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EX-32.2 - EXHIBIT 32.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit321.htm
EX-31.1 - EXHIBIT 31.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit311.htm
EX-31.2 - EXHIBIT 31.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit312.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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 No. 001-34995
 

Preferred Apartment Communities, Inc.
(Exact name of registrant as specified in its charter)
 

Maryland
27-1712193
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3284 Northside Parkway NW, Suite 150, Atlanta, GA 30327
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (770) 818-4100
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨            Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x
The number of shares outstanding of the registrant’s Common Stock, as of November 4, 2015 was 22,368,377.




 
PART I - FINANCIAL INFORMATION
 
 
 
 
INDEX
 
 
 
 
 
 
 
Item 1.
Financial Statements
Page No. 
 
 
 
 
 
1

 
 
 
 
2

 
 
 
 
3

 
 
 
 
4

 
 
 
 
6

 
 
 
Item 2.
37

 
 
 
Item 3.
64

 
 
 
Item 4.
64

 
 
 
 
 
 
Item 1.
Legal Proceedings
66

 
 
 
Item 1A
Risk Factors
66

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
66

 
 
 
Item 3.
Defaults Upon Senior Securities
66

 
 
 
Item 4.
Mine Safety Disclosures
66

 
 
 
Item 5.
Other Information
66

 
 
 
Item 6.
Exhibits
66

 
 
SIGNATURES
67

 
 
 
 
68








Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
Land
 
$
121,990,344

 
$
79,272,457

Building and improvements
 
646,526,008

 
377,030,987

Tenant improvements
 
4,312,964

 
3,240,784

Furniture, fixtures, and equipment
 
81,754,519

 
36,864,668

Construction in progress
 
679,216

 
66,647

Gross real estate
 
855,263,051

 
496,475,543

Less: accumulated depreciation
 
(45,416,437
)
 
(26,388,066
)
Net real estate
 
809,846,614

 
470,087,477

Real estate loans, net of deferred fee income ($0 and $20,313,722 carried at fair value)
 
154,187,851

 
128,306,697

Real estate loans to related parties, net
 
53,609,059

 
24,924,976

Total real estate and real estate loans, net
 
1,017,643,524

 
623,319,150

 
 
 
 
 
Cash and cash equivalents
 
8,046,824

 
3,113,270

Restricted cash
 
12,020,327

 
4,707,865

Notes receivable
 
10,449,914

 
14,543,638

Note receivable and revolving line of credit to related party
 
17,845,319

 
14,153,922

Accrued interest receivable on real estate loans
 
11,227,275

 
8,038,447

Acquired intangible assets, net of amortization of $24,176,820 and $17,030,176
 
14,948,140

 
12,702,980

Deferred loan costs for revolving line of credit, net of amortization of $747,081 and $624,742
 
487,079

 
79,563

Deferred offering costs
 
6,413,474

 
6,333,763

Tenant receivables (net of allowance of $363,936 and $103,452) and other assets
 
5,758,320

 
4,390,309

 
 
 
 
 
Total assets
 
$
1,104,840,196

 
$
691,382,907

 
 
 
 
 
Liabilities and equity
 

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Mortgage notes payable, principal amount
 
$
598,045,978

 
$
354,418,668

Less: deferred loan costs, net of amortization of $1,661,008 and $810,336
 
(7,241,722
)
 
(5,027,505
)
Mortgage notes payable, net of deferred loan costs
 
590,804,256

 
349,391,163

Revolving line of credit
 
28,700,000

 
24,500,000

Real estate loan participation obligation
 
12,525,823

 
7,990,798

Accounts payable and accrued expenses
 
12,144,470

 
4,941,703

Accrued interest payable
 
1,544,500

 
1,116,750

Dividends and partnership distributions payable
 
5,892,424

 
4,623,246

Acquired below market lease intangibles, net of amortization of $1,295,711 and $660,259
 
7,332,327

 
5,935,931

Security deposits and other liabilities
 
2,349,802

 
1,301,442

Total liabilities
 
661,293,602

 
399,801,033

 
 
