumulated amortization								9,004
Total Assets							$	428,658

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18

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

As of December 31, 2012	Residential			Commercial			Total
	(in thousands)
Real estate investments	$	245,494		$	149,252		$	394,746
Accumulated depreciation		(25,138	)		(13,642	)		(38,780	)
	$	220,356		$	135,610			355,966
Cash and cash equivalents								4,556
Restricted deposits and funded reserves								3,471
Investment in unconsolidated affiliates								4,338
Receivables and other assets								4,010
Financing costs, less accumulated amortization								2,436
Rent incentive, less accumulated amortization								1,183
Intangible assets, less accumulated amortization								9,135
Total Assets							$	385,095

NOTE 4 – REAL ESTATE INVESTMENTS

As of September 30, 2013 (unaudited)	Residential			Commercial			Total
	(in thousands)
Land and land improvements	$	32,515		$	28,099		$	60,614
Building and improvements		238,654			121,045			359,699
Furniture and fixtures		16,712			1,466			18,178
Construction in progress		1,021			—			1,021
		288,902			150,610			439,512
Less accumulated depreciation		(30,672	)		(16,151	)		(46,823	)
		258,230			134,459			392,689
Less real estate investments included in assets held for sale		(20,508	)		—			(20,508	)
	$	237,722		$	134,459		$	372,181

As of December 31, 2012	Residential			Commercial			Total
	(in thousands)
Land and land improvements	$	25,187		$	30,524		$	55,711
Building and improvements		205,945			117,261			323,206
Furniture and fixtures		14,362			1,467			15,829
		245,494			149,252			394,746
Less accumulated depreciation		(25,138	)		(13,642	)		(38,780	)
	$	220,356		$	135,610		$	355,966

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Construction in progress consists of costs associated with the development of a new 156 unit residential apartment community which includes four buildings, located in Bismarck, North Dakota. The project is estimated to cost $16.0 million and is expected to be substantially completed in the fall of 2014. The Company is working with GOLDMARK Development Corporation, a related party, as the general contractor for the project. See Note 14 for additional information.

NOTE 5 – HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we use derivative instruments 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 for the notional amount of $1.3 million and $2.4 million to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature in April 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, 2013 and December 31, 2012, we have recorded a liability and other comprehensive loss of $347,000 and $492,000, respectively.

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:

	Lease			Accumulated			Lease
As of September 30, 2013 (unaudited)	Intangibles			Amortization			Intangibles, net
	(in thousands)
In-place leases	$	10,702		$	(3,114	)	$	7,588
Above-market leases		1,717			(301	)		1,416
Below-market leases		(1,384	)		395			(989	)
	$	11,035		$	(3,020	)	$	8,015

	Lease			Accumulated			Lease
As of December 31, 2012	Intangibles			Amortization			Intangibles, net
	(in thousands)
In-place leases	$	10,034		$	(2,375	)	$	7,659
Above-market leases		1,706			(230	)		1,476
Below-market leases		(1,478	)		287			(1,191	)
	$	10,262		$	(2,318	)	$	7,944

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

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

Years ending September 30,	Amount
	(in thousands)
2014	$	944
2015		944
2016		944
2017		944
2018		944
Thereafter		3,295
	$	8,015

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 2013 was 11.0 years.

NOTE 7 – LINES OF CREDIT

We have an $15.0 million variable rate (1-month LIBOR plus 2.35%) line of credit agreement with Wells Fargo Bank, which expires in July 2015; a $1.0 million variable rate (prime rate) unsecured line of credit agreement and a $3.0 million variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expire in November 2013 and 2014, respectively; and a $2.0 million variable rate (prime rate) line of credit agreement with Bell State Bank & Trust, which expires in June 2014. The lines of credit are secured by properties in Duluth, Minnesota; St. Cloud, Minnesota; Minneapolis/St. Paul, Minnesota, Moorhead, Minnesota and Fargo, North Dakota, respectively. At September 30, 2013, there was no balance outstanding on the lines of credit, leaving $21.0 million unused under the agreements. At December 31, 2012, there was no balance outstanding on the lines of credit, leaving $17.0 million unused under the agreements. The line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of September 30, 2013 and December 31, 2012, we were in compliance with all covenants.

Subsequent to September 30, 2013 the unsecured line of credit with Bremer Bank was renewed and the maturity extended to October 2014. The interest rate will equal the greater of the prime rate or 3.25%.

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 8 – MORTGAGE NOTES PAYABLE

Mortgage notes payable consist of:

		Interest			Principal Balance At
		Rate Per			September 30,		December 31,
Maturity Date	Property Name (a)	Annum			2013		2012
					(in thousands)
Residential Properties
October-2017	Auburn II (Arneson)		6.30	%	$	627	$	636
October-2017	Hunter’s Run I (Arneson)		6.30	%		302		306
July-2016	Autumn Ridge 3 &4		4.50	%		3,349		3,438
January-2016	Autumn Ridge 1 & 2		5.74	%		2,883		2,926
October-2033	Bayview		4.62	%		3,594		2,032
June-2018	Berkshire		3.75	%		315		327
September-2021	Brookfield		3.75	%		1,404		1,515
March-2014	Candlelight		5.67	%		1,207		1,245
September-2036	Carling Manor		4.40	%		542		552
December-2013	Carlton 1 – 3		5.60	%		—		2,189
June-2013	Carlton Place		6.96	%		—		1,920
February-2017	Colony Manor		3.63	%		830		853
September-2014	Columbia West		7.80	%		1,414		1,447
November-2024	Country Club		4.37	%		631		663
October-2033	Courtyard		3.92	%		4,500		—
October-2019	Danbury		5.03	%		3,056		3,112
October-2028	Dellwood		4.55	%		8,175		—
March-2017	Eagle Run		3.95	%		4,745		4,838
June-2015	EV-Bismarck		2.55	%		—		14,956
June-2018	Emerald Court		3.75	%		645		669
March-2017	Fairview		3.95	%		3,274		3,325
June-2023	Flickertail		3.75	%		5,974		2,823
September-2020	Forest		4.55	%		493		—
December-2017	Galleria III		4.75	%		634		646
August-2016	Glen Pond		6.30	%		16,175		16,405
March-2017	Hunter		3.95	%		1,212		1,236
September-2014	Islander		6.00	%		492		506
June-2020	Kennedy		4.55	%		538		—
December-2017	Library Lane		6.10	%		1,924		1,950
May-2021	Maple Ridge		5.69	%		4,369		4,413
March-2017	Maplewood Bend		3.95	%		5,600		3,513
September-2017	Oak Court		5.98	%		1,870		1,892
June-2020	Pacific Park I		4.55	%		800		—
June-2020	Pacific Park II		4.55	%		685		—
June-2020	Pacific Park South		4.55	%		422		—
February-2017	Parkwood		3.63	%		1,219		1,254
January-2014	Pebble Creek(a)		2.57	%		2,460		2,530
June-2018	Prairiewood Courts		3.75	%		1,558		1,616
October-2020	Prairiewood Meadows		6.17	%		2,397		2,429
December-2013	Richfield/Harrison		6.67	%		—		2,577
September-2017	Rosegate		5.93	%		2,383		2,411
September-2036	Saddlebrook		4.40	%		1,114		1,135
August-2019	Sierra Ridge Phase I		5.46	%		2,684		2,731

