Company Quick10K Filing
Quick10K
Griffin Capital Essential Asset REIT
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-30 M&A, Shareholder Rights, Control, Regulation FD, Exhibits
8-K 2019-04-15 Shareholder Vote
8-K 2019-03-29 Shareholder Vote, Other Events, Exhibits
8-K 2019-03-19 Regulation FD, Exhibits
8-K 2019-03-14 Shareholder Vote, Other Events, Exhibits
8-K 2019-02-15 Other Events
8-K 2019-01-28 Regulation FD, Exhibits
8-K 2019-01-28 Regulation FD, Exhibits
8-K 2018-12-21 Regulation FD, Exhibits
8-K 2018-12-14 Enter Agreement, M&A, Officers, Regulation FD, Other Events, Exhibits
8-K 2018-11-14 Regulation FD, Exhibits
8-K 2018-10-26 Regulation FD, Other Events, Exhibits
8-K 2018-09-25 Regulation FD, Exhibits
8-K 2018-08-15 Regulation FD, Exhibits
8-K 2018-08-13 Regulation FD, Exhibits
8-K 2018-06-11 Regulation FD, Exhibits
8-K 2018-05-16 Regulation FD, Exhibits
8-K 2018-05-07 Regulation FD, Other Events, Exhibits
8-K 2018-04-18 Regulation FD, Exhibits
8-K 2018-04-12 Regulation FD, Other Events, Exhibits
8-K 2018-03-20 Regulation FD, Other Events, Exhibits
GOSS Gossamer Bio 1,150
SOTK Sono Tek 40
BTOP Recall Studios 11
VICA Rafina Innovations 3
ADGO Advantego 0
TDRP Teardroppers 0
OPC Oglethorpe Power 0
DOYU DouYu 0
EWLL Ewellness Healthcare 0
HHEG Huahui Education Group 0
GCNL 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
EX-10.35 a1035administrativeservices.htm
EX-10.41 exhibit1041amendedandresta.htm
EX-10.42 exhibit1042-masterproperty.htm
EX-21.1 gcear12312018ex211.htm
EX-23.1 ex231-gcearxconsentey2018.htm
EX-31.1 gcear12312018ex311.htm
EX-31.2 gcear12312018ex312.htm
EX-32.1 gcear12312018ex321.htm
EX-32.2 gcear12312018ex322.htm

Griffin Capital Essential Asset REIT Earnings 2018-12-31

GCNL 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 gcear1231201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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: 000-54377
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
Maryland
26-3335705
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
Griffin Capital Plaza, 1520 E. Grand Avenue, El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ý    No  ¨

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment of this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý

There is currently no established public market for the registrant's shares of common stock. Based on the registrant's published net asset value (“NAV”) of $10.05 as of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting common stock held by non-affiliates was $1,709,123,586.
As of March 11, 2019, there were 166,601,264 outstanding shares of common stock of the registrant.
Documents Incorporated by Reference:
None.







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GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
 
Page No.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K of Griffin Capital Essential Asset REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements may discuss, among other things, our future capital expenditures, distributions and acquisitions (including the amount and nature thereof), business strategies, the expansion and growth of our operations, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, capital structure, organizational structure, and other developments and trends of the real estate industry. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (the "SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-K, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws and regulations.
As used in this report, “we,” “us,” “our,” "GCEAR" and the "Company" refer to Griffin Capital Essential Asset REIT, Inc. and its consolidated subsidiaries, except where otherwise indicated or the context otherwise requires. All forward-looking statements should be read in light of the risks identified in "Item 1A. Risk Factors" of this Form 10-K.


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PART I
ITEM 1. BUSINESS

Overview
We were formed as a corporation on August 28, 2008 under the Maryland General Corporation Law ("MGCL") primarily with the purpose of acquiring single tenant properties that are essential to the tenant's business. We qualified as a real estate investment trust ("REIT") commencing with the year ended December 31, 2010. Our year end is December 31. As of December 14, 2018, we are a self-managed REIT. We have 37 employees.
Our operating partnership, Griffin Capital Essential Asset Operating Partnership, L.P. (our "Operating Partnership"), was formed on August 29, 2008. Our Operating Partnership owns, directly or indirectly, all of the properties that we have acquired. Our advisor, Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the "Advisor"), purchased an initial 99% limited partnership interest in the Operating Partnership for $0.2 million, and we contributed the initial one thousand dollars capital contribution, received from our Advisor to the Operating Partnership in exchange for a 1% general partner interest.
From 2009 to 2014, we offered shares of common stock, pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which also included shares for sale pursuant to our distribution reinvestment plan ("DRP"). We issued 126,592,885 total shares of our common stock for gross proceeds of approximately $1.3 billion, pursuant to the Private Offering and Public Offerings. We also issued approximately 41,800,000 shares of our common stock upon the consummation of the merger of Signature Office REIT, Inc. in June 2015.
On May 7, 2014, we filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “2014 DRP Offering”). On September 22, 2015, we filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering”) and terminated the 2014 DRP Offering. On June 9, 2017, we filed a Registration Statement on Form S-3 with the SEC for the registration of 10 million shares for sale pursuant to the DRP (the "2017 DRP Offering," and together with the 2014 DRP Offering and 2015 DRP Offering, the "DRP Offerings"). The 2017 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. In connection with the proposed Mergers (defined below), our board of directors (the "Board") approved the temporary suspension of the DRP effective as of December 30, 2018. All December distributions were paid in cash only. On February 15, 2019, our Board determined it was in the best interests to reinstate the DRP effective with the February distribution to be paid on or around March 1, 2019. 
In connection with our DRP Offerings, we had issued 22,449,998 shares of our common stock for gross proceeds of approximately $229.8 million through December 31, 2018.
We have a share redemption program ("SRP") that enables our stockholders to sell their stock to us in limited circumstances. Since inception and through December 31, 2018, we had redeemed 24,545,498 shares of common stock for approximately $241.2 million at a weighted average price per share of $9.83 pursuant to the SRP. In connection with the proposed Mergers, our Board approved the temporary suspension of the SRP, effective as of January 19, 2019. The SRP will remain suspended until such time, if any, as our Board may approve the resumption of the SRP.
On October 24, 2018, our Board approved an estimated value per share of our common stock of $10.05 based on the estimated value of our assets less the estimated value of our liabilities, or net asset value ("NAV"), divided by the number of shares outstanding on a fully diluted basis, calculated as of June 30, 2018. We are providing this estimated value per share to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority ("FINRA") rules with respect to customer account statements. This valuation was performed in accordance with the methodology provided in Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association ("IPA") in April 2013, in addition to guidance from the SEC. Please see our Current Report on Form 8-K filed with the SEC on October 26, 2018 for a description of the methodologies and assumptions used to determine, and the limitations of, the estimated value per share and Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information regarding the determination of our NAV.
As of December 31, 2018, we had issued 190,830,519 shares of common stock. We have received aggregate gross offering proceeds of approximately $1.5 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings. There were 166,285,021 shares outstanding as of December 31, 2018, including shares issued pursuant to the DRP, less shares redeemed pursuant to the SRP. As of December 31, 2018 and 2017, we had issued approximately $252.8

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million and $211.9 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions paid of approximately $241.2 million and $157.7 million, respectively. Since inception and through December 31, 2018, we had redeemed 24,545,498 shares of common stock for approximately $241.2 million pursuant to the SRP.
On December 14, 2018, we and our Operating Partnership entered into a series of transactions, agreements, and amendments to our existing agreements and arrangements (such agreements and amendments collectively referred to as the “Self Administration Transaction”), with Griffin Capital Company, LLC ("GCC") and Griffin Capital, LLC ("GC LLC"), pursuant to which GCC and GC LLC contributed to our Operating Partnership all of the membership interests in Griffin Capital Real Estate Company, LLC (“GRECO”) and certain assets related to the business of GRECO, in exchange for 20,438,684 units of limited partnership interests in our Operating Partnership, plus additional cash and limited partnership units as earn-out consideration. As a result of the Self Administration Transaction, we are now self-managed and acquired the advisory, asset management and property management business of GRECO (which includes such arrangements for both us and Griffin Capital Essential Asset REIT II, Inc. ("GCEAR II"). GRECO is now the sponsor for GCEAR II. In connection with the Self Administration Transaction, 37 employees of GCC became direct employees of GRECO.

Pending Merger with GCEAR II
After completion of the Self Administration Transaction, on December 14, 2018, we, our Operating Partnership, GCEAR II, Griffin Capital Essential Asset Operating Partnership II, L.P. (the “GCEAR II Operating Partnership”) and Globe Merger Sub, LLC, a wholly owned subsidiary of GCEAR II (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).

Subject to the terms and conditions of the Merger Agreement, (i) we will merge with and into Merger Sub, with Merger Sub surviving as a direct, wholly owned subsidiary of GCEAR II (the “Company Merger”) and (ii) the GCEAR II Operating Partnership will merge with and into our Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”), with our Operating Partnership surviving the Partnership Merger. At such time, (x) in accordance with the applicable provisions of the MGCL, the separate existence of the Company shall cease and (y) in accordance with the Delaware Revised Uniform Limited Partnership Act, the separate existence of the GCEAR II Operating Partnership shall cease.

At the effective time of the Company Merger, each issued and outstanding share of our common stock (or fraction thereof), $0.001 par value per share (the “Common Stock”), will be converted into the right to receive 1.04807 shares of newly created Class E common stock of GCEAR II, $0.001 par value per share (the “GCEAR II Class E Common Stock”), and each issued and outstanding share of our Series A cumulative perpetual convertible preferred stock (the “Series A Preferred Shares”) will be converted into the right to receive one share of newly created Series A cumulative perpetual convertible preferred stock of GCEAR II.

At the effective time of the Partnership Merger, each Operating Partnership unit (“OP Units”) outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive 1.04807 Class E OP Units in the surviving partnership and each GCEAR II Operating Partnership unit outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive one OP Unit of like class in the surviving partnership. The special limited partnership interest of the GCEAR II Operating Partnership will be automatically redeemed, canceled and retired as described in the Merger Agreement.

The combined company (the “Combined Company”) following the Mergers will temporarily retain the name “Griffin Capital Essential Asset REIT II, Inc.” The Company Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").

The Combined Company will have a total capitalization of approximately $4.72 billion, and will own 101 properties in 25 states, consisting of approximately 27.2 million square feet. On a pro forma basis, the Combined Company portfolio will be 96.8% occupied, with a remaining weighted average lease term of 7.3 years. Approximately 65.3% of the Combined Company portfolio net rent, on a pro forma basis, will come from properties leased to tenants and/or guarantors who have, or whose non-guarantor parent companies have, investment grade or what management believes are generally equivalent ratings. In addition, no tenant will represent more than 4.0% of the net rents of the Combined Company, on a pro forma basis, with the top ten tenants comprising a collective 27.8% of the net rents of the Combined Company.



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The Merger Agreement provides certain termination rights for us and GCEAR II. In connection with the termination of the Merger Agreement, under certain specified circumstances, GCEAR II may be required to pay us a termination fee of $52.2 million and we may be required to pay GCEAR II a termination fee of $52.2 million.

Upon completion of the Company Merger, we estimate that our continuing stockholders will own approximately 69% of the issued and outstanding common stock of the Combined Company on a fully diluted basis, and GCEAR II stockholders will own approximately 31% of the issued and outstanding common stock of the Combined Company on a fully diluted basis.

The foregoing descriptions of the Merger Agreement and the Mergers are not complete and are subject to and qualified in their entirety by reference to the Merger Agreement, a copy of which was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 20, 2018. There is no guarantee that the Mergers will be consummated.

Primary Investment Objectives
Our primary investment objectives are to invest in income-producing real property in a manner that allows us to qualify as a REIT for federal income tax purposes, provide regular cash distributions to our stockholders, preserve and protect stockholders' invested capital, and achieve appreciation in the value of our properties over the long term. We cannot assure our stockholders that we will attain these primary investment objectives. The determination by our Board that it is no longer in our best interests to continue to be qualified as a REIT shall require the concurrence of two-thirds of the Board.
Exchange Listing and Other Liquidity Events
Our Board will determine when, and if, to apply to have our shares of common stock listed for trading on a national securities exchange, subject to satisfying then-existing applicable listing requirements. Our Board has begun to consider the appropriate timing for a liquidity event and has begun to weigh various strategic considerations. Subject to market conditions and the sole discretion of our Board, we may seek one or more of the following liquidity events:
list our shares on a national securities exchange;
merge, reorganize or otherwise transfer us or our assets to another entity with listed securities;
commence the sale of all of our properties and liquidate us; or
otherwise create a liquidity event for our stockholders.
However, we cannot assure our stockholders that we will achieve one or more of the above-described liquidity events. Our Board has the sole discretion to forego a liquidity event and continue operations if it deems such continuation to be in the best interests of our stockholders. Even if we accomplish one or more of these liquidity events, we cannot guarantee that a public market will develop for the securities listed or that such securities will trade at a price higher than what stockholders paid for their shares.
As discussed above, we have entered into the Merger Agreement. Please see "Overview--Pending Merger with GCEAR II" in this Item 1 for more details.
Investment Strategy
We operate a portfolio of predominantly single tenant business essential properties throughout the United States diversified by corporate credit, physical geography, product type and lease duration. Although we have no current intention to do so, we may also invest in single tenant business essential properties outside the United States. We acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
essential to the business operations of the tenant;
located in primary, secondary, and certain select tertiary metropolitan statistical areas, or MSAs;
leased to tenants with stable and/or improving credit quality; and
subject to long-term leases with defined rental rate increases or with short-term leases with high-probability renewal and potential for increasing rent.
Our investment objectives and policies may be amended or changed at any time by our Board. Although we have no plans at this time to change any of our investment objectives, our Board may change any and all such investment objectives, including our focus on single tenant business essential properties, if they believe such changes are in the best interests of our

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stockholders. In addition, we may invest in real estate properties other than single tenant business essential properties if the Board deems such investments to be in the best interests of our stockholders.
General Acquisition and Investment Policies
We seek to make investments that satisfy the primary investment objective of providing regular cash distributions to our stockholders. However, because a significant factor in the valuation of income-producing real property is its potential for future appreciation, some properties we acquire may have the potential both for growth in value and for providing regular cash distributions to our stockholders.
In selecting a potential property for acquisition, we consider a number of factors, including, but not limited to, the following:
tenant creditworthiness;
whether a property is essential to the business operations of the tenant;
lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options;
projected demand in the area;
a property’s geographic location and type;
proposed purchase price, terms and conditions;
historical financial performance;
projected net cash flow yield and internal rates of return;
a property’s physical location, visibility, curb appeal and access;
construction quality and condition;
potential for capital appreciation;
demographics of the area, neighborhood growth patterns, economic conditions, and local market conditions;
potential capital and tenant improvements and reserves required to maintain the property;
prospects for liquidity through sale, financing or refinancing of the property;
the potential for the construction of new properties in the area;
treatment under applicable federal, state and local tax and other laws and regulations;
evaluation of title and obtaining satisfactory title insurance; and
evaluation of any reasonable ascertainable risks such as environmental contamination.