 
 
 
Commitments and contingencies (Note 12)
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
Series A Redeemable Preferred Stock, $0.01 par value per share; 1,050,000 shares authorized;
 
 
 
 
386,912 and 193,334 shares issued; 384,112 and 192,846 shares
 
 
 
 
 outstanding at September 30, 2015 and December 31, 2014, respectively
 
3,841

 
1,928

Common Stock, $0.01 par value per share; 400,066,666 shares authorized; 22,301,202 and
 
 
 
 
21,403,987 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
 
223,012

 
214,039

Additional paid-in capital
 
454,470,254

 
300,576,349

Accumulated deficit
 
(13,319,000
)
 
(11,297,852
)
Total stockholders' equity
 
441,378,107

 
289,494,464

Non-controlling interest
 
2,168,487

 
2,087,410

Total equity
 
443,546,594

 
291,581,874

 
 
 
 
 
Total liabilities and equity
 
$
1,104,840,196

 
$
691,382,907


The accompanying notes are an integral part of these consolidated financial statements.
1




Preferred Apartment Communities, Inc.
Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental revenues
$
19,442,628

 
$
6,546,945

 
$
47,304,230

 
$
18,460,968

Other property revenues
2,558,185

 
799,716

 
6,685,752

 
2,205,424

Interest income on loans and notes receivable
5,909,907

 
4,871,387

 
16,367,864

 
13,656,982

Interest income from related parties
2,044,973

 
964,612

 
5,031,189

 
2,164,558

Total revenues
29,955,693

 
13,182,660

 
75,389,035

 
36,487,932

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Property operating and maintenance
3,097,080

 
1,067,849

 
7,722,017

 
2,941,383

Property salary and benefits reimbursement to related party
1,688,347

 
632,051

 
4,114,752

 
1,866,416

Property management fees (including $751,817, $274,060,
 
 
 
 
 
 
 
$1,795,435 and $794,855 to related parties)
857,294

 
283,805

 
2,082,839

 
814,600

Real estate taxes
2,506,885

 
712,752

 
6,911,034

 
2,102,065

General and administrative
632,164

 
177,291

 
1,553,666

 
598,895

Equity compensation to directors and executives
593,417

 
456,961

 
1,761,268

 
1,347,107

Depreciation and amortization
10,536,486

 
3,185,739

 
26,409,763

 
8,791,045

Acquisition and pursuit costs (including $63,486, $171,046,
 
 
 
 
 
 
 
$148,127 and $171,046 to related party)
1,783,708

 
3,056,997

 
2,876,642

 
3,407,392

Acquisition fees to related parties
1,541,250

 
3,443,059

 
3,400,021

 
3,500,327

Asset management fees to related party
1,908,742

 
787,115

 
4,830,588

 
2,207,385

Insurance, professional fees and other expenses
1,062,687

 
458,367

 
2,412,441

 
1,270,281

Total operating expenses
26,208,060

 
14,261,986

 
64,075,031

 
28,846,896

 
 
 
 
 
 
 
 
Asset management and general and administrative expense fees deferred
(373,360
)
 

 
(1,528,479
)
 

 
 
 
 
 
 
 
 
Net operating expenses
25,834,700

 
14,261,986

 
62,546,552

 
28,846,896

 
 
 
 
 
 
 
 
Operating income (loss)
4,120,993

 
(1,079,326
)
 
12,842,483

 
7,641,036

Interest expense
5,818,760

 
2,150,047

 
14,884,343

 
5,650,096

 
 
 
 
 
 
 
 
Net (loss) income
(1,697,767
)
 
(3,229,373
)
 
(2,041,860
)
 
1,990,940

 
 
 
 
 
 
 
 
Consolidated net loss (income) attributable to non-controlling interests
15,289

 
26,481

 
20,712

 
(32,747
)
 
 
 
 
 
 
 
 
Net (loss) income attributable to the Company
(1,682,478
)
 
(3,202,892
)
 
(2,021,148
)
 