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

		Interest			Principal Balance At
		Rate Per			September 30,		December 31,
Maturity Date	Property Name (a)	Annum			2013		2012
					(in thousands)
November-2019	Sierra Ridge Phase II		5.92	%		3,379		3,429
October-2022	Somerset		4.01	%		3,332		3,375
July-2021	Southgate		5.96	%		3,035		3,081
February-2020	Southview III		4.50	%		238		242
December-2017	Southview Villages		6.10	%		2,103		2,131
June-2020	Spring		4.55	%		653		—
April-2015	Stonybrook		5.40	%		5,603		5,684
January-2022	Sunset Ridge		4.44	%		9,185		9,300
May-2019	Sunview		5.75	%		1,238		1,261
April-2023	Sunwood Estates		4.37	%		3,044		—
June-2019	Terrace on the Green		6.53	%		2,171		2,192
October-2022	Twin Parks		4.01	%		2,370		2,400
May-2019	Village		5.75	%		1,092		1,112
July-2016	Village Park		6.15	%		891		911
June-2018	Westwind		3.75	%		359		372
June-2020	Westwood		4.55	%		5,087		5,231
April-2023	Willow Park		3.59	%		4,463		2,529
Commercial Properties
September-2017	Guardian Building Products		3.45	%		2,340		2,404
October-2033	Titan Machinery - Dickinson, ND		4.50	%		1,000		420
December-2019	Titan Machinery - Fargo, ND		4.18	%		1,209		1,241
August-2033	Titan Machinery - Marshall, MN		4.50	%		2,322		2,366
August-2017	Titan Machinery - Minot, ND		3.29	%		1,767		1,816
February-2023	Titan Machinery - Redwood Falls, MN		4.25	%		1,768		—
March-2016	Bio-life Properties - ND, MN, WI (9 total)		7.56	%		9,096		9,938
December-2016	Bio-life Properties - Marquette, MI		7.06	%		1,300		1,421
August-2017	Aetna		5.93	%		6,976		7,066
December-2013	CFB		4.00	%		2,292		2,342
March-2019	Echelon		4.25	%		1,173		1,223
April-2018	Gate City		3.97	%		1,060		1,085
September-2020	Goldmark Office Park		5.33	%		4,807		5,224
April-2020	Great American Building		7.25	%		1,081		1,106
October-2015	Regis		5.68	%		9,582		9,740
April-2017	Dairy Queen - Dickinson, ND		3.63	%		719		749
April-2025	Walgreens-Alexandria		5.69	%		2,130		2,226
March-2034	Walgreens-Batesville		6.85	%		6,496		6,602
June-2021	Walgreens-Colorado		4.50	%		4,366		4,447
August-2033	Walgreens-Fayetteville		6.85	%		4,991		5,077
October-2024	Walgreens-Laurel		6.07	%		2,109		2,202
					$	213,323	$	208,961

(a) Variable rate mortgage notes payable.

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.

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23

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of September 30, 2013 and December 31, 2012, we were in compliance with all covenants.

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
	(in thousands)
2013 (October 1, 2013 to December 31, 2013)	$	4,158
2014		12,473
2015		21,975
2016		34,191
2017		34,605
2018		7,661
Thereafter		98,260
Total payments	$	213,323

NOTE 9 – FAIR VALUE MEASUREMENT

The following table presents the carrying value and estimated fair value of the Company’s financial instruments:

	September 30, 2013				December 31, 2012
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable	$	213,323	$	233,926	$	208,961	$	221,570
Fair value of interest rate swaps	$	347	$	347	$	492	$	492

The carrying values shown in the table are included in the consolidated balance sheets under the indicated captions.

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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24

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2013
Fair value of interest rate swap	$	—	$	347	$	—	$	347
December 31, 2012
Fair value of interest rate swap	$	—	$	492	$	—	$	492

Fair value of interest rate swap: The fair value of the interest rate swap is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2013 and December 31, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 5.

Nonrecurring Fair Value Measurements

As discussed in Note 4, the Company recorded an impairment charge to write the carrying value down to estimated fair value for a certain investment properties after determining that its carrying value exceeded the projected undiscounted cash flows based upon the estimated holding period for such assets. Estimated fair value is determined by the Company utilizing discounted cash flow models, third-party broker valuation estimates, appraisals, bona fide purchase offers or the expected sales price from an executed sales agreement. Capitalization and discount rates utilized within discounted cash flows models are based upon observable rates that the Company believes to be within a reasonable range of current market rates for the property.

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25

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Investment properties measured at fair value on a nonrecurring basis at September 30, 2013 and December 31, 2012, respectively, aggregated by the level within the fair value hierarchy in which those measurements fall are as follows:

	Level 1		Level 2		Level 3		Total		Provision for Impairment of Investment Properties
	(in thousands)
September 30, 2013
Real estate investments (a)		—		—		1,615		1,615		226
December 31, 2012
Real estate investments (a)		—		—		2,942		2,942		262

(a) Includes an impairment charge recorded on one investment property during each of the nine months ended September 30, 2013 and the year ended December 31, 2012, both based upon a discounted cash flow model.

Fair Value Disclosures

The following table presents the Company’s financial assets and liabilities, which are disclosed at fair value, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2013
Mortgage notes payable	$	—	$	233,926	$	—	$	233,926
December 31, 2012
Mortgage notes payable	$	—	$	221,570	$	—	$	221,570

Mortgage notes payable: The Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders. Judgment is used in determining the appropriate rate for each of the Company’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 4.39% to 4.50% and from 4.01% to 4.18% at September 30, 2013 and December 31, 2012, respectively. The fair value of the Company’s matured mortgage payable was determined to be equal to the carrying value of the property because there is no market for a similar debt instrument and the property’s carrying value was determined to be the best estimate of fair value as of September 30, 2013. The Company’s mortgage notes payable are further described in Note 8.

NOTE 10 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of September 30, 2013 and December 31, 2012, outstanding limited partnership units totaled 12.8 million and 11.1 million, respectively. As of September 30, 2013 and 2012, the operating partnership declared distributions of $2.7 million and $2.3 million, respectively, to limited partners to be paid in October 2013 and 2012. Distributions per unit were $0.6300 and $0.6195 during the first nine months of 2013 and 2012, respectively.

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26

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

During the first nine months of 2013 there were 4,937 limited partnership units exchanged for 4,937 INREIT common shares valued at $69,000. During the first nine months of 2012, limited partners exchanged 36,000 limited partnership units for 36,000 INREIT common shares valued at $503,000, pursuant to exchange 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 – REPURCHASE PLANS

On March 11, 2011, our Board of Trustees approved repurchase plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans. Originally, the maximum amount of aggregate securities that could be repurchased under these plans was $5.0 million, and the repurchase price was fixed at $12.60 per share or unit under the plans.