There is no limitation on the number, size, or type of properties that we may acquire, and such acquisitions will depend upon real estate market conditions and other circumstances existing at the time of acquisition and the funds available to us for the purchase of real estate. In determining whether to purchase a particular property, we may obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is ultimately purchased.
Description of Leases
We primarily acquire single tenant properties with existing net leases. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into “net” leases. “Net” leases mean leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance, common area maintenance charges, property services and building repairs related to the property, in addition to the lease payments. There are various forms of net leases, typically classified as triple-net or double-net. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term and/or that require the tenant to pay rent based upon a number of factors. Triple-net leases typically require the tenant to pay all costs associated with a property in addition to the base rent and percentage rent, if any. However, often times in triple-net leases certain capital expenditure costs are not paid for by the tenants (such as roof and structure costs). Absolute triple-net leases are those that require tenants to pay for all the costs in a triple-net lease as well as all the capital costs associated with a property.
Typically, our tenants have lease terms of seven to 15 years at the time of the property acquisition. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is located in a desirable location, is difficult to replace, or has other significant favorable real estate attributes.

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Our Borrowing Strategy and Policies
We may incur our indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties, and publicly- or privately-placed debt instruments or financing from institutional investors or other lenders. We may obtain a credit facility or separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages or other interests in our properties or underlying owner entities. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to pay distributions, to fund redemptions of our shares, or to provide working capital.
There is no limitation on the amount we can borrow for the purchase of any property. At this time, we intend to maintain a leverage ratio of less than 50% to total asset value (as defined in our credit agreement). As of December 31, 2018, our leverage ratio (which we define as debt to total acquisition price) was approximately 45.4%
Acquisition Structure
Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in joint ventures or similar entities that own and operate real estate.
We will make acquisitions of our real estate investments directly through our Operating Partnership, or indirectly through limited liability companies or limited partnerships, or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with other owners of properties, our affiliates, or other persons.
Insurance on Properties
Generally, our leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. As a precautionary measure, we may obtain, to the extent available, contingent liability and property insurance, as well as loss of rents insurance that covers one or more years of annual rent in the event of a rental loss. In addition, we maintain a pollution insurance policy for all of our properties to insure against the risk of environmental contaminants. However, we may decide not to obtain any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high, even in instances where it may otherwise be available.
Tenants are required to provide proof of insurance by furnishing a certificate of insurance to us on an annual basis. The insurance certificates are tracked and reviewed for compliance by our property managers.
Conditions to Closing Acquisitions
We obtain at least a Phase I environmental assessment and history for each property we acquire. In addition, we generally condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or other independent professionals, including, but not limited to, where appropriate:
property surveys and site audits;
appraisal reports;
lease agreements;
building plans and specifications, if available;
soil reports, seismic studies, flood zone studies, if available;
licenses, permits, maps and governmental approvals;
tenant estoppel certificates;
tenant financial statements and information, as permitted;
historical financial statements and tax statement summaries of the properties;
proof of marketable title, subject to such liens and encumbrances as are acceptable to us; and
liability and title insurance policies.
Joint Venture Investments
We may acquire properties in joint ventures, some of which may be entered into with affiliates of our Advisor. We may also enter into joint ventures, general partnerships, co-tenancies and other participations, such as Delaware Statutory Trusts (DSTs), with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our

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portfolio of properties in terms of geographic region or property type. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, we will evaluate the real property which such joint venture owns or is being formed to own under the same criteria that we use to evaluate other real estate investments.
To the extent possible, we will attempt to obtain a right of first refusal or option to buy the property held by the joint venture and allow such venture partners to exchange their interest for our Operating Partnership's units or to sell their interest to us in its entirety. In the event that the venture partner were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the venture partner’s interest in the property held by the joint venture. Entering into joint ventures with affiliates of our Advisor will result in certain conflicts of interest.
Construction and Development Activities
From time to time, we may construct and develop real estate assets or render services in connection with these activities. We may be able to reduce overall purchase costs by constructing and developing a property versus purchasing a completed property. Developing and constructing properties would, however, expose us to risks such as cost overruns, carrying costs of projects under construction or development, availability and costs of materials and labor, weather conditions, and government regulation. To comply with the applicable requirements under federal income tax law, we intend to limit our construction and development activities to performing oversight and review functions, including reviewing the construction design proposals, negotiating and contracting for feasibility studies and supervising compliance with local, state or federal laws and regulations, negotiating contracts, overseeing construction, and obtaining financing. In addition, we may use taxable REIT subsidiaries or certain independent contractors to carry out these oversight and review functions. We will retain independent contractors to perform the actual construction work.
Government Regulations
The properties we acquire are subject to various federal, state and local regulatory requirements, including the Americans with Disabilities Act, environmental regulations, and other laws, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We acquire properties that are in material compliance with all such regulatory requirements. However, we cannot assure stockholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
Disposition Policies
We generally intend to hold each property we acquire for an extended period. However, we may sell a property at any time if, in our judgment, the sale of the property is in the best interests of our stockholders. The determination of whether a particular property should be sold or otherwise disposed of will generally be made after consideration of relevant factors, including prevailing economic conditions, other investment opportunities and considerations specific to the condition, value and financial performance of the property. To date we have sold nine properties, including two during the year ended December 31, 2018, for an average hold time of 4.1 years.

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Investments in Mortgages
While we intend to emphasize equity real estate investments and, hence, operate as what is generally referred to as an “equity REIT,” as opposed to a “mortgage REIT,” we may invest in first or second mortgage loans, mezzanine loans secured by an interest in the entity owning the real estate or other similar real estate loans consistent with our REIT status. We may make such loans to developers in connection with construction and redevelopment of real estate properties. Such mortgages may or may not be insured or guaranteed by the Federal Housing Administration, the Veterans Benefits Administration or another third party. We may also invest in participating or convertible mortgages if our directors conclude that we and our stockholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation.
Affiliate Transaction Policy
Our Board has established a nominating and corporate governance committee, which reviews and approves all matters the board believes may involve a conflict of interest. This committee is composed solely of independent directors. This committee of our Board approves all transactions between us and our Advisor and its affiliates.
Investment Company Act and Certain Other Policies
We intend to operate in such a manner that we will not be subject to regulation under the Investment Company Act of 1940, as amended     (the "1940 Act"). We will continually review our investment activity to attempt to ensure that we do not come within the application of the 1940 Act. Among other things, we will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an “investment company” under the 1940 Act. If at any time the character of our investments could cause us to be deemed as an investment company for purposes of the 1940 Act, we will take all necessary actions to attempt to ensure that we are not deemed to be an “investment company.” In addition, we do not intend to underwrite securities of other issuers or actively trade in loans or other investments.
Subject to the restrictions we must follow in order to qualify to be taxed as a REIT, we may make investments other than as previously described, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our shares of common stock or any of our other securities. We have no present intention of repurchasing any of our shares of common stock except pursuant to our SRP, and we would only take such action in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Code.
Employees
As of December 31, 2018, we employed 37 people.
Competition
As we purchase properties for our portfolio, we are in competition with other potential buyers for the same properties, and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we intend to acquire properties subject to existing leases, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Industry Segments
We internally evaluate all of our properties and interests therein as one reportable segment. 
ITEM 1A. RISK FACTORS
Below are risks and uncertainties that could adversely affect our operations that we believe are material to stockholders. Other risks and uncertainties may exist that we do not consider material based on the information currently available to us at this time.

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Risks Related to an Investment in Griffin Capital Essential Asset REIT, Inc.
We have paid a portion of our distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders’ overall return may be reduced.
In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. From inception and through December 31, 2018, we funded 94% of our cash distributions from cash flows provided by operating activities and 6% from offering proceeds. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Distributions and Our Distribution Policy below. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties, which may reduce our stockholders’ overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock may be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain.
We may be unable to pay or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions will be based principally on cash available from our operations. The amount of cash available for distribution will be affected by many factors, such as our ability to secure properties with leases or originate leases that generate rents to exceed our operating expense levels, as well as many other variables. Actual cash available for distribution may vary substantially from estimates. We cannot assure our stockholders that we will be able to pay or maintain distributions, nor can we give any assurance that rents from the properties will increase, or that future acquisitions of real properties will increase our cash available for distribution to stockholders. Our actual results may differ significantly from the assumptions used by our Board in establishing the distribution rate to stockholders.
Our Series A Preferred Shares rank senior to our common stock and therefore, any cash we have to pay distributions will be used to pay distributions to the holders of Series A Preferred Shares first, which could have a negative impact on our ability to pay distributions to our common stockholders.

Our Series A Preferred Shares rank senior to all common stock, and therefore, the rights of holders of our Series A Preferred Shares to distributions will be senior to distributions to our common stockholders. Furthermore, distributions on our Series A Preferred Shares are cumulative and are declared and payable quarterly. We are obligated to pay the holders of our Series A Preferred Shares their current distributions and any accumulated and unpaid distributions prior to any distributions being paid to our common stockholders and, therefore, any cash available for distribution will be used first to pay distributions to the holders of our Series A Preferred Shares. The Series A Preferred Shares also have a liquidation preference in the event of our involuntary liquidation, dissolution or winding up of our affairs (a “liquidation”) which could negatively affect any payments to our common stockholders in the event of a liquidation. In addition, our right to redeem the Series A Preferred Shares could have a negative effect on our ability to operate profitably and our ability to pay distributions to our common stockholders.

There is currently no public trading market for our shares and there may never be one; therefore, it will be difficult for our stockholders to sell their shares including under our SRP, if and when it is reinstated.
There is currently no public market for our shares and there may never be one. Our charter also prohibits the ownership by any one individual of more than 9.8% of our stock, unless waived by our Board, which may inhibit large investors from desiring to purchase our stockholders’ shares. Our SRP is temporarily suspended, but if and when it is reinstated, stockholders should be aware that it includes numerous restrictions that would limit their ability to sell their shares to us, including a requirement that the shares have been held for at least one year. Redemption of shares, when requested, will generally be made quarterly. During any calendar year, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the prior calendar year and redemptions will be funded solely from proceeds from our DRP. During the quarter ended September 30, 2018, we reached the annual limitation and were unable to redeem shares for the remainder of the calendar year. Our Board could choose to amend, suspend or terminate our SRP upon 30 days’ notice. Therefore, it may be difficult for our stockholders to sell their shares promptly or at all. If our stockholders are able to sell their shares, they will likely have to sell them at a substantial discount to the price they paid for the shares. It also is likely that their shares would not be accepted as the primary collateral for a loan. Our stockholders should purchase the shares only as a long-term investment because of the illiquid nature of the shares.
In determining net asset value, or NAV, per share, we relied upon a valuation of our properties as of June 30, 2018. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable

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value upon the sale of such properties, therefore our new asset value per share may not reflect the amount that would be realized upon a sale of each of our properties.
For the purposes of calculating our NAV per share, an independent third-party appraiser valued our properties as of June 30, 2018. The valuation methodologies used to value our properties involved certain subjective judgments. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond our control and the control of our independent appraiser. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuations of our properties and our investments in real estate related assets may not correspond to the timely realizable value upon a sale of those assets.
Our NAV per share is based upon subjective judgments, assumptions and opinions, which may or may not turn out to be correct. Therefore, our NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
Our NAV per share was based on an estimate of the value of our properties - consisting principally of illiquid commercial real estate - as of June 30, 2018. The valuation methodologies used by the independent appraiser retained by our nominating and corporate governance committee to estimate the value of our properties as of June 30, 2018 involved subjective judgments, assumptions and opinions, which may or may not turn out to be correct. As a result, our NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
We are newly self-managed.
The Self Administration Transaction was consummated on December 14, 2018, and therefore we are a newly self-managed REIT. We no longer bear the costs of the various fees and expense reimbursements previously paid to our former external Advisor and its affiliates; however, our expenses will include the compensation and benefits of our officers, employees and consultants, as well as overhead previously paid by our former external Advisor and its affiliates. Our employees will provide services historically provided by the external Advisor and its affiliates. We will be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and we will bear the cost of the establishment and maintenance of any employee compensation plans. In addition, we have not previously operated as a self-managed REIT and may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis. If we incur unexpected expenses as a result of our self-management, our results of operations could be lower than they otherwise would have been.

We are subject to conflicts of interest relating to the management of GCEAR II by our officers.

GRECO and our management team serve as the sponsor and advisor of GCEAR II. We and GCEAR II have overlapping investment objectives and investment strategies. As a result, we may be seeking to acquire properties and real estate-related investments at the same time as GCEAR II. We have implemented certain procedures to help manage any perceived or actual conflicts among us and GCEAR II, including adopting an allocation policy to allocate property acquisitions among the two companies. There can be no assurance that these policies will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us. Further, under the GCEAR II advisory agreement, we receive fees for various services, including, but not limited to, the day-to-day management of GCEAR II. The terms of this advisory agreement were not the result of arm’s-length negotiations between independent parties and, as a result, the terms of this agreement may not be as favorable to us as they would have been if we had negotiated these agreements with unaffiliated third parties.

If we lose or are unable to obtain key personnel, our ability to implement our investment objectives could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
Our success depends to a significant degree upon the contributions of our executive officers, including Kevin A. Shields, Michael J. Escalante, Javier F. Bitar, Howard S. Hirsch, Louis K. Sohn and Scott Tausk, each of whom would be difficult to replace. We do not have an employment agreement with Mr. Shields. While we have employment agreements with Messrs. Escalante, Bitar, Hirsch, Sohn and Tausk, we cannot guarantee that all, or any particular one, will remain affiliated with us. If any of our key personnel were to cease their affiliation with our Company, our operating results could suffer. We believe that our future success depends, in large part, upon our ability to hire and retain highly skilled managerial and operational personnel. Competition for such personnel is intense, and we cannot assure stockholders that we will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel or do not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, and the value of a stockholder's investment may decline.