1,958,193

 
 
 
 
 
 
 
 
Dividends declared to Series A preferred stockholders
(5,114,126
)
 
(1,903,517
)
 
(12,377,580
)
 
(4,924,832
)
Earnings attributable to unvested restricted stock
(4,068
)
 
(6,275
)
 
(16,355
)
 
(17,227
)
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(6,800,672
)
 
$
(5,112,684
)
 
$
(14,415,083
)
 
$
(2,983,866
)
 
 
 
 
 
 
 
 
Net loss per share of Common Stock available to
 
 
 
 
 
 
 
common stockholders, basic and diluted
$
(0.31
)
 
$
(0.29
)
 
$
(0.65
)
 
$
(0.18
)
 
 
 
 
 
 
 
 
Dividends per share declared on Common Stock
$
0.18

 
$
0.16

 
$
0.535

 
$
0.48

 
 
 
 
 
 
 
 
Weighted average number of shares of Common Stock outstanding,
 
 
 
 
 
 
 
basic and diluted
22,292,217

 
17,564,091

 
22,109,036

 
16,399,675


The accompanying notes are an integral part of these consolidated financial statements.
2




Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the nine months ended September 30, 2015 and 2014
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A Redeemable Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated (Deficit)
 
Total Stockholders' Equity
 
Non-Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
$
893

 
$
152,945

 
$
177,824,720

 
$
(13,391,341
)
 
$
164,587,217

 
$
1,465,502

 
$
166,052,719

Issuance of Units
 
571

 

 
57,132,980

 

 
57,133,551

 

 
57,133,551

Redemptions of Series A Preferred Stock
 
(3
)
 
331

 
(24,842
)
 

 
(24,514
)
 

 
(24,514
)
Issuance of Common Stock
 

 
43,985

 
37,077,020

 

 
37,121,005

 

 
37,121,005

Syndication and offering costs
 

 

 
(7,603,807
)
 

 
(7,603,807
)
 

 
(7,603,807
)
Equity compensation to executives and directors
 

 
35

 
249,682

 

 
249,717

 

 
249,717

Vesting of restricted stock
 

 
293

 
(293
)
 

 

 

 

Conversion of Class A Units to Common Stock
 

 
1,040

 
565,158

 

 
566,198

 
(566,198
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
1,097,389

 
1,097,389

Net income
 

 

 

 
1,958,193

 
1,958,193

 
32,747

 
1,990,940

Reallocation adjustment to non-controlling interests
 

 

 
168,889

 

 
168,889

 
(168,889
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(81,262
)
 
(81,262
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(4,924,832
)
 

 
(4,924,832
)
 

 
(4,924,832
)
Dividends to common stockholders ($0.48 per share)
 

 

 
(8,049,892
)
 

 
(8,049,892
)
 

 
(8,049,892
)
Balance at September 30, 2014
 
$
1,461

 
$
198,629

 
$
252,414,783

 
$
(11,433,148
)
 
$
241,181,725

 
$
1,779,289

 
$
242,961,014

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
 
$
1,928

 
$
214,039

 
$
300,576,349

 
$
(11,297,852
)
 
$
289,494,464

 
$
2,087,410

 
$
291,581,874

Issuance of Units
 
1,936

 

 
193,447,355

 

 
193,449,291

 

 
193,449,291

Redemptions of Series A Preferred Stock
 
(23
)
 
599

 
(1,505,907
)
 

 
(1,505,331
)
 

 
(1,505,331
)
Issuance of Common Stock
 

 
5,479

 
5,487,829

 

 
5,493,308

 

 
5,493,308

Exercises of warrants
 

 
1,307

 
1,241,956

 

 
1,243,263

 

 
1,243,263

Syndication and offering costs
 

 

 
(22,027,008
)
 

 
(22,027,008
)
 

 
(22,027,008
)
Equity compensation to executives and directors
 

 
40

 
282,532

 

 
282,572

 

 
282,572

Vesting of restricted stock
 

 
468

 
(468
)
 

 