On September 7, 2012 and December 20, 2012, our Board of Trustees amended and restated our repurchase plans to increase the maximum amount that can be repurchased under the plans to $15.0 million worth of securities and increased the fixed repurchase price to $12.75 per share or unit under the plans.

On March 28, 2013, our Board of Trustees amended our repurchase plans to increase the maximum amount that can be repurchased under the plan to $20.0 million worth of securities and increase the fixed repurchase price to $13.00 per share or unit under the plans effective May 16, 2013.

On September 26, 2013, our Board of Trustees amended our repurchase plans to increase the maximum amount that can be repurchased under the plan to $25.0 million worth of securities and increase the fixed repurchase price to $14.00 per share or unit under the plans effective October 16, 2013.

We may repurchase securities under the plans if we have sufficient funds to do so. Repurchases may be made quarterly, on a pro rata basis, based on receipt of written repurchase requests. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the repurchase plans, either or both of them, if it determines to do so is in our best interest.

NOTE 12 – BENEFICIAL INTEREST

We are authorized to issue 100.0 million common shares of beneficial interest with $0.01 par value and 50.0 million preferred shares with $0.01 par value, which collectively represent the beneficial interest of INREIT. As of September 30, 2013 and December 31, 2012, there were 5.4 and 5.3 million common shares outstanding, respectively. We had no preferred shares outstanding as of either date.

Dividends paid to holders of common shares were $0.6300 per share and $0.6195 per share for the nine months ending September 30, 2013 and 2012, respectively.

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27

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 13 – DIVIDEND REINVESTMENT PLAN

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges, except brokerage commissions and taxes, if any, when common shares are sold for a participant’s account. On July 20, 2012, we registered with the Securities Exchange Commission 2.0 million common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012.

Under this plan, eligible shareholders may elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional automatic cash purchases of our common shares, not to exceed $5,000 per fiscal quarter or, with our prior approval, in excess of $5,000 per fiscal quarter. The purchase prices per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional automatic cash purchases, as determined by our Board of Trustees. The estimated value per common share was $14.00 from the effective date of the plan through September 30, 2013.

Therefore, the purchase price per common share for dividend reinvestments was $13.30 and for additional automatic cash purchases was $14.00 through September 30, 2013. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten day notice to participants.

In the nine months ended September 30, 2013, 153,000 shares were issued pursuant to dividend reinvestments and 56,000 shares were issued pursuant to additional automatic cash purchases under the plan. In the nine months ended September 30, 2012, 125,000 shares were issued pursuant to dividend reinvestments and no shares were issued pursuant to additional automatic cash purchases under the plan.

NOTE 14 – RELATED PARTY TRANSACTIONS

Property Management Fee

During the first nine months of 2013 and 2012, 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, 2013 and 2012, we paid management fees of $3.7 million and $3.2 million, respectively, to GOLDMARK Property Management.

Board of Trustee Fees

We paid Trustee fees of $38,000 and $41,000 during the nine month periods ended September 30, 2013 and 2012, 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.

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28

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

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 a majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

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.

Development Fee: Based on a 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, 2013 and 2012, we incurred advisory management fees of $1.1 million and $976,000 owed to INREIT Management, LLC, our Advisor, for advisory management fees. As of September 30, 2013 and December 31, 2012, we owed our Advisor $125,000 and $112,000, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations.

Acquisition Fees

During the nine months ended September 30, 2013 and 2012, we incurred acquisition fees of $1.1 million and $463,000, respectively, owed to our Advisor. These fees are for performing due diligence on properties acquired. There were no acquisition fees owed to our Advisor as of September 30, 2013 and December 31, 2012, respectively.

Financing Fees

During the nine months ended September 30, 2013 and 2012, we incurred financing fees of $73,000 and $31,000, respectively, owed to our Advisor for loan financing and refinancing activities. As of September 30, 2013, we owed our Advisor $3,000 for unpaid financing fees. There were no financing fees owed to our Advisor as of December 31, 2012.

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29

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Disposition Fees

There were no disposition fees incurred during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, we incurred disposition fees of $28,000 owed to our Advisor. See Note 18. There were no disposition fees owed to our Advisor as of September 30, 2013 and December 31, 2012, respectively.

Development Fees

We did not incur any development fees during the nine months ended September 30, 2013 and 2012, respectively.

Commissions

During the nine months ended September 30, 2013, there were no brokerage fees incurred that were owed to a broker-dealer benefitting Dale Lian, a shareholder of INREIT and a member of our Advisor. During the nine months ended September 30, 2012, we incurred $771,000 of brokerage fees. Brokerage fees were based on 8% of the purchase price of INREIT common shares sold. As of September 30, 2013 and December 31, 2012, there were no outstanding brokerage fees owed to Dale Lian or entities benefitting Dale Lian.

During the nine months ended September 30, 2013 and 2012, we incurred brokerage fees of $67,000 and $92,000, 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, 2013 and December 31, 2012, there were no outstanding brokerage fees owed to the broker-dealer.

During the nine months ended September 30, 2013 and 2012, we incurred real estate commissions of $1.0 million and $82,000, respectively, owed to GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc., which is controlled by Messrs. Regan and Wieland. There were no outstanding commissions owed as of September 30, 2013 and December 31, 2012.

Rental Income

During each of the nine months ended September 30, 2013 and 2012, we received rental income of $134,000 under an operating lease agreement with GOLDMARK Property Management.

During the nine months ended September 30, 2013, we received rental income of $28,000 under an operating lease agreement with GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc. There was no rental income received for the nine months ended September 30, 2012.

During each of the nine months ended September 30, 2013 and 2012, we received rental income of $31,000 under operating lease agreements with our Advisor.

Construction Costs

During the nine months ended September 30, 2013, we incurred costs related to the construction of a 156 unit apartment complex in Bismarck, North Dakota of $1.0 million owed to GOLDMARK Development. We incurred no construction costs for the nine months ended September 30, 2012. As of September 30, 2013, we owed $35,000 for retainage and $313,000 unpaid construction fees. There were no retainage or unpaid construction fees as of December 31, 2012.

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30

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 15 – 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 $30.9 million and $26.0 million for the nine months ended September 30, 2013 and 2012, 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, 2013 and 2012, gross revenues from commercial property rentals, including CAM (common area maintenance) income of $2.8 and $2.6 million, respectively, totaled $14.1 million and $12.3 million, respectively.

NOTE 16 – 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, 2013 and 2012, we incurred property management fees of $75,000 and $55,000, respectively, to unrelated management companies.

During the nine month periods ended September 30, 2013 and 2012, we incurred property management fees of $3.7 million and $3.2 million, respectively, to GOLDMARK Property Management, a related party. The Company’s related party property management fees are further described in Note 14.