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Impairment of goodwill or other intangible assets resulting from the Self Administration Transaction may adversely affect our financial condition and results of operations.
Potential impairment of goodwill or other intangible assets and other acquired intangibles, resulting from the Self Administration Transaction could adversely affect our financial condition and results of operations. We assess our goodwill and other intangible assets and long-lived assets for impairment at least annually or upon the occurrence of a triggering event, as required by generally accepted accounting principles ("GAAP"). We are required to record an impairment charge if circumstances indicate that the asset carrying values exceed their fair values. Our assessment of goodwill, other intangible assets, or long-lived assets could indicate that an impairment of the carrying value of such assets may have occurred that could result in a material, non-cash write-down of such assets, which could have a material adverse effect on our results of operations and future earnings.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The results of these incidents may include disrupted operations, misstated or unreliable financial data, financial loss, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation, and damage to our tenant and investor relationships. As our reliance on technology increases, so will the risks posed to our information systems, both internal and those we outsource. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.
We disclose funds from operations and adjusted funds from operations, each a non-GAAP financial measure, in communications with investors, including documents filed with the SEC; however, funds from operations and adjusted funds from operations are not equivalent to our net income or loss or cash flow from operations as determined under GAAP, and stockholders should consider GAAP measures to be more relevant to our operating performance.
We use and we disclose to investors, funds from operations (“FFO”) and adjusted funds from operations (“AFFO”), which are non-GAAP financial measures. FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant in evaluating our operating performance and ability to pay distributions. FFO and AFFO and GAAP net income differ because FFO and AFFO exclude gains or losses from sales of property and asset impairment write-downs, and add back depreciation and amortization and adjustments for unconsolidated partnerships and joint ventures. AFFO further adjusts for straight-line rental income, amortization of in-place lease valuation, acquisition-related costs, financed termination fee, net, unrealized gains or losses on derivative instruments and gain or loss from extinguishment of debt.
Because of these differences, FFO and AFFO may not be accurate indicators of our operating performance. In addition, FFO and AFFO are not indicative of cash flow available to fund cash needs and investors should not consider FFO and AFFO as alternatives to cash flows from operations or an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to pay distributions to our stockholders.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. Also, because not all companies calculate FFO and AFFO the same way, comparisons with other companies may not be meaningful.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a judicial forum of their choosing for disputes with us or our directors, officers or employees.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland (or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division) shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to our Company, our directors, our officers or our employees. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of their choosing, which may discourage meritorious claims from being asserted against us and our directors, officers and employees. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely

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affect our business, financial condition or results of operations. We adopted this provision because we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements, and we believe the risk of a court declining to enforce this provision is remote, as the General Assembly of Maryland has specifically amended the MGCL to authorize the adoption of such provisions.

We may have to reimburse the contributors of certain of our properties for tax liabilities when disposing of such properties pursuant to tax protection agreements.
In connection with the contribution of seven properties from certain affiliates of our former sponsor and several other third party investors, we have entered into tax protection agreements with the contributors. These agreements obligate our Operating Partnership to reimburse the contributors for tax liabilities resulting from their recognition of income or gain if we cause our Operating Partnership to take certain actions with respect to the various properties, the result of which causes income or gain to the contributors for a period subsequent to the contribution of such property as specified in the tax protection agreement. As a result, if we sell one of these properties, it could cause our Operating Partnership to provide reimbursements under the tax protection agreements if we do not reinvest the proceeds of the sale pursuant to Section 1031 of the Code or any other tax deferred investment.
Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
In order for us to continue to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To ensure that we do not fail to qualify as a REIT under this test, our charter restricts ownership by one person or entity to no more than 9.8% in value or number, whichever is more restrictive, of any class of our outstanding stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (consisting, in this instance, of actions such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Our charter permits our Board to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our Board to issue up to 900,000,000 shares of capital stock. In addition, our Board, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our Board may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our Board could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (consisting, in this instance, of actions such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price for holders of our common stock. In addition, our board can authorize the issuance of preferred units under our Operating Partnership which may have similar preferential rights as preferred stock. There is no limit on the amount of preferred units our Operating Partnership could issue.
Our Series A Preferred Shares rank junior to our existing and future indebtedness and will rank junior to any class or series of stock we may issue in the future with terms specifically providing that such stock ranks senior to our Series A Preferred Shares with respect to the payment of dividends and the distribution of assets in the event of our liquidation and the interests of the holders of our Series A Preferred Shares could be diluted by the issuance of additional shares of preferred stock and by other transactions.

The payment of amounts due on our Series A Preferred Shares are junior in payment preference to all of our existing and future debt and any securities we may issue in the future that have rights or preferences senior to those of our Series A Preferred Shares. We may issue additional shares of preferred stock in the future which, upon the prior affirmative vote or consent of the holders of at least two-thirds of the Series A Preferred Shares outstanding at the time, are on a parity with or senior to the Series A Preferred Shares with respect to the payment of dividends and the distribution of assets upon liquidation. Additional issuance of preferred securities or other transactions could reduce the pro-rata assets available for distribution upon liquidation and the holders of our Series A Preferred Shares may not receive their full liquidation preference if there are not sufficient assets. In

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addition, issuance of additional preferred securities or other transactions could dilute voting rights of the holders of the Series A Preferred Shares with respect to certain matters that require votes or the consent of such holders.

We may not be able to pay dividends or other distributions on our Series A Preferred Shares.

There can be no guarantee that we will have sufficient cash to pay dividends on the Series A Preferred Shares. Payment of our dividends depends upon our earnings, our financial condition, maintenance of our REIT qualification and other factors as our Board may deem relevant from time to time. We cannot assure the holders of our Series A Preferred Shares that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our Series A Preferred Shares and on our common stock, to pay our indebtedness or to fund our other liquidity needs.

Our Series A Preferred Shares will be subject to interest rate risk.

Dividends payable on the Series A Preferred Shares will be subject to interest rate risk. Because dividends on our Series A Preferred Shares will be predetermined, our costs may increase upon maturity or redemption of the securities. This risk might require us to sell investments at a time when we would otherwise not do so, which could adversely affect our ability to generate cash flow.

We are not afforded the protection of Maryland law relating to business combinations.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
These prohibitions are intended to prevent a change of control by interested stockholders who do not have the support of our Board. Since our charter contains limitations on ownership of 9.8% or more of our common stock, we opted out of the business combinations statute in our charter. Therefore, we will not be afforded the protections of this statute and, accordingly, there is no guarantee that the ownership limitations in our charter would provide the same measure of protection as the business combinations statute and prevent an undesired change of control by an interested stockholder.
Our stockholders’ investment return may be reduced if we are required to register as an investment company under the 1940 Act. If we become an unregistered investment company, we will not be able to continue our business unless and until we register under the 1940 Act.
We do not intend to register as an investment company under the 1940 Act. As of December 31, 2018, we owned 74 properties, and our intended investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to registration under the 1940 Act. In order to maintain an exemption from regulation under the 1940 Act, we must engage primarily in the business of buying real estate. If we are unable to remain fully invested in real estate holdings, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns, which would reduce the cash available for distribution to investors and possibly lower our stockholders’ returns.
To maintain compliance with our 1940 Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forgo opportunities to acquire interests in companies that we would otherwise want to acquire. If we are required to register as an investment company but fail to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

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Our stockholders are bound by the majority vote on matters on which our stockholders are entitled to vote and, therefore, a stockholder’s vote on a particular matter may be superseded by the vote of other stockholders.
Stockholders may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, stockholders will be bound by the majority vote on matters requiring approval of a majority of the stockholders even if they do not vote with the majority on any such matter.
If stockholders do not agree with the decisions of our Board, they only have limited control over changes in our policies and operations and may not be able to change such policies and operations, except as provided for in our charter and under applicable law.
Our Board determines our major policies, including our policies regarding investments, operations, capitalization, financing, growth, REIT qualification and distributions. Our Board may amend or revise these and other policies without a vote of our stockholders. Under the MGCL and our charter, our stockholders have a right to vote only on the following:
the election or removal of directors;
any amendment of our charter, except that our Board may amend our charter without stockholder approval to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, or to classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;
our liquidation or dissolution; and
any merger, consolidation or sale or other disposition of substantially all of our assets.
All other matters are subject to the discretion of our Board. Therefore, our stockholders are limited in their ability to change our policies and operations.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter requires us to indemnify our directors and officers to the maximum extent permitted under Maryland law. Our charter also limits the liability of our directors and officers for monetary damages to the maximum extent permitted under Maryland law. Our directors and certain of our officers also have indemnification agreements with the Company. Further, our charter permits us, with the approval of our Board, to provide indemnification and advancement of expenses to any of our employees or agents. Additionally, the Advisory Agreement requires us to indemnify our Advisor and its affiliates for actions taken by them in good faith and without negligence or misconduct. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents of our Advisor in some cases which would decrease the cash otherwise available for distribution to our stockholders.
Our stockholders’ interest in us will be diluted as we issue additional shares.
Our stockholders will not have preemptive rights to any shares issued by us in the future. Subject to any limitations set forth under Maryland law, our Board may increase the number of authorized shares of stock (currently 900,000,000 shares), increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our Board. Therefore, as we (1) sell additional shares in the future, including those issued pursuant to our DRP Offering, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of restricted common stock or stock options to our independent directors, (5) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our Operating Partnership, or (6) issue preferred units, existing stockholders and investors purchasing shares in our DRP Offering will experience dilution of their equity investment in us. Because the limited partnership interests of our Operating Partnership may, in the discretion of our Board, be exchanged for shares of our common stock, any merger, exchange or conversion between our Operating Partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. As of December 31, 2018, we had 166,285,021 shares of common stock issued and outstanding, and we owned approximately 86% of

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the limited partnership units of the Operating Partnership. GCC and certain of its affiliates owned approximately 12% of the limited partnership units of the Operating Partnership, and the remaining approximately 2% of the limited partnership units were owned by third parties. Because of these and other reasons described in this “Risk Factors” section, stockholders should not expect to be able to own a significant percentage of our shares.
In addition, the net book value per share of our common stock was approximately $6.76 as of December 31, 2018, as compared to our offering price per share pursuant to our DRP Offering of $10.05. Therefore, upon a purchase of our shares in the DRP Offering, stockholders will be immediately diluted based on the net book value. Net book value takes into account a deduction of commissions and/or expenses paid by us, and is calculated to include depreciated tangible assets, deferred financing costs, and amortized intangible assets, which include in-place market leases. Net book value is not an estimate of net asset value, or of the market value or other value of our common stock.

We are uncertain of our sources of debt or equity for funding our future capital needs. If we cannot obtain funding on acceptable terms, our ability to make necessary capital improvements to our properties may be impaired or delayed.
To continue to qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified all sources of debt or equity for future funding, and such sources of funding may not be available to us on favorable terms or at all. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or expand our business. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:
general market conditions;
the market's perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the price per share of our common stock.
If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
Risks Related to Our Pending Mergers
The exchange ratio is fixed and will not be adjusted in the event of any change in the relative values of the shares of GCEAR II common stock or our common stock.
Upon consummation of the Company Merger, each issued and outstanding share of our common stock (or fraction thereof) will be converted into the right to receive 1.04807 shares of newly created GCEAR II Class E common stock, and each issued and outstanding share of our Preferred Shares will be converted into the right to receive one share of newly created GCEAR II Series A cumulative perpetual convertible preferred stock. This exchange ratio is fixed pursuant to the Merger Agreement and will not be adjusted to reflect events or circumstances or other developments of which we or GCEAR II become aware or which occur after the date of the Merger Agreement, or any changes in the relative values of us and GCEAR II including, but not limited to:
changes in the respective businesses, operations, assets, liabilities or prospects of us and GCEAR II;
changes in general market and economic conditions and other factors generally affecting the relative values of our and GCEAR II’s assets;
federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and GCEAR II operate; or
other factors beyond the control of us and GCEAR II, including those described or referred to elsewhere in this “Risk Factors” section.
Any such changes may materially alter or affect the relative values of shares of GCEAR II common stock or our common stock. Therefore, if, between the date of the Merger Agreement and the consummation of the Mergers, the value of shares of our common stock increases or the value of shares of GCEAR II common stock decreases, the Merger Consideration may be less than the fair value of our stockholders’ shares of our common stock.


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Completion of the Mergers is subject to a number of conditions, and if these conditions are not satisfied or waived, the Mergers will not be completed, which could result in the requirement that we or GCEAR II pay certain termination fees or, in certain circumstances, that we or GCEAR II pay expenses to the other party.

The Merger Agreement is subject to many conditions which must be satisfied or waived in order to complete the Mergers. The mutual conditions of the parties include, among others: (i) the approval of the Company Merger by the holders of a majority of the outstanding shares of our common stock; (ii) the approval of the Company Merger by the GCEAR II stockholders; (iii) the absence of any law, order or other legal restraint or prohibition that would prohibit, make illegal, enjoin, or otherwise restrict, prevent, or prohibit the Mergers or any of the transactions contemplated by the Merger Agreement; and (iv) the effectiveness of the registration statement on Form S-4 filed by GCEAR II for purposes of registering the GCEAR II Class E common stock to be issued in connection with the Company Merger. In addition, each party’s obligation to consummate the Company Merger is subject to certain other conditions, including, among others: (w) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (x) the other party’s compliance with its covenants and agreements contained in the Merger Agreement; (y) the absence of any event, change, or occurrence arising during the period from the date of the Merger Agreement until the effective time of the Company Merger that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the other party; and (z) the receipt of an opinion of counsel of each party to the effect that such party has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT and that the Company Merger will qualify as a tax-free reorganization.

There can be no assurance that the conditions to closing of the Mergers will be satisfied or waived or that the Mergers will be completed. Failure to consummate the Mergers may adversely affect our or GCEAR II’s results of operations and business prospects for the following reasons, among others: (i) each of us and GCEAR II will incur certain transaction costs, regardless of whether the proposed Mergers close, which could adversely affect each company’s respective financial condition, results of operations and ability to make distributions to its stockholders; and (ii) the proposed Mergers, whether or not they close, will divert the attention of certain management and other key employees of us, our affiliates and of GCEAR II and its affiliates from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us or GCEAR II, respectively. In addition, we or GCEAR II may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Mergers are not completed by August 31, 2019 and if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, either we or GCEAR II may be required to pay the other party a termination fee of $52.2 million. The Merger Agreement also provides that one party may be required to reimburse the other party’s transaction expenses, not to exceed $5.0 million, if the Merger Agreement is terminated under certain circumstances.

The pendency of the Mergers could adversely affect our business and operations.

Prior to the effective date of the Mergers, some of our tenants, prospective tenants or vendors may delay or defer decisions, which could negatively affect our revenues, earnings, cash flows and expenses, regardless of whether the Mergers are completed. Similarly, our current and prospective employees may experience uncertainty about their future roles with the Combined Company following the Mergers, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Mergers. In addition, due to operating restrictions in the Merger Agreement, subject to certain exclusions, we may be unable during the pendency of the Mergers to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.

The ownership percentage of our common stockholders will be diluted by the Company Merger.

The Company Merger will result in our common stockholders having an ownership stake in GCEAR II following the effective date of the Company Merger that is smaller than their current stake in GCEAR. Following the issuance of shares of GCEAR II Class E common stock to our stockholders pursuant to the Merger Agreement, our stockholders are expected to hold approximately 69% of GCEAR II common stock issued and outstanding immediately after the effective time of the Company Merger, based on the number of shares of GCEAR II common stock, limited partnership units in the GCEAR II Operating Partnership, and shares of our common stock currently outstanding and various assumptions regarding share issuances by GCEAR II prior to the effective time of the Company Merger. Consequently, our common stockholders, as a general matter, may have less influence over the management and policies of GCEAR II after the effective date of the Company Merger than they currently exercise over our management and policies.

The Merger Agreement contains provisions that could discourage a potential competing acquisition proposal or could result in any competing proposal being at a lower price than it might otherwise be.


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The Merger Agreement contains provisions that, subject to limited exceptions necessary to comply with the duties of our directors, restrict our ability to solicit, initiate, knowingly encourage, or knowingly facilitate competing third-party proposals to acquire all, or a significant part, of us. In addition, we generally have an obligation to offer to modify the terms of the proposed Mergers in response to any competing acquisition proposals that may be made before our Board may withdraw or qualify its recommendation. Upon termination of the Merger Agreement in certain circumstances, we may be required to pay a termination fee to GCEAR II, and in certain other circumstances, we may be required to pay GCEAR II’s transaction expenses.