 

 

Conversion of Class A Units to Common Stock
 

 
1,080

 
717,583

 

 
718,663

 
(718,663
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
1,478,696

 
1,478,696

Net loss
 

 

 

 
(2,021,148
)
 
(2,021,148
)
 
(20,712
)
 
(2,041,860
)
Reallocation adjustment to non-controlling interests
 

 

 
508,937

 

 
508,937

 
(508,937
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(149,307
)
 
(149,307
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(12,377,579
)
 

 
(12,377,579
)
 

 
(12,377,579
)
Dividends to common stockholders ($0.535 per share)
 

 

 
(11,881,325
)
 

 
(11,881,325
)
 

 
(11,881,325
)
Balance at September 30, 2015
 
$
3,841

 
$
223,012

 
$
454,470,254

 
$
(13,319,000
)
 
$
441,378,107

 
$
2,168,487

 
$
443,546,594


The accompanying notes are an integral part of these consolidated financial statements.
3



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Nine months ended September 30,
 
 
2015
 
2014
Operating activities:
 
 
 
 
Net (loss) income
 
$
(2,041,860
)
 
$
1,990,940

Reconciliation of net (loss) income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
19,052,639

 
7,348,550

Amortization expense
 
7,357,124

 
1,442,495

Amortization of above and below market leases
 
(566,260
)
 
(96,056
)
Deferred fee income amortization
 
(580,996
)
 
(805,360
)
Deferred loan cost amortization
 
1,069,961

 
433,609

(Increase) in accrued interest income on real estate loans
 
(3,188,828
)
 
(3,219,158
)
Equity compensation to executives and directors
 
1,761,268

 
1,347,107

Deferred cable income amortization
 
(14,807
)
 
(14,073
)
Loss on asset disposal
 

 
2,804

Changes in operating assets and liabilities:
 
 
 
 
(Increase) decrease in tenant receivables and other assets
 
(539,565
)
 
279,345

Increase in accounts payable and accrued expenses
 
5,069,158

 
1,146,507

Increase in accrued interest payable
 
427,750

 
89,745

Increase in prepaid rents
 
237,613

 
19,033

Increase in security deposits and other liabilities
 
144,931

 
32,096

Net cash provided by operating activities
 
28,188,128

 
9,997,584

 
 
 
 
 
Investing activities:
 
 
 
 
Investments in real estate loans
 
(83,800,145
)
 
(39,513,149
)
Repayments of real estate loans
 
18,772,024

 
3,125,202

Notes receivable issued
 
(5,805,972
)
 
(9,111,133
)
Notes receivable repaid
 
9,897,319

 
3,810,504

Note receivable issued to and draws on line of credit by related party
 
(12,869,093
)
 
(9,312,953
)
Repayments of line of credit by related party
 
8,514,582

 
5,359,560

Acquisition fees received on real estate loans
 
2,126,913

 
836,755

Acquisition fees paid on real estate loans
 
(1,063,456
)
 
(438,465
)
Acquisition fees paid to real estate loan participants
 
(24,665
)
 

Acquisition of properties
 
(311,936,810
)
 
(285,302,277
)
Additions to real estate assets - improvements
 
(3,007,537
)
 
(1,661,807
)
(Payment) refunds of deposits for property acquisitions
 
(1,519,269
)
 
4,773

(Increase) in restricted cash
 
(4,998,076
)
 
(648,950
)
Net cash used in investing activities
 
(385,714,185
)
 
(332,851,940
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
204,555,500

 
217,956,000

Payments for mortgage debt
 
(2,553,190
)
 
(13,098,170
)
Payments for deposits and other mortgage loan costs
 
(3,240,080
)
 
(4,903,701
)
Proceeds from real estate loan participants
 
4,134,882

 
3,338,204

Proceeds from lines of credit
 
165,900,000

 
73,683,305

Payments on lines of credit
 
(161,700,000
)
 
(67,073,306
)
Proceeds from Term Loan
 
32,000,000

 
44,250,000

Repayment of the Term Loan
 
(32,000,000
)
 