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we may acquire properties) impose 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 a 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, 2013 and December 31, 2012 of $2.4 million. We owed $966,000 and $983,000 of our respective share of the mortgage loan balance as of September 30, 2013 and December 31, 2012, respectively.

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31

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

The operating partnership is a 50% owner of Grand Forks Marketplace Retail Center through 100% ownership in a limited liability company. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2013 and December 31, 2012 of $11.5 million and $11.7 million, respectively. We owed $5.7 million and $5.8 million for our respective share of the mortgage loan balance as of September 30, 2013 and December 31, 2012, respectively.

The operating partnership owns a 2/3 interest as tenant in common 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, 2013 and December 31, 2012 of $7.4 million and $7.5 million, respectively. We owed $5.0 million for our respective share of the mortgage loan balance on September 30, 2013 and December 31, 2012, respectively.

NOTE 18 – 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.

Dispositions during the first nine months of 2013

During the second quarter of 2013, the operating partnership sold land in Fargo, North Dakota for approximately $276,000 and recognized a gain of approximately $42,000.

During the third quarter of 2013, there were no dispositions. As of September 30, 2013, the Company had received a notice from a tenant to exercise a purchase option for the senior living facility located in Bismarck, North Dakota. This property qualified for held for sale accounting treatment upon meeting all the applicable GAAP criteria on or prior to September 30, 2013, at which time depreciation and amortization were ceased. As such, the assets and liabilities associated with this property was separately classified as held for sale in the consolidated balance sheets as of September 30, 2013 and the operations for all periods presented were classified as discontinued operations in the consolidated statements of operations and other comprehensive loss.

Dispositions during the first nine months of 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 $114,000.

During the third and fourth quarters of 2012, there were no dispositions.

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32

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

The following table presents the assets and liabilities associated with the held for sale property as of September 30, 2013:

	(in thousands)
ASSETS
Real estate investments	$	20,508
Receivables		205
Rent incentive, less accumulated amortization of $392 in 2013		1,108
Total assets	$	21,821
LIABILITIES
Mortgage notes payable	$	14,355
Special assessments payable		160
Accrued expenses		225
Total liabilities	$	14,740

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, 2013 and 2012:

	Discontinued Operations				Discontinued Operations
	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Income from rental operations
Real estate rental income	$	540	$	540	$	1,620	$	1,620
Tenant reimbursements		68		69		205		208
		608		609		1,825		1,828
Expenses
Expenses from rental operations
Interest		94		217		297		647
Depreciation and amortization		181		181		542		543
Real estate taxes		68		72		206		213
Insurance		—		—		—		(1	)
		343		470		1,045		1,402
Administration of REIT
Disposition expenses		—		—		25		28
Legal and accounting		—		—		—		2
		—		—		25		30
Total expenses		343		470		1,070		1,432
Income from operations		265		139		755		396
Other income
Interest income		—		—		—		3
		—		—		—		3
Income from discontinued operations before gain on sale		265		139		755		399
Gain on sale of discontinued operations		—		—		42		26
Gain from discontinued operations	$	265	$	139	$	797	$	425

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33

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 19 – 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, our overall relationship with that respective 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 the 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 (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

Purchases during the first nine months of 2013

In January 2013, the operating partnership purchased a 50,000 square foot implement dealership in Redwood Falls, Minnesota for approximately $4.7 million. The purchase was financed with a combination of a $1.8 million loan, the issuance of limited partnership units valued at approximately $2.6 million and cash.

In February 2013, the operating partnership purchased a 42 unit apartment complex in Fargo, North Dakota for approximately $2.3 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.3 million. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $499,000.

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

In February 2013, the operating partnership purchased a 20 unit apartment complex in Fargo, North Dakota for approximately $740,000. The purchase was financed with the issuance of limited partnership units valued at approximately $740,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $129,000.

In February 2013, the operating partnership purchased a 12 unit apartment complex in Fargo, North Dakota for approximately $714,000. The purchase was financed with the combination of a $263,000 loan and the issuance of limited partnership units valued at approximately $471,000. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $100,000.

In February 2013, the operating partnership purchased a 30 unit apartment complex in Fargo, North Dakota for approximately $957,000. The purchase was financed with the combination of a $238,000 loan and the issuance of limited partnership units valued at approximately $751,000. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $229,000.

In February 2013, the operating partnership purchased a 39 unit apartment complex in Fargo, North Dakota for approximately $1.0 million. The purchase was financed with the issuance of limited partnership units valued at approximately $985,000 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received cash of $51,000 and limited partnership units valued at approximately $389,000, respectively.

In February 2013, the operating partnership purchased a 15 unit apartment complex in Fargo, North Dakota for approximately $550,000. The purchase was financed with the issuance of limited partnership units valued at approximately $481,000 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $69,000 and limited partnership units valued at approximately $110,000.

In February 2013, the operating partnership purchased a 25 unit apartment complex in Fargo, North Dakota for approximately $950,000. The purchase was financed with the combination of a $210,000 loan and the issuance of limited partnership units valued at approximately $772,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $43,000 and limited partnership units valued at approximately $236,000.

In February 2013, the operating partnership purchased a 96 unit apartment complex in Grand Forks, North Dakota for approximately $4.4 million. The purchase was financed with the issuance of limited partnership units valued at approximately $4.4 million. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $828,000.

In May 2013, the operating partnership purchased a 132 unit apartment complex in Anoka, Minnesota for approximately $11.5 million. The purchase was financed with the issuance of limited partnership units valued at approximately $302,000 and cash.

In June 2013, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $756,000. The purchase was financed with the issuance of limited partnership units valued at approximately $677,000 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $151,000.

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INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

In June 2013, the operating partnership purchased a 12 unit apartment complex in Bismarck, North Dakota for approximately $636,000. The purchase was financed with the issuance of limited partnership units valued at approximately $636,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $159,000.

In June 2013, the operating partnership purchased a 59 unit apartment complex in Fargo, North Dakota for approximately $3.1 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.4 million and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $691,000 and $627,000, respectively.

In July 2013, the operating partnership purchased an 82.50% interest in a 61 unit apartment complex in Fargo, North Dakota for approximately $3.0 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.2 million and cash. The interest was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $533,000.

In September 2013, the operating partnership purchased a 151 unit apartment complex in St. Louis Park, Minnesota for approximately $8.8 million. The purchase was financed with a combination of a $4.5 million loan, the issuance of limited partnership units valued at approximately $5.4 million and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland, and Furness, related parties, who received limited partnership units valued at approximately $1.3 million, $973,000 and $943,000, respectively.