These provisions could discourage a potential competing acquirer that might have an interest in acquiring all, or a significant part, of us from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value imputed to the exchange ratio proposed to be received or realized in the Mergers, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

The Merger Agreement includes restrictions on our ability to make excess distributions to our stockholders, even if we would otherwise have net income and net cash available to make such distributions.

The Merger Agreement generally prohibits us from making distributions to our stockholders in excess of $0.694 per share of our common stock (determined on an annual basis), unless we obtain the prior written consent of GCEAR II. While we and GCEAR II have generally agreed to use our reasonable best efforts to close the Mergers in an expeditious manner, factors could cause the delay of the closing, which include obtaining the approval of the Company Merger from the common stockholders of us and GCEAR II. Therefore, even if we have available net income or net cash to make distributions to our stockholders and satisfy any other conditions to make such distributions, the terms of the Merger Agreement could prohibit such action.

The shares of GCEAR II common stock to be received by our common stockholders as a result of the Mergers will have rights different from shares of our common stock.

Upon completion of the Company Merger, the rights of our former common stockholders who become GCEAR II common stockholders will be governed by the charter and bylaws of GCEAR II and the MGCL. The rights associated with our common stock are different from the rights associated with GCEAR II common stock.

The Company Merger and the other transactions contemplated by the Merger Agreement are subject to approval by common stockholders of us and GCEAR II.

In order for the Company Merger to be completed, our stockholders must approve the Company Merger and the other transactions contemplated by the Merger Agreement, which requires the affirmative vote of a majority of all the votes entitled to be cast on such proposal at our annual meeting. Pursuant to the Merger Agreement, as a condition to completing the Company Merger, GCEAR II stockholders must also approve the Company Merger and the other transactions contemplated by the Merger Agreement, which requires the affirmative vote of a majority of all the votes cast on such proposal at the GCEAR II annual meeting. If these required votes are not obtained, the Company Merger may not be consummated.

The Merger Agreement contains provisions that grant our Board or GCEAR II's board of directors the ability to change its recommendation regarding the Mergers in certain circumstances based on the exercise of our or GCEAR II's directors’ duties.

We may change our recommendation regarding the Mergers, subject to the terms of the Merger Agreement, in response to a material change in circumstances or development that was not known to our Board prior to the execution of the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which change in circumstances or development, or any material consequence thereof, becomes known to our Board prior to the effective time of the Mergers if our board determines in good faith, after consultation with its outside legal counsel, that failure to change its recommendation with respect to the Mergers would be inconsistent with our directors’ duties under applicable law.

In addition, GCEAR II may change its recommendation regarding the Mergers, subject to the terms of the Merger Agreement, in response to a material change in circumstances or development that was not known to GCEAR II's board or directors prior to the execution of the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which change in circumstances or development, or any material consequence thereof, becomes known to the GCEAR II board of directors prior to the effective time of the Mergers if the GCEAR II board of directors determines in good faith, after consultation with its outside legal counsel, that failure to change its recommendation with respect to the Mergers would be inconsistent with the GCEAR II directors’ duties under applicable law.


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There may be unexpected delays in the consummation of the Mergers.

The Mergers are expected to close during the first half of 2019 assuming that all of the conditions in the Merger Agreement are satisfied or waived. The Merger Agreement provides that either we or GCEAR II may terminate the Merger Agreement if the Mergers have not occurred by August 31, 2019. Certain events may delay the consummation of the Mergers. Some of the events that could delay the consummation of the Mergers include difficulties in obtaining the approval of our and GCEAR II's stockholders, or satisfying the other closing conditions to which the Mergers are subject.

Risks Related to the Combined Company Following Consummation of the Proposed Mergers
    
The future results of the Combined Company will suffer if the Combined Company does not effectively manage its expanded operations following the Mergers.

Following the Mergers, the Combined Company expects to continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. The future success of the Combined Company will depend, in part, upon the ability of the Combined Company to manage its expansion opportunities, which may pose substantial challenges for the Combined Company to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that the Combined Company’s expansion or acquisition opportunities will be successful, or that the Combined Company will realize its expected operating efficiencies, cost savings, revenue enhancements, or other benefits.

The Combined Company will be newly self-managed.

The Self Administration Transaction was consummated on December 14, 2018, and assuming the Mergers are consummated, the Combined Company will be a self-managed REIT. The Combined Company will no longer bear the costs of the various fees and expense reimbursements previously paid to the former external advisors of us and GCEAR II and their affiliates; however, the Combined Company’s expenses will include the compensation and benefits of the Combined Company’s officers, employees and consultants, as well as overhead previously paid by the former external advisors of us and GCEAR II and their affiliates. The Combined Company’s employees will provide services historically provided by the external advisors and their affiliates. The Combined Company will be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and the Combined Company will bear the cost of the establishment and maintenance of any employee compensation plans. In addition, the Combined Company has not previously operated as a self-managed REIT and may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis. If the Combined Company incurs unexpected expenses as a result of its self-management, its results of operations could be lower than they otherwise would have been.

The Combined Company may need to incur additional indebtedness in the future.

In connection with executing the Combined Company’s business strategies following the Mergers, the Combined Company expects to evaluate the possibility of acquiring additional properties and making strategic investments, and the Combined Company may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness could have material adverse consequences for the Combined Company, including: (i) hindering the Combined Company’s ability to adjust to changing market, industry or economic conditions; (ii) limiting the Combined Company’s ability to access the capital markets to refinance maturing debt or to fund acquisitions or emerging businesses; (iii) limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses; (iv) making the Combined Company more vulnerable to economic or industry downturns, including interest rate increases; and (v) placing the Combined Company at a competitive disadvantage compared to less leveraged competitors.

Following the consummation of the Mergers, the Combined Company will assume certain potential liabilities relating to us.

Following the consummation of the Mergers, the Combined Company will have assumed certain potential liabilities relating to us. These liabilities could have a material adverse effect on the Combined Company’s business to the extent the Combined Company has not identified such liabilities or has underestimated the amount of such liabilities.

If and when the Combined Company has a potential liquidity event in the future (such as a merger, listing or sale of assets) (a “Strategic Transaction”), the market value ascribed to the shares of common stock of the Combined Company

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upon the Strategic Transaction may be significantly lower than the estimated value per share of us and GCEAR II considered by our respective board of directors in approving and recommending the Mergers.

In approving and recommending the Mergers, the GCEAR II board of directors, the GCEAR II special committee, our Board, and our special committee considered the most recent estimated value per share of GCEAR II and us as determined by our respective board of directors with the assistance of our respective third-party valuation experts. In the event that the Combined Company completes a Strategic Transaction after consummation of the Mergers, such as a listing of its shares on a national securities exchange, a merger in which stockholders of the Combined Company receive securities that are listed on a national securities exchange, or a sale of the Combined Company for cash, the market value of the shares of the Combined Company upon consummation of such Strategic Transaction may be significantly lower than the current estimated values considered by the GCEAR II board of directors, the GCEAR II special committee, our board of directors and our special committee and the estimated value per share of GCEAR II that may be reflected on the account statements of stockholders of the Combined Company after consummation of the Mergers. For example, if the shares of the Combined Company are listed on a national securities exchange at some point after the consummation of the Mergers, the trading price of the shares may be significantly lower than the current GCEAR II estimated value per share of $9.62. There can be no assurance, however, that any such Strategic Transaction will occur.

Risks Related to Investments in Single Tenant Real Estate
Many of our properties depend upon a single tenant for all or a majority of their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of a single tenant.
Most of our properties are occupied by only one tenant or will derive a majority of their rental income from one tenant and, therefore, the success of those properties is materially dependent on the financial stability of such tenants. A tenant at one or more of our properties may be negatively affected by an economic slowdown. Lease payment defaults by tenants, including those caused by an economic downturn, could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us and the potential resulting vacancy would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated or an existing tenant elects not to renew a lease upon its expiration, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration could have an adverse effect on our financial condition and our ability to pay distributions at our current level.
A significant portion of our leases are due to expire around the same period of time, which may (i) cause a loss in the value of our stockholders’ investment until the affected properties are re-leased, (ii) increase our exposure to downturns in the real estate market during the time that we are trying to re-lease such space and (iii) increase our capital expenditure requirements during the releasing period (dollars in thousands unless otherwise noted).
Year of Lease Expiration (1)
 
Net Rent
(unaudited) (2)
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Net Rent
2019
 
$
9,880

 
10

 
2,218,400

 
4.7
%
2020
 
23,318


11

 
1,602,300

 
11.0

2021
 
15,123

(3) 
8

 
1,470,300

 
7.1

2022
 
11,207

 
5

 
648,300

 
5.3

2023
 
8,886

(3) 
5

 
504,200

 
4.2

2024
 
32,689

 
11

 
3,252,600

 
15.4

>2025
 
110,712

 
40

 
9,472,800

 
52.3

VACANT
 

 

 
697,100

 

Total
 
$
211,815

 
90

 
19,866,000

 
100.0
%
(1)
Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
(2)
Net rent is based on (a) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses or the property is self-managed by the tenant and the tenant is responsible for all, or substantially all, of the operating expenses; or (b) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to December 31, 2018 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.

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(3)
Included in the net rent amount is approximately 52,900 square feet related to a lease expiring in 2021 with the remaining square footage expiring in 2023. We included the lessee in the number of lessees in 2021.
We may experience similar concentrations of lease expiration dates in the future. As the expiration date of a lease for a single-tenant building approaches, the value of the property generally declines because of the risk that the building may not be re-leased upon expiration of the existing lease or may be re-leased on terms less favorable than those of the expiring leases. Therefore, if we were to list or liquidate our portfolio prior to the favorable re-leasing of the space, our stockholders may suffer a loss on their investment. Our stockholders may also suffer a loss (and a reduction in distributions) after the expiration of the lease terms if we are not able to re-lease such space on terms similar to or more favorable than the terms of the expiring lease. These expiring leases, therefore, increase our risk to real estate downturns during and approaching these periods of concentrated lease expirations. In addition, we may have to spend significant capital in order to ready the space for new tenants. To meet our need for cash at this time, we may have to increase borrowings or reduce our distributions, or both.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.
If a sale-leaseback transaction is recharacterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
Net leases may not result in fair market lease rates over time.
A large portion of our rental income is derived from net leases. Net leases are typically characterized by (1) longer lease terms; and (2) fixed rental rate increases during the primary term of the lease, and, thus, there is an increased risk that these contractual lease terms will fail to result in fair market rental rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.

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Our real estate investments may include special-use single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.
We have investments in commercial and industrial properties, which may include manufacturing facilities and special-use single tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed. These and other limitations may affect our ability to sell or re-lease properties and adversely affect returns to our stockholders.
A high concentration of our properties in a particular geographic area, or that have tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
In the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio. As of December 31, 2018, approximately 12.6%, 11.0%, and 9.3% of our net rents for the 12-month period subsequent to December 31, 2018 was concentrated in the states of Texas, California, and Georgia, respectively. Additionally, as of December 31, 2018, approximately 14.9%, 11.3% and 10.4% of our net rents for the 12-month period subsequent to December 31, 2018 was concentrated in the Capital Goods, Telecommunication Services, and Insurance industries, respectively.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws;
changes in property tax assessments and insurance costs; and
increases in interest rates and tight debt and equity supply.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We may obtain only limited warranties when we purchase a property.
The seller of a property will often sell such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, certain sellers of real estate are single purpose entities without significant other assets. The purchase of properties with limited warranties or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders at our current level.

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The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our properties for investment, rather than for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to dispose of properties promptly, or on favorable terms, in response to economic or other market conditions, and this may adversely impact our ability to make distributions to our stockholders at our current level.
In addition, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements.
In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would also restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such properties, which may lead to a decrease in the value of our assets.
We may be purchasing our properties at a time when capitalization rates are at historically low levels and purchase prices are high. Therefore, the value of our properties may not increase over time, which may restrict our ability to sell our properties, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the properties.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. Such provisions are typically provided for by the Code or the terms of the agreement underlying a loan. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distribution to our stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Any mortgage debt that we place on our properties may also impose prepayment penalties upon the sale of the mortgaged property. If a lender invokes these penalties upon the sale of a property or prepayment of a mortgage on a property, the cost to us to sell the property could increase substantially.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in our stockholders’ best interests and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in our stockholders’ best interests.
Adverse economic conditions may negatively affect our returns and profitability.
The following market and economic challenges may adversely affect our operating results:
poor economic times may result in customer defaults under leases or bankruptcy;
re-leasing may require reduced rental rates under the new leases; and
increased insurance premiums, resulting in part from the increased risk of terrorism and natural disasters, may reduce funds available for distribution.

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We are susceptible to the effects of adverse macro-economic events that can result in higher unemployment, shrinking demand for products, large-scale business failures and tight credit markets. Because our portfolio primarily consists of single-tenant commercial and industrial properties, we are subject to risks inherent in investments in single tenant properties in which we rely on the payment of rent from an individual tenant, and our results of operations are sensitive to changes in overall economic conditions that impact the tenant's business and on-going cash flow that can cause the tenant to cease making rental payments. A continuation of, or slow recovery from, ongoing adverse domestic and foreign economic conditions, such as employment levels, business conditions, interest rates, tax rates, and fuel and energy costs, could continue to negatively impact a tenant's business resulting in insufficient cash flow to continue as a going-concern and ultimately the vacating of the occupied property. Such circumstances will have a direct impact on our cash flow from operations and cause us to incur costs, such as on-going maintenance during vacancy and leasing costs, that could have an impact on our ability to continue the payment of distributions to our stockholders.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. In addition, we may decide not to obtain any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high even in instances where it may otherwise be available. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure our stockholders that we will have adequate coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
We are subject to risks from natural disasters such as earthquakes and severe weather conditions.
Our properties are located in areas that may be subject to natural disasters, such as earthquakes, and severe weather conditions. Natural disasters and severe weather conditions may result in significant damage to our properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have a geographic concentration of exposures, a single catastrophe (such as an earthquake, especially in California or Washington) affecting a region may have a significant negative effect on our financial condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next, and our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather conditions.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for distribution.
All real property we acquire, and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health, safety and fire. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.

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Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions to our stockholders and may reduce the value of our stockholders’ investment.
Further, we may not obtain an independent third party environmental assessment for every property we acquire. In addition, we cannot assure our stockholders that any such assessment that we do obtain will reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot assure our stockholders that our business, assets, results of operations, liquidity or financial condition will not be adversely affected by these laws, which may adversely affect cash available for distribution, and the amount of distributions to our stockholders.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distribution.
Our properties are subject to the Americans with Disabilities Act of 1990, or ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party to ensure compliance with the ADA. However, we cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for ADA compliance may affect cash available for distribution and the amount of distributions to our stockholders.
We will be subject to risks associated with the co-owners in our co-ownership arrangements that otherwise may not be present in other real estate investments.
We may enter into joint ventures or other co-ownership arrangements with respect to a portion of the properties we acquire. Ownership of co-ownership interests involves risks generally not otherwise present with an investment in real estate such as the following:
the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the tenants-in-common agreement or management agreement entered into by the co-owner owning interests in the property;
the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
the risk that a co-owner could breach agreements related to the property, which may cause a default under, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities laws and otherwise adversely affect the property and the co-ownership arrangement; or
the risk that a default by any co-owner would constitute a default under the applicable mortgage loan financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.