Proceeds from sales of Units, net of offering costs and redemptions
 
174,702,572

 
51,479,498

Proceeds from sales of Common Stock
 
5,381,848

 
36,058,950

Common Stock dividends paid
 
(11,560,512
)
 
(7,563,679
)
Series A Preferred Stock dividends paid
 
(11,453,618
)
 
(4,663,139
)
Distributions to non-controlling interests
 
(124,905
)
 
(75,179
)
Payments for deferred offering costs
 
(1,582,886
)
 
(2,127,153
)
Net cash provided by financing activities
 
362,459,611

 
327,261,630

 
 
 
 
 
Net increase in cash and cash equivalents
 
4,933,554

 
4,407,274

Cash and cash equivalents, beginning of period
 
3,113,270

 
9,180,431

Cash and cash equivalents, end of period
 
$
8,046,824

 
$
13,587,705

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.
4



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
(Unaudited)
 
 
 
 
 
Nine months ended September 30,
 
 
2015
 
2014
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
13,386,632

 
$
5,132,292

 
 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
 
Accrued capital expenditures
 
$
641,627

 
$
70,392

Writeoff of fully depreciated or amortized assets and liabilities
 
$
290,009

 
$

Dividends payable - Common Stock
 
$
4,018,249

 
$
2,937,911

Dividends payable - Series A Preferred Stock
 
$
1,824,395

 
$
693,357

Partnership distributions payable to non-controlling interests
 
$
49,781

 
$
23,202

Accrued and payable deferred offering costs
 
$
665,756

 
$
175,598

Reclass of offering costs from deferred asset to equity
 
$
2,584,073

 
$
739,831

Bridge loans converted to real estate loans
 
$
29,158,371

 
$
17,334,271

CityPark View real estate loan balance applied to purchase of property
 
$
10,000,000

 
$

Fair value issuances of equity compensation
 
$
2,309,569

 
$
1,792,245

Offering cost reimbursement to related party
 
$
670,579

 
$
321,910

Assumed mortgage debt
 
$
41,625,000

 
$



The accompanying notes are an integral part of these consolidated financial statements.
5


Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements
September 30, 2015



1.
Organization and Basis of Presentation

Preferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the context otherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company was formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and may make mezzanine loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities and other properties. As a secondary strategy, the Company also may acquire or originate senior mortgage loans, subordinate loans or mezzanine debt secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest not more than 20% of its assets in other real estate related investments such as owned grocery-anchored shopping centers, senior mortgage loans, subordinate loans or mezzanine debt secured by interests in grocery-anchored shopping centers, membership or partnership interests in grocery-anchored shopping centers and other grocery-anchored related assets, as determined by its Manager (as defined below) as appropriate for the Company. The Company is externally managed and advised by Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and related party (see Note 7).

As of September 30, 2015, the Company had 22,301,202 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and owned units in the Operating Partnership which represented a weighted-average ownership percentage of 98.7% for the nine-month period ended September 30, 2015. The number of partnership units not owned by the Company totaled 276,560 at September 30, 2015 and represented Class A Units of the Operating Partnership, or Class A Units. The Class A Units are convertible at any time at the option of the holder into the Company's choice of either cash or Common Stock. In the case of cash, the value is determined based upon the trailing 20-day volume weighted average price of the Company's Common Stock.

The Company controls the Operating Partnership through its sole general partner interest and conducts substantially all of its business through the Operating Partnership. New Market Properties, LLC, a wholly-owned subsidiary of the Operating Partnership, owns and conducts the business of the Company's grocery-anchored shopping centers.

Basis of Presentation

These unaudited consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. All significant intercompany transactions have been eliminated in consolidation. Certain adjustments have been made consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the Company's financial condition and results of operations. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The year end condensed balance sheet data was derived from audited financial statements, but does not include all the disclosures required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 16, 2015.
    