The following table summarizes the fair value of the assets acquired and liabilities assumed during the nine months ended September 30, 2013:

	Property and		In Place		Favorable		Unfavorable		Mortgages		Consideration
	Equipment		Leases		Lease Terms		Lease Terms		Assumed		Given
	(in thousands)
Titan Machinery, Redwood Falls, MN	$	3,902	$	745	$	11	$	—	$	—	$	4,658
44th Street, Fargo, ND		2,310		—		—		—		—		2,310
Forest Avenue, Fargo, ND		740		—		—		—		—		740
Kennedy, Fargo, ND		714		—		—		—		—		714
Pacific Park I, Fargo, ND		957		—		—		—		—		957
Pacific Park II, Fargo, ND		1,036		—		—		—		—		1,036
Pacific Park South, Fargo, ND		550		—		—		—		—		550
Spring, Fargo, ND		950		—		—		—		—		950
Stanford Court, Grand Forks, ND		4,416		—		—		—		—		4,416
Dellwood Estates, Anoka, MN		11,500		—		—		—		—		11,500
Arbor Apartments, Bismarck, ND		636		—		—		—		—		636
Granger Court I, Fargo, ND		3,127		—		—		—		—		3,127
Schrock Apartments, Fargo, ND		756		—		—		—		—		756
Ashbury, Fargo, ND		3,020		—		—		—		—		3,020
Courtyard Apartments, St. Louis Park, MN		8,758		—		—		—		—		8,758
	$	43,372	$	745	$	11	$	—	$	—	$	44,128

Total consideration given for acquisitions in the first nine months of 2013 was completed through issuing approximately 1.8 million limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $25.1 million, new loans of $4.5 million and cash of $14.5 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.

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36

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

Purchases during the first nine months of 2012

In January 2012, the operating partnership purchased a 2,811 square foot restaurant in Dickinson, North Dakota for approximately $1.3 million. The purchase was financed with the issuance of limited partnership units valued at approximately $1.3 million and cash.

In March 2012, the operating partnership purchased a 17,760 square foot implement dealership in Dickinson, North Dakota for approximately $1.4 million. The purchase was financed through the issuance of limited partnership units valued at approximately $959,000, the $431,000 assumption of a mortgage and cash.

In August 2012, the operating partnership purchased a 23,690 square foot implement dealership in Minot, North Dakota for $2.6 million 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 $2.4 million with cash.

In August 2012, the operating partnership purchased a 100,600 square foot commercial property in Fargo, North Dakota for $3.5 million. The purchase was financed with the issuance of limited partnership units valued at $965,000 and cash.

In September 2012, the operating partnership purchased an 85 unit apartment complex in Fargo, North Dakota for $3.5 million. The purchase was financed through assumption of $2.4 million in mortgage debt and cash.

In September 2012, the operating partnership purchased a 116 unit apartment complex in Moorhead, Minnesota for $3.5 million. The purchase was financed with the issuance of limited partnership units valued at $796,000, the assumption of $2.2 million 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		In Place		Favorable		Unfavorable			Mortgages			Consideration
	Equipment		Leases		Lease Terms		Lease Terms			Assumed			Given
	(in thousands)
Dairy Queen, Dickinson, ND	$	986	$	226	$	118	$	—		$	—		$	1,330
Titan Machinery, Dickinson, ND		1,450		199		—		(259	)		(431	)		959
Titan Machinery, Minot, ND		2,272		358		—		—			—			2,630
Land, Dickinson, ND		400		—		—		—			—			400
Land, Bismarck, ND		2,420		—		—		—			—			2,420
Guardian Building, Fargo, ND		3,125		531		—		(206	)		—			3,450
Prairiewood Meadows Apts., Fargo, ND		3,450		—		—		—			(2,439	)		1,011
Terrace on the Green Apts., Moorhead, MN		3,450		—		—		—			(2,199	)		1,251
	$	17,553	$	1,314	$	118	$	(465	)	$	(5,069	)	$	13,451

Total consideration given for acquisitions in the first nine months of 2012 was completed through issuing approximately 290,000 limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $4.1 million 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.

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37

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

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 the first nine months of 2013 and 2012. 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, 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 the first nine months of 2013 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.

NOTE 20 – SUBSEQUENT EVENTS

On July 15, 2013, the operating partnership received a notice from a tenant to exercise a purchase option for the senior living facility located in Bismarck. The purchase agreement provides for a sales price of approximately $24.0 million and we closed the sale on October 1, 2013. We recognized a gain of approximately $2.6 million.

In October 2013, we purchased a 48 unit apartment complex in Fargo, North Dakota for approximately $2.9 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.

In October 2013, we purchased a 444 unit apartment complex in Little Canada, Minnesota for approximately $27.1 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.

In October 2013, we purchased a property occupied by an implement dealership in Sioux City, Iowa for approximately $4.6 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.

Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions 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 29.7% of the operating partnership as of September 30, 2013. 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 units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, 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, 2013, approximately 65.1% 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 undershort-term leases.

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As of September 30, 2013, approximately 34.9% 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, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. Most commercial properties are leased to a variety of tenants underlong-term leases.

Our real estate portfolio consisted of 116 properties containing approximately 5,592 apartments, 193 assisted living units and 1.4 million square feet of leasable commercial space as of September 30, 2013. The portfolio has a gross book value of approximately $372.2 million, which excludes assets held for sale, and book equity, including noncontrolling interests, of approximately $130.5 million as of September 30, 2013.

Our Board of Trustees and Executive Officers

We operate under the direction of our Board of Trustees, the members of which are accountable to us and our shareholders as fiduciaries. In addition, the Board has a specific fiduciary duty to supervise our relationship with the Advisor, and evaluate the performance of and fees paid to the Advisor on an annual basis prior to renewing the Advisory Agreement with the Advisor. Our Board of Trustees has provided investment guidance for the Advisor to follow, and must approve each investment recommended by the Advisor. Currently, we have nine members on our board, six of whom are independent of our Advisor. Our trustees are elected annually by our shareholders. Although we have executive officers, we do not have any paid employees.

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 nine month period ended September 30, 2013 included elsewhere in this report.

Specific Achievements

• Increased revenues from rental operations by $6.7 million or 17.3% for the nine months ended September 30, 2013, compared to the same nine month period in 2012.

• Acquired fifteen (15) properties totaling 50,000 commercial square feet and 712 residential apartment units for a total of $44.1 million during the nine months ended September 30, 2013.

• Declared and paid dividends totaling $0.6300 per common share for first, second and third quarters of 2013.