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In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, we may not be able to sell our interest in a property at the time we would like to sell. In addition, we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright.
Risks Associated with Debt Financing
If we breach covenants under our unsecured credit agreement with KeyBank, National Association ("KeyBank") and other syndication partners, we could be held in default under such agreement, which could accelerate our repayment date and materially adversely affect the value of our stockholders’ investment in us.
We entered into an unsecured credit facility with KeyBank and a syndicate of lenders partners under which we were provided with a $1.2 billion senior unsecured credit facility consisting of a $500.0 million senior unsecured revolver and a $715.0 million senior unsecured term loan.
The credit facility requires that we must maintain a pool of real properties, which is subject to the following requirements: (i) no less than 30 unencumbered asset pool properties at all times; (ii) no greater than 15% of the unencumbered asset pool value may be contributed by any single unencumbered asset pool property; (iii) no greater than 15% of the aggregate unencumbered asset pool value may be contributed by unencumbered asset pool properties subject to ground leases; (iv) no greater than 15% of the aggregate unencumbered asset pool value may be contributed by unencumbered asset pool properties that are under development; (v) a minimum weighted average occupancy of all unencumbered asset pool properties shall be no less than 90%; (vi) minimum weighted average remaining lease term for all unencumbered properties shall be no less than five years; and (vii) other limitations as determined by KeyBank upon further diligence of the unencumbered asset pool properties. Upon the occurrence of certain events described further in the KeyBank credit facility agreement, KeyBank may require the borrower to grant a first perfected mortgage/deed of trust lien on each of the unencumbered asset pool properties.
The credit facility includes a number of financial covenant requirements, including, but not limited to, a maximum consolidated leverage ratio (60% or, for a maximum of two consecutive quarters following a material acquisition, 65%), a minimum fixed charge ratio (1.5 to 1), a maximum secured debt ratio (40%), a maximum secured recourse debt ratio (5%), a maximum unhedged variable rate debt (30% of total asset value), minimum tangible net worth of at least approximately $1.2 billion plus 75% of the net proceeds of any common or preferred share issuance after the effective date and 75% of the amount of units of limited partnership interest in our Operating Partnership issued in connection with the contribution of properties, a maximum payout ratio of 95% of distribution to core funds from operations and minimum unsecured interest coverage ratio (2 to 1).
If we were to default under the KeyBank credit facility agreement, the lenders could accelerate the date for our repayment of the loan, and could sue to enforce the terms of the loan. In addition, upon the occurrence of certain events described further in the KeyBank credit facility agreement, the lenders may have the ability to place a first mortgage on certain of the properties in the unencumbered asset pool, and could ultimately foreclose on such properties. Such foreclosure could result in a material loss for us and would adversely affect the value of our stockholders’ investment in us.
If an event of default occurs under our loan agreement with Bank of America, N.A. (“Bank of America”) then a portion of or all of the cash which would otherwise be distributed to us may be restricted by the lenders and unavailable to us.
On September 29, 2017, we, through ten special purpose entities wholly owned by our Operating Partnership, entered into a loan agreement with Bank of America in which we borrowed $375.0 million.
If an event of default occurs under our loan agreement with Bank of America then a portion of or all of the cash which would otherwise be distributed to us may be restricted by the lenders and unavailable to us. This would limit the amount of cash available to us for use in our business and could affect our ability to make distributions to our common stockholders. No assurance can be given that a triggering event will not occur in the future.
The covenants and other restrictions under our Bank of America loan agreement affect, among other things, our ability to:
incur indebtedness;
create liens on assets;

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sell or substitute assets;
modify certain terms of our leases;
manage our cash flows; and
make distributions to equity holders.
Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of our stockholders’ investment.
There is no limitation on the amount we can borrow. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of our stockholders’ investment.
We have incurred, and intend to continue to incur, mortgage indebtedness and other borrowings, which may increase our business risks.
We have placed, and intend to continue to place, permanent financing on our properties or obtain a credit facility or other similar financing arrangement in order to acquire properties. We may also decide to later further leverage our properties. We may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire real properties. We may borrow if we need funds to pay a desired distribution rate to our stockholders. We may also borrow if we deem it necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes. If there is a shortfall between the cash flow from our properties and the cash flow needed to service mortgage debt, then the amount available for distribution to our stockholders may be reduced.
If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt, which could reduce the amount of distributions we pay to our stockholders and decrease the value of our stockholders’ investment.
We may have a significant amount of acquisition indebtedness secured by first priority mortgages on our properties. In addition, some of our properties contain, and any future acquisitions we make may contain, mortgage financing. If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt. In any such event, we could lose some or all of our investment in these properties, which would reduce the amount of distributions we pay to our stockholders and decrease the value of our stockholders’ investment.
Our debt financing agreements, including the KeyBank credit facility and the Bank of America loan agreement, contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our common stockholders at our current level.
Agreements governing our borrowings, including the KeyBank credit facility and the Bank of America loan agreement, contain or may contain in the future financial and other covenants with which we are or will be required to comply and that limit or will limit our ability to operate our business. These covenants, as well as any additional covenants to which we may be subject in the future because of additional borrowings, could affect our ability to incur additional debt, cause us to have to forego investment opportunities, reduce or eliminate distributions to our common stockholders, limit our ability to discontinue insurance coverage or replace our Advisor, or cause us to obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. In addition, the agreements governing our borrowing may have cross default provisions, which provide that a default under one of our debt financing agreements would lead to a default on all of our debt financing agreements.
Increases in interest rates would increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders at our current level.
We currently have outstanding debt payments which are indexed to variable interest rates. We may also incur additional debt or preferred equity in the future which rely on variable interest rates. Increases in these variable interest rates in the future would increase our interest costs, which would likely reduce our cash flows and our ability to make distributions to stockholders at our current level. In addition, if we need to make payments on instruments which contain variable interest during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Disruptions in the credit markets and real estate markets could have a material adverse effect on our results of operations, financial condition, and ability to pay distributions to our stockholders at our current level.

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Future disruptions in domestic and international financial markets may severely impact the amount of credit available to us and may contribute to rising costs associated with obtaining or maintaining such credit. In such an instance, we may not be able to obtain new debt financing, or maintain our existing debt financing, on terms and conditions we find to be ideal. If disruptions in the credit markets occur and are ongoing, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets may be negatively impacted. In addition, if we pay fees to lock in a favorable interest rate, falling interest rates or other factors could require us to forfeit these fees. All of these events would have a material adverse effect on our results of operations, financial condition and ability to pay distributions at our current level.
In addition to volatility in the credit markets, the real estate market is subject to fluctuation and can be impacted by factors such as general economic conditions, supply and demand, availability of financing and interest rates. To the extent we purchase real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracts at the time of our purchases, or the number of companies seeking to acquire properties decreases, the value of our investments may not appreciate or may decrease significantly below the amount we pay for these investments.
Federal Income Tax Risks
Failure to continue to qualify as a REIT would adversely affect our operations and our ability to make distributions, as we would incur additional tax liabilities.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. In addition, distributions to stockholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations, or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT would adversely affect the return of a stockholder's investment.
To qualify as a REIT, and to avoid the payment of federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities, or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income, generally determined without regard to the deduction for distributions paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income, and (iii) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on the acquisition, maintenance or development of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities, or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of federal income and excise taxes. We may be required to make distributions to stockholders at times it would be more advantageous to reinvest cash in our business or when we do not have cash readily available for distribution, and we may be forced to liquidate assets on terms and at times unfavorable to us. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of capital.
If our Operating Partnership fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status would be terminated.

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If the Internal Revenue Service ("IRS") were to successfully challenge the status of our Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders’ investment. In addition, if any of the entities through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of our Operating Partnership or an underlying property owner could also threaten our ability to maintain REIT status.
Our stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If stockholders participate in our DRP, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the common stock received.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to our stockholders.
We may be required to pay some taxes due to actions of our taxable REIT subsidiaries which would reduce our cash available for distribution to our stockholders.
Any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes, which are wholly-owned by our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We filed an election to treat each of Griffin Capital Essential Asset TRS, Inc. and Griffin Capital JVMB (Fort Worth), LLC as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT, we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary or capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable income (UBTI) to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI;
part of the income and gain recognized by a tax exempt investor with respect to our common stock would constitute UBTI if the investor incurs debt in order to acquire the common stock; and

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part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code may be treated as UBTI.
Complying with the REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to liquidate otherwise attractive investments in order to comply with the REIT tests. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Legislative or regulatory action could adversely affect investors.
Individuals with incomes below certain thresholds are subject to federal income taxation on qualified dividends at a maximum rate of 15%. For those with income above such thresholds, the qualified dividend rate is 20%. These tax rates are generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself has been taxed. As a result, distributions (other than capital gain distributions) we pay to individual investors generally will be subject to the tax rates that are otherwise applicable to ordinary income for federal income tax purposes, subject to a 20% deduction for REIT dividends available under the 2017 Tax Act. Stockholders are urged to consult with their own tax advisors with respect to the impact of recent legislation on their investment in our common stock and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
To the extent our distributions represent a return of capital for tax purposes, a stockholder could recognize an increased capital gain upon a subsequent sale of the stockholder's common stock.
Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a stockholder to the extent those distributions do not exceed the stockholder’s adjusted tax basis in his or her common stock, but instead will constitute a return of capital and will reduce such adjusted basis. (Such distributions to Non-U.S. Stockholders may be subject to withholding, which may be refundable.) If distributions exceed such adjusted basis, then such adjusted basis will be reduced to zero and the excess will be capital gain to the stockholder. If distributions result in a reduction of a stockholder’s adjusted basis in his or her common stock, then subsequent sales of such stockholder’s common stock potentially will result in recognition of an increased capital gain.
Foreign purchasers of our common stock may be subject to the Foreign Investment in Real Property Tax Act (“FIRPTA”) upon the sale of their shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence.
We cannot assure our stockholders that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless the non-U.S. stockholder is a qualified foreign pension fund (or an entity wholly owned by a qualified foreign pension fund) or our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock.
Employee Retirement Income Security Act of 1974 (“ERISA”) Risks
There are special considerations that apply to employee benefit plans, individual retirement accounts (each, an "IRA") or other tax-favored benefit accounts investing in our shares which could cause an investment in our shares to be a prohibited transaction which could result in additional tax consequences.

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ERISA and the Code impose certain restrictions on (i) employee benefit plans (as defined in Section 3(3) of ERISA), (ii) plans described in Code Section 4975(e)(1), including IRAs and Keogh plans, (iii) any entities whose underlying assets include plan assets by reason of a plan’s investment in such entities, and (iv) persons who have certain specified relationships to such plans, i.e., parties-in-interest under ERISA and disqualified persons under the Code. If stockholders are investing the assets of such a plan or account in our common stock, they should satisfy themselves that, among other things:
their investment is consistent with their fiduciary obligations under ERISA, the Code, or other applicable law;
their investment is made in accordance with the documents and instruments governing their IRA, plan or other account, including any applicable investment policy;
their investment satisfies the prudence and diversification requirements of ERISA or other applicable law;
their investment will not impair the liquidity of the IRA, plan or other account;
their investment will not produce UBTI for the IRA, plan or other account;
they will be able to value the assets of the plan annually in accordance with the requirements of ERISA or other applicable law, to the extent applicable; and
their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or constitute a violation of analogous provisions under other applicable law, to the extent applicable.
Persons investing the assets of employee benefit plans, IRAs, and other tax-favored benefit accounts should consider ERISA and related risks of investing in our shares.
ERISA and Code Section 4975 prohibit certain transactions that involve (1) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts and Keogh plans, and (2) any person who is a "party-in-interest" or "disqualified person" with respect to such a plan. Consequently, the fiduciary of a plan contemplating an investment in the shares should consider whether we, any other person associated with the issuance of the shares, or any of their affiliates is or might become a "party-in-interest" or "disqualified person" with respect to the plan and, if so, whether an exemption from such prohibited transaction rules is applicable. In addition, the Department of Labor plan asset regulations provide that, subject to certain exceptions, the assets of an entity in which a plan holds an equity interest may be treated as assets of an investing plan, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to the prohibited transaction provisions. We intend to take such steps as may be necessary to qualify us for one or more of the exemptions available, and thereby prevent our assets as being treated as assets of any investing plan.
In addition, if stockholders are investing the assets of an IRA or a pension, profit sharing, 401(k), Keogh or other employee benefit plan, they should satisfy themselves that their investment (i) is consistent with their fiduciary obligations under ERISA and other applicable law, (ii) is made in accordance with the documents and instruments governing their plan or IRA, including their plan’s investment policy, and (iii) satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA. Stockholders should also determine that their investment will not impair the liquidity of the plan or IRA and will not produce UBTI for the plan or IRA; or, if it does produce UBTI, that the purchase and holding of the investment is still consistent with their fiduciary obligations. Stockholders should also satisfy themselves that they will be able to value the assets of the plan annually in accordance with ERISA requirements, and that their investment will not constitute a prohibited transaction under Section 406 of ERISA or Code Section 4975.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.

33


ITEM 2. PROPERTIES
As of December 31, 2018, we owned a fee simple interest in 74 properties, encompassing approximately 19.9 million rentable square feet and an 80% interest in an unconsolidated joint venture. See Part IV, Item 15. “Exhibits, Financial Statement Schedules—Schedule III—Real Estate and Accumulated Depreciation and Amortization,” of this Annual Report on Form 10-K for a detailed listing of our properties.
Revenue Concentration
No lessee or property, based on net rents for the 12-month period subsequent to December 31, 2018, pursuant to the respective in-place leases, was greater than 5.5% as of December 31, 2018.
The percentage of net rents for the 12-month period subsequent to December 31, 2018, by state, based on the respective in-place leases, is as follows (dollars in thousands):
State
 
Net Rent
(unaudited)
 
Number of
Properties
 
Percentage of
Net Rent
Texas
 
$
26,750

 
10

 
12.6
%
California
 
23,205

 
5

 
11.0

Georgia
 
19,616

 
5

 
9.3

Ohio
 
19,416

 
8

 
9.2

Arizona
 
17,758

 
5

 
8.4

Illinois
 
16,553

 
7

 
7.8

Colorado
 
16,538

 
5

 
7.8

New Jersey
 
11,531

 
3

 
5.4

Florida
 
10,320

 
4

 
4.9

South Carolina
 
10,080

 
2

 
4.8

All Others (1)
 
40,048

 
20

 
18.8

Total
 
$
211,815

 
74

 
100.0
%
(1)
All others account for less than 4% of total net rents on an individual basis.

34


The percentage of net rents for the 12-month period subsequent to December 31, 2018, by industry, based on the respective in-place leases, is as follows (dollars in thousands): 
Industry (1)
 
Net Rent
(unaudited)
 
Number of
Lessees
 
Percentage of
Net Rent
Capital Goods
 
$
31,491

 
12

 
14.9
%
Telecommunication Services
 
23,835

 
7

 
11.3

Insurance
 
22,044

 
9

 
10.4

Health Care Equipment & Services
 
21,107

 
9

 
10.0

Diversified Financials
 
16,309

 
5

 
7.7

Energy
 
12,913

 
5

 
6.1

Software & Services
 
12,818

 
10

 
6.1

Retailing
 
12,262

 
4

 
5.8

Consumer Durables & Apparel
 
11,439

 
4

 
5.4

Consumer Services
 
8,270

 
4

 
3.9

Technology, Hardware & Equipment
 
8,156

 
4

 
3.9

Media
 
7,773

 
3

 
3.7

All others (2)
 
23,398

 
14

 
10.8

Total
 
$
211,815

 
90

 
100.0
%
(1)
Industry classification based on the Global Industry Classification Standard.
(2)
All others account for less than 3% of total net rents on an individual basis.
The tenant lease expirations by year based on net rents for the 12-month period subsequent to December 31, 2018 are as follows (dollars in thousands):
Year of Lease Expiration (1)
 
Net Rent
(unaudited)
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Net Rent
2019
 
$
9,880

 
10

 
2,218,400

 
4.7
%
2020
 
23,318

 
11

 
1,602,300

 
11.0

2021
 
15,123

(2) 
8

 
1,470,300

 
7.1

2022
 
11,207

 
5

 
648,300

 
5.3

2023
 
8,886

(2) 
5

 
504,200

 
4.2

2024
 
32,689

 
11

 
3,252,600

 
15.4

>2025
 
110,712

 
40

 
9,472,800

 
52.3

VACANT
 

 

 
697,100

 

Total
 
$
211,815

 
90

 
19,866,000

 
100.0
%
(1)
Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
(2)
Included in the net rent amount is approximately 52,900 square feet related to a lease expiring in 2021 with the remaining square footage expiring in 2023. We included the lessee in the number of lessees in 2021.
ITEM 3. LEGAL PROCEEDINGS
(a)
From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of our business. We are not a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
(b)
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 11, 2019, we had approximately $1.7 billion in shares of common stock outstanding, including $255.9 million in shares issued pursuant to our DRP, held by a total of approximately 36,400 stockholders of record. There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for our shares will develop. To assist fiduciaries of Plans (as defined below) subject to the annual reporting requirements of ERISA and Account (as defined below) trustees or custodians to prepare reports relating to an investment in our shares, we intend to provide reports in annual determinations of the current value of our net assets per outstanding share to those fiduciaries (including Account trustees and custodians) who identify themselves to us and request the reports.
For purposes of the preceding paragraphs, “Plans” include tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans described in Section 3(3) of ERISA, and annuities described in Section 403(a) or (b) of the Code, and “Accounts” include an individual retirement account or annuity described in Sections 408 or 408A of the Code (also known as IRAs), an Archer MSA described in Section 220(d) of the Code, a health savings account described in Section 223(d) of the Code, and a Coverdell education savings account described in Section 530 of the Code.
We are currently selling shares of our common stock to the public pursuant to the 2017 DRP Offering at a price of $10.05 per share (our most recently published estimated NAV). Our Board established this share price following its receipt of a third-party report from an advisor to the Board regarding the determination of the Company's NAV as of June 30, 2018. See Determination of Estimated Value Per Share below.
Determination of Estimated Value Per Share
On October 24, 2018, our Board approved an estimated value per share of our common stock of $10.05 based on the estimated value of our assets less the estimated value of our liabilities, or NAV, divided by the number of shares outstanding on a fully diluted basis, calculated as of June 30, 2018. We are providing this estimated value per share to assist broker dealers in connection with their obligations under applicable FINRA rules with respect to customer account statements. This valuation was performed in accordance with the methodology provided in Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the IPA in April 2013, in addition to guidance from the SEC.
The estimated value per share was determined after consultation with our Advisor and Robert A. Stanger & Co, Inc. ("Stanger"), an independent third-party valuation firm not affiliated with our Advisor. Stanger was selected by our nominating and corporate governance committee to appraise the properties in our portfolio as of June 30, 2018. Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public securities offerings, private placements, business combinations, and similar transactions. Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties and relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures. In determining an

35


estimated value per share, our Board considered the reports provided by Stanger and information provided by our Advisor. Our goal in calculating an estimated value per share is to arrive at a value that is reasonable and supportable using what our Board deems to be appropriate valuation methodologies and assumptions.
Upon the Board’s receipt and review of the reports, the recommendation of the nominating and corporate governance committee, and the recommendation of our Advisor, the Board approved $10.05 as the estimated value of our common stock as of June 30, 2018, which determinations are ultimately and solely the responsibility of the Board.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant; made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control; and made assumptions with respect to certain factual matters. Furthermore, Stanger's analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to June 30, 2018, and any material change in such circumstances and conditions may affect Stanger's analyses and conclusions. Stanger's report contains other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein.
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not held for sale. As a result, our estimated value per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
For additional information on the methodology used in calculating our estimated value per share, please refer to our Current Report on Form 8-K filed with the SEC on October 26, 2018.
Equity Compensation Plans
Information regarding our equity compensation plans and the securities authorized under the plans is included in Item 12 below.
Recent Sales of Unregistered Securities
On August 8, 2018, we entered into a purchase agreement (the "Purchase Agreement") with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee)(the "Purchaser") and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of our Series A Cumulative Perpetual Convertible Preferred Stock, $0.001 par value per share, at a price of $25.00 per share (the "Series A Preferred Shares") in two tranches, each comprising 5,000,000 Series A Preferred Shares. On August 8, 2018 (the "First Issuance Date"), we issued 5,000,000 Series A Preferred Shares to the Purchaser for a total purchase price of $125 million (the "First Issuance"). We paid transaction fees totaling 3.5% of the First Issuance purchase price and incurred approximately $0.4 million in transaction-related expenses to third parties unaffiliated with us or the former sponsor. The Advisor incurred transaction-related expenses of approximately $0.2 million, which will be reimbursed by us. Pursuant to the Purchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares at a later date (the "Second Issuance Date") for an additional purchase price of $125 million subject to approval by the Purchaser’s internal investment committee and the satisfaction of the conditions in the Purchase Agreement, including, but not limited to, the execution of an Ownership Limit Exemption Agreement (the "Second Issuance"). Pursuant to the Purchase Agreement, the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of five years from the closing date.
The Series A Preferred Shares were offered and sold pursuant to an exemption from the registration requirements provided under Regulation S of the Securities Act. We relied on this exemption from registration based in part on representations made by the Purchaser in the Purchase Agreement. The shares of our common stock issuable upon conversion of the Series A Preferred Shares have not been registered under the Securities Act and may not be offered or sold in the United States in the absence of an effective registration statement or an applicable exemption from the registration requirements.
On December 14, 2018, in connection with the Self Administration Transaction, we issued 20,438,684 OP Units to GC LLC as consideration for the contribution to our Operating Partnership of all the membership interests in GRECO and certain assets related to the business of GRECO. These securities were issued without registration pursuant to the exemption afforded

36


by Rule 506 of Regulation D promulgated under the Securities Act. These OP Units may not be exchanged for shares of our common stock until November 30, 2020. After such date, GC LLC will have the right to cause their OP Units to be redeemed by our Operating Partnership or purchased by us for cash. In either event, the cash amount to be paid will be equal to the cash value of the number of our shares that would be issuable if the OP Units were exchanged for our shares based on the conversion ratio set forth in our operating partnership agreement. Alternatively, at our sole discretion, we may elect to purchase the OP Units by issuing shares of our common stock for OP Units exchanged based on the conversion ratio set forth in our operating partnership agreement. Such exchange rights are subject to the other limitations set forth in our operating partnership agreement.
On March 14, 2019, we issued 7,000 shares of restricted common stock to each of Gregory M. Cazel and Ranjit M. Kripalani, upon each of their respective re-elections to our Board. The shares vested 50% at the time of grant and will vest 50% upon the first anniversary of the grant date, subject to their continued service as a director during such vesting period. The issuance of these securities was effected without registration in reliance upon Regulation D promulgated under the Securities Act. No underwriters were involved with the issuance of such securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Redemption Program
As noted in Note 10, Equity – Share Redemption Program, we adopted a SRP that enables stockholders to sell their stock to us in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by us. Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. During any calendar year, we will not redeem more than 5% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the DRP.
If we cannot purchase all shares presented for redemption in any quarter, based upon insufficient cash available or the limit on the number of shares we may redeem during any calendar year, we will attempt to honor redemption requests on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. We will treat the unsatisfied portion of the redemption request as a request for redemption the following quarter. Such pending requests will generally be honored on a pro rata basis. Any stockholder request to cancel an outstanding redemption must be sent to our transfer agent prior to the last day of the new quarter. We will determine whether sufficient funds are available or the SRP has reached the 5% share limit as soon as practicable after the end of each quarter, but in any event prior to the applicable payment date.
Pursuant to the SRP, the redemption price per share shall be the lesser of (i) the amount paid for the shares or (ii) 95% of the NAV of the shares. Shares redeemed in connection with the death or qualifying disability of a stockholder may be repurchased at 100% of the NAV of the shares. The redemption price per share will be as of the last business day of the applicable quarter.
Redemption requests will be honored on or about the last business day of the month following the end of each quarter. Redemption requests must be received on or prior to the end of the quarter in order for us to repurchase the shares as of the end of the following month.
During the three months ended September 30, 2018, we received requests for the redemption of common stock of 4,083,881 shares, which exceeded the annual limitation of 5% of the weighted average number of shares outstanding during the prior calendar year by 3,401,249 shares or approximately $32.4 million. We are not obligated to redeem any amounts in excess of the limitations until 2019, when the 5% share limitation is reset and to the extent DRP proceeds are available.
We processed the redemption requests according to the SRP policy described above and redeemed 16.7% of the shares requested at a weighted average price per share of $9.76 and carried forward the unprocessed portion of such requests.  As a result, standard redemption requests for the quarter ended September 30, 2018 were processed on a pro-rata basis and were paid out on October 31, 2018. As the 5% maximum was reached for the quarter ended September 30, 2018, the Company did not process any redemption requests for the quarter ended December 31, 2018.

37


During the year ended December 31, 2017, we redeemed 9,931,245 shares of common stock for approximately $98.9 million at a weighted average price per share of $9.96. During the year ended December 31, 2018, we redeemed 8,695,600 shares of common stock for approximately $83.6 million at a weighted average price per share of $9.61 pursuant to the SRP. Our Board may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time, which may be provided through our filings with the SEC. Since inception and through December 31, 2018, we had redeemed 24,545,498 shares of common stock for approximately $241.2 million at a weighted average price per share of $9.83 pursuant to the SRP. Since inception and through June 30, 2018, we have honored all redemption requests.
On December 12, 2018, in connection with the proposed Company Merger, our Board approved the temporary suspension of the SRP, effective as of January 19, 2019. The SRP shall remain suspended until such time, if any, as the Board of the Company may approve the resumption of the SRP.

During the quarter ended December 31, 2018, we redeemed shares under our SRP as follows:
For the Month Ended
 
Total
Number of
Shares
Redeemed
 
Average
Price Paid
per Share
 
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
 Yet Be Purchased Under the Plans or Programs
October 31, 2018 (1)
 
682,078

 
$
9.77

 
682,078

 
(2) 
November 30, 2018
 

 

 

 
(2) 
December 31, 2018
 

 

 

 
(2) 
(1)
Shares redeemed in the month of October 2018 were pursuant to redemption requests received during the quarter ended September 30, 2018.
(2)
A description of the maximum number of shares that may be purchased under our SRP is included in the narrative preceding this table. As disclosed above, we reached the maximum number of shares available for redemption for 2018.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes thereto included elsewhere in this annual report on Form 10-K (in thousands, except per share data):
 
For the Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Operating Data
 
 
 
 
 
 
 
 
 
Total revenue (1)
$
336,359

 
$
346,490

 
$
344,274

 
$
292,853

 
$
203,191

Income before other income and (expenses)
$
77,980

 
$
82,294

 
$
73,531

 
$
35,109

 
$
22,501

Net income
$
22,038

 
$
146,133

 
$
26,555

 
$
15,621

 
$
14

Net income (loss) attributable to common stockholders
$
17,618

 
$
140,657

 
$
25,285

 
$
(3,750
)
 
$
(18,654
)
Net income (loss) attributable to common stockholders per share, basic and diluted
$
0.10

 
$
0.81

 
$
0.14

 
$
(0.02
)
 
$
(0.17
)
Distributions declared per common share
$
0.68

 
$
0.68

 
$
0.68

 
$
0.69

 
$
0.68

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total real estate, net
$
2,534,952

 
$
2,442,576

 
$
2,685,837

 
$
2,760,049

 
$
1,805,333

Total assets
$
3,012,775

 
$
2,803,410

 
$
2,894,803

 
$
3,037,390

 
$
2,053,656

Total debt, net
$
1,353,531

 
$
1,386,084

 
$
1,447,535

 
$
1,473,427

 
$
613,905

Total liabilities
$
1,527,079

 
$
1,512,835

 
$
1,574,274

 
$
1,636,859

 
$
743,707

Perpetual convertible preferred shares
$
125,000

 
$

 
$

 
$

 
$
250,000

Redeemable noncontrolling interests
$
4,887

 
$
4,887

 
$
4,887

 
$
4,887

 
$
12,543

Redeemable common stock
$
11,523

 
$
33,877

 
$
92,058

 
$
86,557

 
$
56,421

Total stockholders’ equity
$
1,112,083

 
$
1,220,706

 
$
1,193,470

 
$
1,287,769

 
$
973,507

Total equity
$
1,344,286

 
$
1,251,811

 
$
1,223,584

 
$
1,309,087

 
$
990,985

Other Data
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities (2)
$
120,859

 
$
142,097

 
$
137,457

 
$
99,972

 
$
89,980

Net cash (used in) provided by investing activities (2)
$
(194,496
)
 
$
254,568

 
$
9,496

 
$
(401,524
)
 
$
(747,789
)
Net cash (used in) provided by financing activities (2)
$
(76,945
)
 
$
(238,660
)
 
$
(183,814
)
 
$
274,942

 
$
743,162

(1)
Property expense recovery reimbursements are presented gross on the statement of operations for all periods presented.