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Results of Operations for the Three Months Ended September 30, 2013 and 2012

	Three Months Ended September 30, 2013							Three Months Ended September 30, 2012
	Residential		Commercial		Total			Residential		Commercial		Total
	(unaudited)							(unaudited)
	(in thousands)							(in thousands)
Real Estate Revenues	$	10,766	$	4,722	$	15,488		$	8,594	$	4,181	$	12,775
Real Estate Expenses
Real Estate Taxes		1,053		644		1,697			891		599		1,490
Property Management Fees		1,256		86		1,342			1,015		64		1,079
Utilities		728		239		967			591		215		806
Repairs and Maintenance		1,596		192		1,788			1,245		177		1,422
Insurance		339		20		359			200		15		215
Total Real Estate Expenses		4,972		1,181		6,153			3,942		1,070		5,012
Net Operating Income	$	5,794	$	3,541	$	9,335		$	4,652	$	3,111	$	7,763
Interest						2,683							2,639
Depreciation and amortization						3,047							2,622
Administration of REIT						1,157							918
Gain on involuntary conversion						(17	)						—
Other (income)/expense						(250	)						(238	)
Loss on impairment of property						226							—
Income from continuing operations						2,489							1,822
Discontinued operations						265							139
Net Income					$	2,754						$	1,961
Net Income Attributed to:
Noncontrolling Interest					$	1,917						$	1,354
INREIT Real Estate Investment Trust					$	837						$	607
Dividends per share (1)					$	0.2100						$	0.2065
Earnings per share					$	0.15						$	0.12

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

Revenues

Property revenues of approximately $15.5 million increased approximately $2.7 million or 21.2% for the three months ended September 30, 2013 in comparison to the same period in 2012. Approximately $2.2 million of the increase in property revenues relates to residential property revenues and $541,000 of the increase in property revenues relates to commercial property revenues.

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

	30-Sep-13			30-Jun-13			30-Sep-12			30-Jun-12
Residential occupancy		97.9	%		98.1	%		98.6	%		98.0	%
Commercial occupancy		99.4	%		99.3	%		98.4	%		98.3	%

Residential revenues for the three month period ended September 30, 2013 increased $2.2 million in comparison to the same period in 2012. Approximately $1.7 million of the increase was due to residential properties acquired since January 1, 2012. Rental income from residential properties owned prior to January 1, 2012 increased approximately $500,000 in comparison to the same period in 2012. Residential revenues comprised 69.5% of total revenues for the three month period ended September 30, 2013 compared to 67.3% of total revenues for the three month period ended September 30, 2012.

Commercial revenues for the three month period ended September 30, 2013 increased $541,000 in comparison to the same period in 2012. Approximately $330,000 of the increase was due to commercial properties acquired since January 1, 2012. Rental income from commercial properties owned prior to January 1, 2012 increased approximately $211,000 in comparison to the same period in 2012. Commercial revenues comprised 30.5% of the total revenues for the three month period ended September 30, 2013 compared to 32.7% of total revenues for the three month period ended September 30, 2012.

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Expenses

Residential expenses from operations of $5.0 million during the three month period ended September 30, 2013 increased $1.0 million or 26.1% in comparison to the same period in 2012. This increase corresponds with a 25.3% increase in residential rental revenues and is attributed to increases in real estate tax expense, property management fees, utilities, repairs and maintenance and insurance expense, all of which increased principally because of the increase in number of residential properties owned during the three month period ended September 30, 2013 versus the same period in 2012.

Commercial expenses from operations of $1.2 million during the three month period ended September 30, 2013 increased slightly in comparison to the same period in 2012, which corresponds to the increase in commercial revenues resulting from the addition of commercial properties acquired since September 30, 2012.

Interest expense of $2.7 million during the three month period ended September 30, 2013 increased $44,000 in comparison to the same period in 2012. Interest expense was approximately 17.3% and 20.7% of rental income for three month periods ended September 30, 2013 and 2012, respectively. The decrease of interest expense as a percentage of rental income during the three month period ended September 30, 2013 was a result of lower interest rates for mortgage notes payable during this period in 2013 compared to the same period in 2012, and increased rental revenues from acquired properties unencumbered by mortgages. Even with fluctuation in interest rates during the three month period ended September 30, 2013, we were able to reduce our overall interest rates by refinancing existing loans with higher interest rates.

Depreciation and amortization expense increased 16.2% from $2.6 million for the three months ended September 30, 2012 to approximately $3.0 million for the three months ended September 30, 2013. The $425,000 increase was primarily a result of depreciation and amortization for the 17 properties added to our portfolio since September 30, 2012. Depreciation and amortization expense as a percentage of rental income for the nine month periods ended September 30, 2013 and 2012 was relatively consistent at 19.7% and 20.5%, respectively.

REIT administration expenses increased from $0.9 million for the three months ended September 30, 2012 to $1.2 million for the three month periods ended September 30, 2013 due to an increase in acquisition and disposition expenses related to acquisition activity during the third quarter of 2013.

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 $1.1 million or 24.5% for the three month period ended September 30, 2013 in comparison to the same three month period in 2012 due primarily to acquisition activity in the residential segment. Commercial NOI increased $430,000 or 13.8% for the three month period ended September 30, 2013 in comparison to the same three month period in 2012 due primarily to acquisition activity in the commercial segment.

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Results of Operations for the Nine Months Ended September 30, 2013 and 2012

	Nine Months Ended September 30, 2013							Nine Months Ended September 30, 2012
	Residential		Commercial		Total			Residential		Commercial		Total
	(unaudited) (in thousands)							(unaudited) (in thousands)
Real Estate Revenues	$	30,917	$	14,103	$	45,020		$	26,018	$	12,349	$	38,367
Real Estate Expenses
Real Estate Taxes		2,981		1,940		4,921			2,669		1,771		4,440
Property Management Fees		3,546		230		3,776			3,030		203		3,233
Utilities		2,589		650		3,239			2,110		599		2,709
Repairs and Maintenance		4,094		594		4,688			3,238		588		3,826
Insurance		810		48		858			620		27		647
Total Real Estate Expenses		14,020		3,462		17,482			11,667		3,188		14,855
Net Operating Income	$	16,897	$	10,641	$	27,538		$	14,351	$	9,161	$	23,512
Interest						8,036							8,123
Depreciation and amortization						8,848							7,752
Administration of REIT						3,926							2,188
Gain on involuntary conversion						(17	)						—
Other (income)/expense						(625	)						(680	)
Loss on impairment of property						226							—
Income from continuing operations						7,144							6,129
Discontinued operations						797							425
Net Income					$	7,941						$	6,554
Net Income Attributed to:
Noncontrolling Interest					$	5,523						$	4,661
INREIT Real Estate Investment Trust					$	2,418						$	1,893
Dividends per share (1)					$	0.6300						$	0.6195
Earnings per share					$	0.45						$	0.42

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

Revenues

Property revenues of approximately $45.0 million increased approximately $6.7 million or 17.3% for the nine months ended September 30, 2013 in comparison to the same period in 2012. Approximately $4.9 million of the increase in property revenues relates to residential property revenues and $1.8 million of the increase in property revenues relates to commercial property revenues.

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

	30-Sep-13			31-Dec-12			30-Sep-12			31-Dec-11
Residential occupancy		97.9	%		98.8	%		98.6	%		98.2	%
Commercial occupancy		99.4	%		99.3	%		98.4	%		97.4	%

Residential revenues for the nine month period ended September 30, 2013 increased $4.9 million in comparison to the same period in 2012. Approximately $3.7 million of the increase was due to residential properties acquired since January 1, 2012. Rental income from residential properties owned prior to January 1, 2012 increased approximately $1.2 million in comparison to the same period in 2012. Residential revenues comprised 68.7% of total revenues for the nine month period ended September 30, 2013 compared to 67.8% of total revenues for the nine month period ended September 30, 2012.