38


(2)
During the year ended December 31, 2017, the Company elected to early adopt ASU No. 2016-18. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies for further discussion.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Result of Operations” should be read in conjunction with the financial statements and the notes thereto contained in this report.
Overview
We are a public, non-traded REIT that invests primarily in business essential properties significantly occupied by a single tenant, diversified by corporate credit, physical geography, product type and lease duration. As a result of the Self Administration Transaction, we are now self-managed and we acquired the advisory, asset management and property management business of GRECO (which includes such arrangements for both us and GCEAR II). GRECO is now the sponsor for GCEAR II. In connection with the Self Administration Transaction, 37 employees of GCC became direct employees of GRECO. Through the GCEAR II Advisor, we are responsible for, among other things, managing GCEAR II’s affairs on a day-to-day basis and identifying and making acquisitions and investments on GCEAR II’s behalf.
We issued 126,592,885 total shares of our common stock for gross proceeds of approximately $1.3 billion pursuant to the Private Offering and Public Offerings since 2008. We also issued approximately 41,800,000 shares of our common stock upon the consummation of the merger of Signature Office REIT, Inc. in June 2015.
On December 14, 2018, we entered into the Merger Agreement with GCEAR II in connection with the Mergers. Under the terms of the Merger Agreement, each share of our common stock issued and outstanding will be converted into the right to receive 1.04807 shares of GCEAR II's common stock. The Mergers are subject to customary closing conditions, including the receipt of approval of both our and GCEAR II’s stockholders, thus, there is no guarantee that the Mergers will be consummated.  In connection with the proposed Mergers, our Board approved the temporary suspension of our DRP effective as of December 30, 2018.  All December distributions were paid in cash only. On February 15, 2019, the Board determined it was in the best interests to reinstate the DRP effective with the February distribution to be paid on or around March 1, 2019. Also in connection with the proposed Mergers, our Board approved the temporary suspension of the SRP, effective as of January 19, 2019.  The SRP will remain suspended until such time, if any, as our Board may approve the resumption of the SRP. 
As of December 31, 2018, our real estate portfolio, consisted of 74 properties in 20 states and 90 lessees consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation. Our net rents for the 12-month period subsequent to December 31, 2018 is approximately $211.8 million with approximately 61.4% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or, in management's belief, equivalent ratings. Our portfolio, based on square footage, is approximately 96.5% leased as of December 31, 2018, with a weighted average remaining lease term of 6.55 years, weighted average annual rent increases of approximately 2.1%, and a debt to total real estate acquisition price of 45.4%.
Critical Accounting Policies and Estimates
We have established accounting policies which conform to GAAP in the United States as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.

39


The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion on our significant accounting policies, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.
Real Estate - Valuation and Purchase Price Allocation
When we acquire operating properties, we allocate the purchase price on an asset acquisition to the various components of the acquisition based upon the relative fair value of each component. The components typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. Transaction costs are capitalized as a component of the cost of the asset acquisition.
We allocate the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on our assumptions about the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions.
In determining the relative fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated relative fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with an asset acquisition are capitalized as a component of the transaction.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For acquisitions that do not meet the accounting criteria of an asset acquisition, acquisition costs are expensed as incurred.
Impairment of Real Estate and Related Intangible Assets and Liabilities
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management will assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent the carrying value exceeds the estimated fair value of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of December 31, 2018, we recorded no impairment provision related to the lease intangibles, building and land.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.

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Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on our estimate of the property's operating expenses for the year, pro rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. Quarterly, we reconcile the amount of additional rent paid by the tenant during the year to the actual amount of Recoverable Expenses incurred by us for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount we can recover from the tenant such as a cap on certain or all property operating expenses.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.
Results of Operations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets. Leases that comprise approximately 4.7% of our annualized base rental revenue will expire during the period from January 1, 2019 to December 31, 2019. We assume, based upon internal renewal probability estimates, that some of our tenants will renew and others will vacate and the associated space will be re-let subject to market leasing assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases may vary from the rates under existing leases expiring during the period January 1, 2019 to December 31, 2019, thereby resulting in revenue that may differ from the current in-place rents.
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management, and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K.
Same Store Analysis
For the year ended December 31, 2018, our "Same Store" portfolio consisted of 70 properties, encompassing approximately 17.5 million square feet, with an acquisition value of $2.7 billion and net rents of $192.1 million (for the 12-month period subsequent to December 31, 2018). Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 70 properties for the years ended December 31, 2018 and 2017 (dollars in thousands):
 
Year Ended December 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2018
 
2017
 
Rental income
$
227,623

 
$
231,608

 
$
(3,985
)
 
(2
)%
Lease termination income
14,218

 
14,603

 
(385
)
 
(3
)%
Property expense recoveries
69,680

 
70,926

 
(1,246
)
 
(2
)%
Property operating expense
47,438

 
47,877

 
(439
)
 
(1
)%
Property tax expense
41,278

 
41,593

 
(315
)
 
(1
)%
Property management fees to affiliates
8,899

 
8,796

 
103

 
1
 %
Impairment provision

 
8,460

 
(8,460
)
 
(100
)%
Depreciation and amortization
109,832

 
109,600

 
232

 
0
 %
Interest expense
8,830

 
10,370

 
(1,540
)
 
(15
)%
Rental Income
The decrease in rental income of approximately $4.0 million compared to the same period a year ago is primarily the result of (1) approximately $4.2 million as a result of terminations/expired leases subsequent to June 30, 2017; and (2) $1.7 million due to a vacancy in the prior year; offset by (3) approximately $1.0 million in acceleration of amortization of intangibles primarily related to early lease terminations; and (4) new leases/lease extensions of approximately $0.8 million in the current year.

41


Lease Termination Income
The decrease in lease termination income of approximately $0.4 million is primarily the result of $14.2 million in termination income related to the 2500 Windy Ridge Parkway and South Lake at Dulles properties in the prior year; offset by $13.7 million in termination income related to the 2500 Windy Ridge Parkway, 2275 Cabot Drive and 11200 West Parkland properties in the current year.
Impairment Provision
During the year ended December 31, 2017, as a result of Westinghouse Electric Company, LLC filing for bankruptcy and the 333 East Lake Street property write-down on building and land, we recorded an impairment provision of approximately $8.5 million related to the lease intangibles, building and land as it was determined that the carrying value of these assets exceeded the fair value in the prior year.
Interest Expense
The decrease of approximately $1.5 million as compared to the same period in the prior year is primarily the result of two mortgage loan payoffs during the year ended December 31, 2017.
For the year ended December 31, 2017, our "Same Store" portfolio consisted of 71 properties, encompassing approximately 17.6 million square feet, with an acquisition value of $2.7 billion and annual net rent of $203.8 million (for the 12-month period subsequent to December 31, 2017). Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 71 properties for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
Year Ended December 31,
 
Increase/
(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
230,572

 
$
237,971

 
$
(7,399
)
 
(3
)%
Lease termination income
14,603

 
1,197

 
13,406

 
1,120
 %
Property expense recoveries
70,479

 
73,041

 
(2,562
)
 
(4
)%
Property operating expense
47,020

 
47,047

 
(27
)
 
 %
Property tax expense
41,504

 
43,333

 
(1,829
)
 
(4
)%
Asset management fees to affiliates
20,072

 
19,976

 
96

 
 %
Property management fees to affiliates
8,781

 
8,734

 
47

 
1
 %
Impairment provision
8,460

 

 
8,460

 
100
 %
Depreciation and amortization
108,897

 
119,392

 
(10,495
)
 
(9
)%
Interest expense
9,366

 
11,484

 
(2,118
)
 
(18
)%
Rental Income
The decrease in rental income of approximately $7.4 million compared to the same period a year ago is primarily the result of (1) approximately $7.9 million in reduction of occupied space; offset by (2) approximately $0.3 million in acceleration of amortization of intangibles in prior period primarily related to early lease terminations.
Lease Termination Income
The increase in lease termination income of approximately $13.4 million is primarily the result of lease terminations on the 2500 Windy Ridge Parkway and South Lake at Dulles properties during 2017.
Property Expense Recoveries
The decrease in property expense recoveries of $2.6 million compared to the same period a year ago is primarily the result of prior year tax appeals won in the current year owed to tenants.

42


Property Tax Expense
The decrease in property tax expense of $1.8 million compared to the same period a year ago is primarily the result of (1) approximately $2.1 million prior year tax appeals won in the current year; offset by (2) approximately $0.3 million of appreciation of property value.
Impairment Provision
The increase in impairment provision expense is a result of (1) Westinghouse Electric Company, LLC filing for bankruptcy and (2) the 333 East Lake Street property write-down of building and land, we recorded an impairment provision of approximately $8.5 million related to the lease intangibles, building and land as it was determined that the carrying value of these assets exceed the fair value.
Depreciation and Amortization
The decrease of approximately $10.5 million as compared to the same period in the prior year is primarily the result of (1) approximately $9.4 million in amortization of intangibles as a result of early lease terminations and (2) $2.2 million related to assets fully depreciated in the current year; offset by (3) $1.3 million related to intangibles placed in service subsequent to December 31, 2017.
Interest Expense
The decrease of approximately $2.1 million as compared to the same period in the prior year is primarily the result of four mortgage loan payoffs subsequent to April 30, 2016.
Portfolio Analysis
As of December 31, 2018, we owned 74 properties. We may continue to draw from our unsecured credit facility, issue additional preferred units or use proceeds from dispositions to acquire assets that adhere to our investment criteria.
Comparison of the Years Ended December 31, 2018 and 2017
The following table provides summary information about our results of operations for the years ended December 31, 2018 and 2017 (dollars in thousands):
 
 
Year Ended December 31,
 
Increase/(Decrease)
 
Percentage
Change
 
 
2018
 
2017
 
Rental income
 
$
247,442

 
$
257,465

 
$
(10,023
)
 
(4
)%
Lease termination income
 
15,671

 
14,604

 
1,067

 
7
 %
Property expense recoveries
 
73,246

 
74,421

 
(1,175
)
 
(2
)%
Property operating expense
 
49,509

 
50,918

 
(1,409
)
 
(3
)%
Property tax expense
 
44,662

 
44,980

 
(318
)
 
(1
)%
Asset management fees to affiliates
 
23,668

 
23,499

 
169

 
1
 %
Property management fees to affiliates
 
9,479

 
9,782

 
(303
)
 
(3
)%
Self administration transaction expense
 
1,331

 

 
1,331

 
100
 %
General and administrative expenses
 
6,968

 
7,322

 
(354
)
 
(5
)%
Corporate operating expenses to affiliates
 
3,594

 
2,652

 
942

 
36
 %
Depreciation and amortization
 
119,168

 
116,583

 
2,585

 
2
 %
Impairment provision
 

 
8,460

 
(8,460
)
 
100
 %
Interest expense
 
55,194

 
51,015

 
4,179

 
8
 %
Rental Income
Rental income for the year ended December 31, 2018 is comprised of base rent and adjustments to straight-line contractual rent, offset by in-place lease valuation amortization. The decrease in rental income of approximately $10.0 million is primarily the result of (1) approximately $28.2 million as a result of two properties sold during the fourth quarter of 2017 and terminations/expired leases subsequent to June 30, 2017; and (2) $1.7 million due to a contraction in the prior year; offset by (3) approximately $1.0 million in acceleration of amortization of intangibles primarily related to early lease terminations; (4)

43


approximately $17.7 million of rental income related to properties acquired subsequent to September 30, 2017; and (5) new/amended leases/lease extensions of approximately $0.8 million in the current year.
Lease Termination Income
The increase in lease termination income of approximately $1.1 million is primarily the result of $15.5 million in termination income related to the 333 East Lake Street, 2500 Windy Ridge Parkway, 2275 Cabot Drive and 11200 West Parkland properties in the current year; offset by $14.2 million in termination income related to the 2500 Windy Ridge Parkway and South Lake at Dulles properties in the prior year.
Self Administration Transaction
Self administration transaction expenses for the year ended December 31, 2018 increased by approximately $1.3 million compared to the same period a year ago primarily as a result of legal and professional service fees incurred in connection with the Self Administration Transaction. See Note 4, Self Administration Transaction, for additional details.
Corporate Operating Expenses to Affiliates
Corporate operating expenses to affiliates for the year ended December 31, 2018 increased by approximately $0.9 million compared to the same period a year ago primarily as a result of an increase in allocated personnel and rent costs incurred by our Advisor.
Impairment Provision
During the year ended December 31, 2017, as a result of Westinghouse Electric Company, LLC filing for bankruptcy and the 333 East Lake Street property write down on building and land, we recorded an impairment provision of approximately $8.5 million related to the lease intangibles, building and land as it was determined that the carrying value of these assets exceed the fair value in prior year.
Interest Expense
The increase of approximately $4.2 million in interest expense as compared to the same period in the prior year is primarily the result of (1) approximately $10.7 million as a result of the Bank of America loan; and (2) approximately $6.5 million in higher LIBO rates; offset by (3) approximately $6.0 million in Revolver Loan interest expense due to pay downs during 2017 and the current year; (4) approximately $5.7 million as a result of favorable swap positions in the current period; and (5) $1.3 million payoff of two mortgage loans subsequent to June 30, 2017.
Comparison of the Years Ended December 31, 2017 and 2016
As of December 31, 2017, we owned 73 properties.

44


The following table provides summary information about our results of operations for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
Year Ended December 31,
 
Increase/(Decrease)
 
Percentage
Change
2017
 
2016
 
Rental income
$
257,465

 
$
267,654

 
$
(10,189
)
 
(4
)%
Lease termination income
14,604

 
1,211

 
13,393

 
1,106
 %
Property expense recoveries
74,421

 
75,409

 
(988
)
 
(1
)%
Property operating expense
50,918

 
50,986

 
(68
)
 
 %
Property tax expense
44,980

 
45,789

 
(809
)
 
(2
)%
Asset management fees to affiliates
23,499

 
23,530

 
(31
)
 
 %
Property management fees to affiliates
9,782

 
9,740

 
42

 
 %
Acquisition fees and expenses to non-affiliates

 
541

 
(541
)
 
(100
)%
Acquisition fees and expenses to affiliates

 
1,239

 
(1,239
)
 
(100
)%
General and administrative expenses
7,322

 
6,544

 
778

 
12
 %
Corporate operating expenses to affiliates
2,652

 
1,525

 
1,127

 
74
 %
Depreciation and amortization
116,583

 
130,849

 
(14,266
)
 
(11
)%
Impairment provision
8,460

 

 
8,460

 
100
 %
Interest expense
51,015

 
48,850

 
2,165

 
4
 %
Rental Income
Rental income for the year ended December 31, 2017 is comprised of base rent and adjustments to straight-line contractual rent, offset by in-place lease valuation amortization. The decrease in rental income of approximately $10.2 million is primarily the result of (1) approximately $7.4 million in reduction of occupied space; (2) approximately $4.5 million in three assets sold in 2017; offset by (3) approximately $1.8 million in assets acquired subsequent to January 2016.
Lease Termination Income
The increase in lease termination income of approximately $13.4 million is primarily the result of lease terminations on the 2500 Windy Ridge Parkway and South Lake at Dulles properties during 2017.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates and affiliates decreased by approximately $1.8 million for the year ended December 31, 2017 compared to the same period a year prior as a result of an accounting standard, which clarified the definition of a business combination, which we adopted on January 1, 2017. Under the clarified definition, our one acquisition through the year ended December 31, 2017 did not qualify as a business combination; consequently, we accounted for the transaction as an asset acquisition. Thus, approximately $4.1 million of acquisition expense was capitalized as part of the asset acquisition and allocated on a relative fair value basis.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2017 increased by approximately $0.8 million compared to the same period a year prior primarily as a result of higher state taxes.
Corporate Operating Expenses to Affiliates
Corporate operating expenses to affiliates for the year ended December 31, 2017 increased by approximately $1.1 million compared to the same period a year prior primarily as a result of an increase in allocated personnel and rent costs incurred by our Advisor.

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Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2017 consisted of (1) depreciation of building and building improvements of our properties of $56.0 million and (2) amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $60.6 million. The decrease of approximately $14.3 million as compared to the same period in the prior year is primarily the result of (1) approximately $3.4 million related to three sales in the current period; (2) $0.8 million related to one property reclassified as held for sale during the year ended December 31, 2017; and (3) $11.8 million related to acceleration of amortization expense and assets fully depreciated during the prior period; offset by (4) $1.1 million related to intangibles placed in service subsequent to December 31, 2016.
Impairment Provision
During the year ended December 31, 2017, as a result of (1) Westinghouse Electric Company, LLC filing for bankruptcy and (2) the 333 East Lake Street property write down on building and land, we recorded an impairment provision of approximately $8.5 million related to the lease intangibles, building and land as it was determined that the carrying value of these assets exceed the fair value.
Funds from Operations and Adjusted Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient.
Management is responsible for managing interest rate, hedge and foreign exchange risks. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.
Additionally, we use Adjusted Funds from Operations (“AFFO”) as a non-GAAP financial measure to evaluate our operating performance. We previously used Modified Funds from Operations ("MFFO") (as defined by the Institute for Portfolio Alternatives) as a non-GAAP measure of operating performance.  Management decided to replace the MFFO measure with AFFO because AFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. In addition, AFFO is a measure used among our peer group, which includes publicly traded REITs. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.
Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in

46


reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of AFFO based on the following economic considerations:
Deferred rent. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded on a straight-line basis and create deferred rent. As deferred rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of deferred rent to arrive at AFFO as a means of determining operating results of our portfolio.
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As this item is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization of in-place lease valuation to arrive at AFFO as a means of determining operating results of our portfolio.
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP are capitalized and included as part of the relative fair value when the property acquisition meets the definition of an asset acquisition or are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss), for property acquisitions accounted for as a business combination. By excluding acquisition-related costs, AFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the AFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management.
Financed termination fee, net of payments received. We believe that a fee received from a tenant for terminating a lease is appropriately included as a component of rental revenue and therefore included in AFFO. If, however, the termination fee is to be paid over time, we believe the recognition of such termination fee into income should not be included in AFFO. Alternatively, we believe that the periodic amount paid by the tenant in subsequent periods to satisfy the termination fee obligation should be included in AFFO.
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management believes that this loss is considered an event not associated with our operations, and therefore, deems this write off to be an exclusion from AFFO.
Unrealized gains (losses) on derivative instruments. These adjustments include unrealized gains (losses) from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness. The change in the fair value of interest rate swaps not designated as a hedge and the change in the fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense. We have excluded these adjustments in our calculation of AFFO to more appropriately reflect the economic impact of our interest rate swap agreements.
For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other

47


uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. The use of AFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and AFFO is presented in the following table for the years ended December 31, 2018, 2017 and 2016 (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net income
$
22,038

 
$
146,133

 
$
26,555

Adjustments:
 
 
 
 
 
Depreciation of building and improvements
60,120

 
55,982

 
56,707

Amortization of leasing costs and intangibles
59,020

 
60,573

 
74,114

Impairment provision

 
8,460

 

Equity interest of depreciation of building and improvements - unconsolidated entities
2,594

 
2,496

 
2,486

Equity interest of amortization of intangible assets - unconsolidated entities
4,644

 
4,674

 
4,751

Gain from sale of depreciable operating property
(1,231
)
 
(116,382
)
 

Gain on acquisition of unconsolidated entity

 

 
(666
)
FFO
$
147,185

 
$
161,936

 
$
163,947

Distributions to redeemable preferred shareholders
(3,275
)
 

 

Distributions to noncontrolling interests
(4,737
)
 
(4,737
)
 
(4,493
)
FFO, net of noncontrolling interest and redeemable preferred distributions
$
139,173

 
$
157,199

 
$
159,454

Reconciliation of FFO to AFFO:
 
 
 
 
 
FFO, net of noncontrolling interest and redeemable preferred distributions
$
139,173

 
$
157,199

 
$
159,454

Adjustments:
 
 
 
 
 
Acquisition fees and expenses to non-affiliates
1,331

 

 
541

Acquisition fees and expenses to affiliates

 

 
1,239

Revenues in excess of cash received (straight-line rents)
(7,730
)
 
(11,372
)
 
(14,751
)
Amortization of (below) above market rent
(685
)
 
1,689

 
3,287

 Amortization of debt premium (discount)
32

 
(414
)
 
(1,096
)
Amortization of ground leasehold interests (below market)
28

 
28

 
28

Amortization of deferred revenue

 

 
(1,228
)
Revenues in excess of cash received
(12,532
)
 
(12,845
)
 
(1,202
)
Financed termination fee payments received
15,866

 
11,783

 
1,322

Equity interest of revenues in excess of cash received (straight-line rents) - unconsolidated entities
116

 
(311
)
 
(735
)
Unrealized (gain) loss on derivatives

 
(28
)
 
49

Equity interest of amortization of above/(below) market rent - unconsolidated entities
2,956

 
2,968

 
2,984

AFFO
$
138,555

 
$
148,697

 
$
149,892


Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the payment of operating and capital expenses, including costs associated with re-leasing a property, distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of our Unsecured Credit Facility (as defined below), Bank of America Loan (as defined below), and property secured mortgage loans. Generally, cash needs for items, other than property acquisitions, will be met from operations and the 2017 DRP Offering. Our Advisor will evaluate potential additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to repay debt as allowed under the loan agreements or temporarily invest in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Unsecured Credit Facility
On July 20, 2015, we, through our Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement ") with a syndicate of lenders, co-led by KeyBank National Association ("KeyBank"), Bank of America, N.A. ("Bank of America"), Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement, we were provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan") and a $640.0 million senior unsecured term loan (the "Term Loan"). The Unsecured Credit Facility may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan, the Term Loan, or both. The Revolver Loan has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan has a term of 5 years, maturing on July 20, 2020.
The Unsecured Credit Facility has an interest rate calculated based on London Interbank Offered Rate ("LIBOR") plus the applicable LIBOR margin or Base Rate (as defined below) plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement. The applicable LIBOR margin and Base Rate margin are dependent on whether the interest rate is calculated prior to or after we have received an investment grade senior unsecured credit rating of BBB-/Baa3 from Standard & Poors, Moody's, or Fitch, and we have elected to utilize the investment grade pricing list, as provided in the Unsecured Credit Agreement. Otherwise, the applicable LIBOR margin will be based on a leverage ratio computed in accordance with our quarterly compliance package and communicated to KeyBank. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate (as defined in the Unsecured Credit Agreement) or (ii) the Federal Funds rate (as defined in the Unsecured Credit Agreement) plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter.
As of December 31, 2018, the remaining capacity pursuant to the Unsecured Credit Facility was $206.1 million.
Bank of America Loan
On September 29, 2017, we, through ten special purpose entities wholly owned by our Operating Partnership, entered into a loan agreement with Bank of America, N.A. (together with its successors and assigns, the "Lender") in which we borrowed $375.0 million (the “Bank of America Loan”).
The Bank of America Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on ten properties.The Bank of America Loan has a term of 10 years, maturing on October 1, 2027. The Bank of America Loan bears interest at a rate of 3.77%. The Bank of America Loan requires monthly payments of interest only.

48


Derivative Instruments
As discussed in Note 7, Interest Rate Contracts, to the consolidated financial statements, we entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted, LIBOR-based variable-rate debt, including our Unsecured Credit Facility. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in the fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps as of December 31, 2018 and 2017 (dollars in thousands):
 
 
 
 
 
 
 
 
Fair Value (1)
 
Current Notional Amount (2)
 
 
 
 
 
 
 
 
December 31,
 
December 31,
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
2018
 
2017
 
2018
 
2017
Assets/(Liabilities):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.69%
 
$
5,245

 
$
3,255

 
$
425,000

 
$
425,000

Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.32%
 

 
458

 

 
300,000

Interest Rate Swap
 
7/1/2020
 
7/1/2025
 
2.82%
 
(1,987
)
 

 
125,000

 

Interest Rate Swap
 
7/1/2020
 
7/1/2025
 
2.82%
 
(1,628
)
 

 
100,000

 

Interest Rate Swap
 
7/1/2020
 
7/1/2025
 
2.83%
 
(1,636
)
 

 
100,000

 

Interest Rate Swap
 
7/1/2020
 
7/1/2025
 
2.84%
 
(1,711
)
 

 
100,000

 

Total
 
 
 
 
 
 
 
$
(1,717
)
 
$
3,713

 
$
850,000

 
$
725,000

(1)
We record all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2018, derivatives in an asset/liability position are included in the line item "Other assets or Interest rate swap liability," respectively, in the consolidated balance sheets at fair value.
(2)
Represents the notional amount of swaps as of the balance sheet date of December 31, 2018 and 2017.

Preferred Equity
On August 8, 2018, we entered into a Purchase Agreement with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of our Series A Preferred Shares in two tranches, each comprising 5,000,000 shares. The First Issuance Date, we issued 5,000,000 Series A Preferred Shares to the Purchaser for a total purchase price of $125 million. Pursuant to the Purchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares at a later date for an additional purchase price of $125 million subject to approval by the Purchaser’s internal investment committee and the satisfaction of the conditions in the Purchase Agreement, including, but not limited to, the execution of an Ownership Limit Exemption Agreement. Pursuant to the Purchase Agreement, the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of five years from the closing date.
Distributions
Subject to the terms of the articles supplementary, the holders of the Series A Preferred Shares are entitled to receive distributions quarterly in arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as follows:
i.an initial annual distribution rate of 6.55% from and after the First Issuance Date, or if the Second Issuance occurs, 6.55% from and after the Second Issuance Date until the five year anniversary of the First Issuance Date, or if the Second Issuance occurs, the five year anniversary of the Second Issuance Date, subject to paragraphs (iii) and (iv) below;
ii.6.75% from and after the reset date, subject to paragraphs (iii) and (iv) below;
iii.if a listing of our shares of common stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020, 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to certain conditions as set forth in the articles supplementary; or

49


iv.if a Listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date.
See Note 11, Perpetual Convertible Preferred Shares, to the consolidated financial statements for further discussion regarding the Series A Preferred Shares.
Other Potential Future Sources of Capital
Other potential future sources of capital include proceeds from potential private or public offerings of our stock or limited partnership units of our Operating Partnership, proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate acquisition transaction, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon our current financing, our 2017 DRP Offering and income from operations.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of December 31, 2018 (in thousands):
 
Payments Due During the Years Ending December 31,
 
 
Total
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
 
Outstanding debt obligations (1)
$
1,362,179

 
$
6,570

 
$
729,092

 
$
123,395

 
$
503,122

 
Interest on outstanding debt obligations (2)
254,755

  
54,598

 
73,574

 
47,902

 
78,681

 
Interest rate swaps (3)
8,635

 

 
1,255

 
4,121

 
3,259

 
Ground lease obligations
204,614

 
1,032

 
2,064

 
2,494

 
199,024

 
Total
$
1,830,183

  
$
62,200

 
$
805,985

 
$
177,912

 
$
784,086

 
(1)
Amounts only include principal payments. The payments on our mortgage debt do not include the premium/discount or debt financing costs.
(2)
Projected interest payments are based on the outstanding principal amounts at December 31, 2018. Projected interest payments on the Revolver Loan and Term Loan are based on the contractual interest rate in effect at December 31, 2018.
(3)
The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBOR as of December 31, 2018.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with remaining proceeds raised in our 2017 DRP Offering, operating cash flows generated from our properties, and draws from our Unsecured Credit Facility.
Our cash, cash equivalent and restricted cash balances decreased by approximately $150.6 million during the year ended December 31, 2018 and were primarily used in or provided by the following:
Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. During the year ended December 31, 2018, we generated $120.9 million compared to $142.1 million for the year ended December 31, 2017. Net cash provided in operating activities before changes in operating assets and liabilities for the year ended December 31, 2018 decreased by approximately $3.9 million to approximately $133.1 million compared to approximately $137.0 million for the year ended December 31, 2017.
Investing Activities. During the year ended December 31, 2018, we used approximately $194.5 million in cash in investing activities compared to approximately $254.6 million provided by investing activities during the same period in 2017. The $449.1 million decrease in cash generated in investing activities is primarily related to the following:
$383.1 million decrease in cash proceeds from disposition of properties in the prior period;
$61.2 million increase in cash paid for property acquisitions, and payments for construction in progress;
$3.3 million increase in cash paid for an investment in an unconsolidated joint venture; and
$2.0 million increase in cash paid for acquisition deposits; offset by
$0.8 million decrease in disbursements of cash on building improvements.

50


Financing Activities. During the year ended December 31, 2018, we used approximately $76.9 million of cash in financing activities compared to approximately $238.7 million in cash used in financing activities during the same period in 2017. The decrease in cash used in financing activities of $161.8 million is primarily comprised of the following:
$335.0 million decrease in principal repayments under the Unsecured Credit Facility;
$22.5 million decrease in principal payoff of mortgage debt;
$15.3 million decrease in repurchases of common stock;
$3.3 million decrease in deferred financing costs;
$120.0 million increase in the issuance of preferred equity subject to redemption in the current year, net of offering costs for the preferred shares issued in the current year; and
$42.1 million increase in proceeds from borrowings under the Unsecured Credit Facility; offset by
$375.0 million decrease in proceeds from borrowings under the Bank of America Loan in the prior year; and
$1.2 million increase in dividends paid on preferred units subject to redemption.
Distributions and Our Distribution Policy
Distributions will be paid to our common stockholders as of the record date selected by our Board. We expect to continue to pay distributions monthly based on daily declaration and record dates. We expect to pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our Board, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
our operating and interest expenses;
the amount of distributions or dividends received by us from our indirect real estate investments;
our ability to keep our properties occupied;
our ability to maintain or increase rental rates;
tenant improvements, capital expenditures and reserves for such expenditures;
the issuance of additional shares; and
financings and refinancings.

51


Distributions may be funded with operating cash flow from our properties, offering proceeds raised in future public offerings (if any), or a combination thereof. From inception and through December 31, 2018, we funded 94% of our cash distributions from cash flows provided by operating activities and 6% from offering proceeds. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions declared, distributions paid, and cash flow provided by operating activities during the year ended December 31, 2018 and year ended December 31, 2017 (dollars in thousands):
 
Year Ended December 31, 2018
 
 
 
Year Ended December 31, 2017
 
 
Distributions paid in cash — noncontrolling interests
$
4,737

 
 
 
$
4,737

 
 
Distributions paid in cash — common stockholders
71,822

 
 
 
71,124

 
 
Distributions paid in cash — preferred stockholders
1,228

 
 
 

 
 
Distributions of DRP
40,838

 
 
 
49,541

 
 
Total distributions
$
118,625

(1) 
 
 
$
125,402

 
 
Source of distributions (2)
 
 
 
 
 
 
 
Paid from cash flows provided by operations
$
77,787

  
66
%
 
$
75,861

 
60
%
Offering proceeds from issuance of common stock pursuant to the DRP
40,838