Commercial revenues for the nine month period ended September 30, 2013 increased $1.8 million in comparison to the same period in 2012. Approximately $1.2 million of the increase was due to commercial properties acquired since January 1, 2012. Rental income from commercial properties owned prior to January 1, 2012 increased approximately $563,000 in comparison to the same period in 2012. Commercial revenues comprised 31.3% of the total revenues for the nine month period ended September 30, 2013 compared to 32.2% of total revenues for the nine month period ended September 30, 2012.

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Expenses

Residential expenses from operations of $14.0 million during the nine month period ended September 30, 2013 increased $2.4 million or 20.2% in comparison to the same period in 2012. This increase corresponds with a 18.8% increase in residential rental revenues and is attributed to increases in real estate tax expense, property management fees, utilities, repairs and maintenance and insurance expense, all of which increased principally because of the increase in number of residential properties owned during the nine month period ended September 30, 2013 versus the same period in 2012.

Commercial expenses from operations of $3.5 million during the nine month period ended September 30, 2013 increased slightly in comparison to the same period in 2012, which corresponds to the addition of several triple-net lease commercial properties acquired since September 30, 2012. The operating expenses increase at a lessor rate than the revenues for commercial properties due to the lease terms in which tenants are responsible for many of the property expenses.

Interest expense of $8.0 million during the nine month period ended September 30, 2013 decreased $87,000 in comparison to the same period in 2012. Interest expense was approximately 17.8% and 21.2% of rental income for nine month periods ended September 30, 2013 and 2012, respectively. The decrease of interest expense as a percentage of rental income during the nine month period ended September 30, 2013 was a result of lower interest rates for mortgage notes payable during this period in 2013 compared to the same period in 2012, and increased rental revenues from acquired properties unencumbered by mortgages. Even with fluctuation in interest rates during the nine month period ended September 30, 2013, we were able to reduce our overall interest rates by refinancing existing loans with higher interest rates.

Depreciation and amortization expense increased 14.1% from $7.8 million for the nine months ended September 30, 2012 to approximately $8.8 million for the nine months ended September 30, 2013. The $1.1 million increase was primarily a result of depreciation and amortization for the 17 properties added to our portfolio since September 30, 2012. Depreciation and amortization expense as a percentage of rental income for the nine month periods ended September 30, 2013 and 2012 was relatively consistent at 19.7% and 20.2%, respectively.

REIT administration expenses increased from $2.2 million for the nine months ended September 30, 2012 to $3.9 million for the nine month periods ended September 30, 2013 due to an increase in acquisition and disposition expenses related to acquisition activity during the first, second and third quarters of 2013.

Net Operating Income

See the discussion of NOI on page 42.

Residential NOI increased $2.5 million or 17.7% for the nine month period ended September 30, 2013 in comparison to the same nine month period in 2012 due primarily to acquisition activity in the residential segment. Commercial NOI increased $1.5 million or 16.2% for the nine month period ended September 30, 2013 in comparison to the same nine month period in 2012 due primarily to acquisition activity in the commercial segment.

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Property Acquisitions and Dispositions

Property Acquisitions and Dispositions during the nine month period ended September 30, 2013

We acquired fifteen properties for a total of $44.1 million during the first nine months of 2013. Total consideration for the acquisitions was the issuance of approximately $25.1 million in limited partnership units of the operating partnership and new loans of $4.5 million and cash of $14.5 million

We sold land for a total of $276,000 during the first nine months of 2013. We recognized a $42,000 gain on the sale.

Property Acquisitions and Dispositions during the nine month period ended September 30, 2012

We acquired six properties and two parcels of land for a total of $18.6 million during the first nine month of 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 $9.4 million. We assumed $5.1 million in mortgage notes payable.

We sold one property and one parcel of vacant land for a total of $0.9 million during the first nine months of 2012. We recognized a $26,000 net gain on the sales.

See Notes 18 and 19 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the nine month periods ended September 30, 2013 and 2012.

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.

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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. 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.

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, 2013 and 2012, 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, 2013						Three Month Period Ending September 30, 2012
	Amount		Weighted Avg Shares and Units(1)		Per Share and Unit(2)		Amount		Weighted Avg Shares and Units(1)		Per Share and Unit(2)
	(in thousands, except per share data)
Net Income attributable to
INREIT Real Estate
Investment Trust	$	837		5,405	$	0.15	$	607		4,958	$	0.12
Add back:
Noncontrolling Interest—OPU		1,926		12,558				1,344		11,012
Depreciation & Amortization from continuing operations		3,047						2,622
Depreciation & Amortization from discontinued operations		181						181
Pro rata share of unconsolidated affiliate depreciation & amortization		103						97
Loss on depreciable asset sales		—						—
Loss on impairment of property		226						—
Subtract:
Gains (loss) on land and depreciable asset sales		—						—
Funds from operations applicable to common shares and limited partnership units		6,320		17,963	$	0.35		4,851		15,970	$	0.30
Add back:
Acquisition and disposition expenses		620						435
Modified Funds from operations (MFFO)	$	6,940		17,963	$	0.39	$	5,286		15,970	$	0.33

(1) UPREIT Units of the Operating Partnership are exchangeable for shares of beneficial interest 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 is calculated on a per share and unit basis.

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	Nine Month Period Ended September 30, 2013							Nine Month Period Ended September 30, 2012
	Amount			Weighted Avg Shares and Units(1)		Per Share and Unit(2)		Amount			Weighted Avg Shares and Units(1)		Per Share and Unit(2)
	(in thousands, except per share data)
Net Income attributable to
INREIT Real Estate
Investment Trust	$	2,418			5,358	$	0.45	$	1,893			4,538	$	0.42
Add back:
Noncontrolling Interest—OPU		5,515			12,183				4,638			10,989
Depreciation & Amortization from continuing operations		8,848							7,752
Depreciation & Amortization from discontinued operations		542							543
Pro rata share of unconsolidated affiliate depreciation & amortization		307							293
Loss on depreciable asset sales		—							88
Loss on impairment of property		226							—
Subtract:
Gains (loss) on land and depreciable asset sales		(42	)						(114	)
Funds from operations (FFO) applicable to common shares and limited partnership units		17,814			17,541	$	1.02		15,093			15,527	$	0.97
Add back:
Acquisition and disposition expenses		2,207							623
Modified Funds from operations (MFFO)	$	20,021			17,541	$	1.14	$	15,716			15,527	$	1.01

(1) UPREIT Units of the Operating Partnership are exchangeable for shares of beneficial interest 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 is 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 repurchases, 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 repurchase requests to our shareholders and the unit holders of our operating partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary. 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 repurchase requests. As part of our analysis, we consider credit quality of tenants and lease expirations among other factors.

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.

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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 other than the $226,000 impairment in this quarter. We currently 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 deteriorate. Factors that lead to the impairment recognized this quarter were related to the projected cash flows from the eventual disposition of the property using a property specific capitalization rate. We expect these factors to be non-recurring.

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

Lease Expirations and Occupancy

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.

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,
	2013			2012
	(in thousands)
Net cash flows provided by operating activities	$	16,313		$	17,774
Net cash flows used in investing activities	$	(19,892	)	$	(10,245	)
Net cash flows provided by (used in) financing activities	$	2,625		$	(7,653	)

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, acquisition and disposition expenses, and financing and development fees.

Net cash provided by operating activities was $16.3 million and $17.8 million for the nine months ended September 30, 2013 and 2012, respectively, which consisted primarily of net income from property operations, adjusted for non-cash depreciation and amortization and gains on sales of investment properties. The decrease in operating cash flows is primarily attributable to increased loan fee deposits, and ordinary course fluctuations in working capital, specifically accrued expenses.

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Investing Activities

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

Net cash used in investing activities was $19.9 million and $10.2 million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013 and 2012, cash flows used in investing activities related primarily to the acquisition of properties and capital expenditures for $17.0 million and $10.3 million, respectively, and the change in restricted cash for real estate tax, insurance and replacement reserve escrows of $3.9 million and $3.0 million, respectively. This was offset by cash received as distributions from unconsolidated affiliates of $849,000 and $795,000, respectively. In addition, during this period in 2012, we received $1.6 million on the payment of a note receivable.

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 provided by financing activities were $2.6 million for the nine months ended September 30, 2013. Net cash used in financing activities was $7.7 million for the nine months ended September 30, 2012. During the nine months ended September 30, 2013, cash flows provided by financing activities related primarily to borrowings on our mortgage loans payable of $29.1 million, offset by principal payments on mortgage notes payable of $14.8 million, share repurchases of $3.1 million and cash distributions in the amount of $8.9 million.

For the nine months ended September 30, 2012, cash flows used in financing activities related primarily to principal payments on our mortgage notes payable of $14.6 million; short-term note payments reduced by $4.0 million; share repurchases of $3.7 million; cash distributions of $7.7 million, all offset by share issuance proceeds of $18.3 million.

Cash Resources

At September 30, 2013, our cash resources consisted of cash and cash equivalents totaling approximately $3.6 million. In addition, we had unencumbered properties with a gross book value of $39.3 million, which could potentially be used as collateral to secure additional financing in future periods.

We also have four lines of credit: (i) a $15.0 million line of credit with Wells Fargo Bank (which expires in July 2015) secured by an office property in Duluth, Minnesota, four retail properties in Minnesota, one retail property in Texas, and four retail properties in North Dakota (ii) a $1.0 million unsecured line of credit (which expires in November 2013) and a $3.0 million line of credit (which expires November 2014) with Bremer Bank secured by two commercial properties in Moorhead, Minnesota and an office property in St. Cloud, Minnesota and (iii) a $2.0 million line of credit with Bell State Bank and Trust secured by a multifamily property in Fargo, North Dakota, which expires in June 2014. As of September 30, 2013, there was no balance outstanding on the lines of credit, leaving $21.0 million available. As of December 31, 2012, there was no balance outstanding on the lines of credit.

Subsequent to September 30, 2013 the unsecured line of credit with Bremer Bank was renewed and the maturity extended to October 2014.

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In connection with our construction in progress, the Company is in the process of obtaining an additional $12 million line of credit. We presently expect the terms of the line of credit to be for 24 months with variable interest rate based on 1-month LIBOR plus 2.5%, then subsequent to the initial period, rolling into a 5 year amortizing loan. The line will be used as needed to fund the construction of the residential project currently in process.

Our cash resources can be used for working capital needs and other commitments. Our lines of credit and certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of September 30, 2013, we were in compliance with all covenants.

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, 2013, we did not sell any common shares in private placements. During the nine months ended September 30, 2013, we issued 153,000 and 56,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively. The dividend reinvestment plan raised gross proceeds of $2.8 million. During the nine months ended September 30, 2012, we sold 1,332,000 common shares in private placements. The 2012 private placements raised gross proceeds of $18.3 million. During the nine months ended September 30, 2012, we issued 125,000 common shares under the dividend reinvestment plan and raised gross proceeds of $1.7 million.

During the nine month period ended September 30, 2013, we issued limited partnership units valued at approximately $25.1 million in connection with the acquisition of fifteen properties.

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

Off-Balance Sheet Arrangements

As of September 30, 2013 and December 31, 2012, 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 Accounting 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 Accounting Officer have concluded that, as of September 30, 2013, 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 2013 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

INREIT did not issue any unregistered securities during the three month period ended September 30, 2013.

In connection with the completion our two property acquisitions, the operating partnership issued 540,000 units to two unit-holders during the three month period ended September 30, 2013 pursuant to Section 4(2) of Regulation D and Rule 506.

Repurchases of Securities

Set forth below is information regarding common shares and limited partnership units repurchased during the three months ended September 30, 2013:

Period	Total Number of Common Shares Repurchased		Total Number of Common Units Repurchased		Average Price Paid per Common Share/Unit		Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs		Total Number of Units Repurchased as Part of Publicly Announced Plans or Programs		Shares (and Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2013		14,000		8,000		13.00		511,000		81,000		9,089,000
August 1-31, 2013		13,000		38,000		13.00		524,000		119,000		8,426,000
September 1-30, 2013		—		—		13.00		524,000		119,000		8,426,000
Total		27,000		46,000

On March 28, 2013, and September 26, 2013 our Board of Trustees revised the Share Repurchase Plan. The amended and restated 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 $25.0 million 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 was fixed at $13.00 per share or unit, which was increased to $14.00 effective October 16, 2013. The maximum amount of shares and units that may be repurchased was $20.0 million, which was increased to $25.0 million effective October 16, 2013. 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 at any time if it determines to do so is in our best interest.

Item 6. Exhibits.

Exhibit Number	Title of Document
4.1	INREIT Real Estate Investment Trust 99.1 First Amendment to Dividend Reinvestment Plan (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed with the Commission on October 2, 2013.
4.2	INREIT Real Estate Investment Trust Amended and Restated Share Repurchase Plan (incorporated by reference to Exhibit 99.2 to the registrant’s Current Report on Form 8-K filed with the Commission on October 2, 2013.
4.3	INREIT Properties, LLLP Amended and Restated Unit Repurchase Plan (incorporated by reference to Exhibit 99.3 to the registrant’s Current Report on Form 8-K filed with the Commission on October 2, 2013.

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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 Accounting 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 Accounting 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, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended September 30, 2013 and 2012; (iii) Consolidated Statements of Shareholders’ Equity for nine months ended September 30, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and; (v) Notes to Consolidated Financial Statements.

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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, 2013

INREIT REAL ESTATE INVESTMENT TRUST
By:	/s/ Kenneth P. Regan
	Kenneth P. Regan
	Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Angie D. Stock
	Angie D. Stock
	Chief Accounting Officer
	(Principal Financial and Accounting Officer)