6

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015


2.
Summary of Significant Accounting Policies

Acquisitions and Impairments of Real Estate Assets

The Company generally records its initial investments in income-producing real estate at fair value at the acquisition date in accordance with ASC 805-10, Business Combinations. The aggregate purchase price of acquired properties is apportioned to the tangible and identifiable intangible assets and liabilities acquired at their estimated fair values. The value of acquired land, buildings and improvements is estimated by formal appraisals, observed comparable sales transactions, and information gathered during pre-acquisition due diligence activities and the valuation approach considers the value of the property as if it were vacant. The values of furniture, fixtures, and equipment are estimated by calculating their replacement cost and reducing that value by factors based upon estimates of their remaining useful lives. Intangible assets and liabilities for multifamily communities include the values of in-place leases and above-market or below-market leases. Additional intangible assets for retail properties also include costs to initiate leases such as commissions and legal costs.

In-place lease values for multifamily communities are estimated by calculating the estimated time to fill a hypothetically empty apartment complex to its stabilization level (estimated to be 92% occupancy) based on historical observed move-in rates for each property, and which approximate market rates. Carrying costs during these hypothetical expected lease-up periods are estimated, considering current market conditions and include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates. The intangible assets are calculated by estimating the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. The acquired in-place lease values are amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases. The amounts of above-market or below-market lease values are developed by comparing the Company's estimate of the average market rent to the average contract rent of the leases in place at the property acquisition date. This ratio is applied on a lease by lease basis to derive a total asset or liability amount for the property. The above-market or below-market lease values are recorded as a reduction or increase, respectively, to rental revenue over the remaining average non-cancelable term of the respective leases, plus any below market probable renewal options.

The fair values of in-place leases for retail shopping centers represent the value of direct costs associated with leasing, including opportunity costs associated with lost rentals that are avoided by acquiring in-place leases. Direct costs associated with obtaining a new tenant include commissions, legal and marketing costs, incentives such as tenant improvement allowances and other direct costs. Such direct costs are estimated based on our consideration of current market costs to execute a similar lease. The value of opportunity costs is estimated using the estimated market lease rates and the estimated absorption period of the space. These direct costs and opportunity costs are included in the accompanying consolidated balance sheets as acquired intangible assets and are amortized to expense over the remaining term of the respective leases. The fair values of above-market and below-market in-place leases for retail shopping centers are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the leases, taking into consideration the probability of renewals for any below-market leases. The capitalized above-market leases and in place leases are included in the acquired intangible assets line of the consolidated balance sheets. Both above-market and below-market lease values are amortized as adjustments to rental revenue over the remaining term of the respective leases, plus any below market probable renewal options.

Estimating the fair values of the tangible and intangible assets requires us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount and capitalization rates, market absorption periods, and the number of years the property is held for investment. The use of unreasonable estimates would result in an incorrect assessment of our purchase price allocations, which would impact the amount of our reported net income. Acquired intangible assets and liabilities have no residual value.

The Company evaluates its tangible and identifiable intangible real estate assets for impairment when events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. The total undiscounted cash flows of the asset group, including proceeds from disposition, are compared to the net book value of the asset group. If this test indicates that impairment exists, an impairment loss is recorded in earnings equal to the shortage of the book value to the discounted net cash flows of the asset group.


7

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015


Loans and Notes Held for Investment

The Company carries its investments in real estate loans at amortized cost with assessments made for impairment in the event recoverability of the principal amount becomes doubtful. If, upon testing for impairment, the fair value result is lower than the carrying amount of the loan, a valuation allowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. Recoveries of valuation allowances are only recognized in the event of maturity or a sale or disposition in an amount above carrying value. The balances of real estate loans presented on the consolidated balance sheets consist of drawn amounts on the loans, net of deferred loan fee revenue. See the "Revenue Recognition" section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6.

Deferred Offering Costs

Deferred offering costs represent direct costs incurred by the Company related to current equity offerings, excluding costs specifically identifiable to a closing, such as commissions, dealer-manager fees, and other registration fees. For issuances of equity that occur on one specific date, associated offering costs are reclassified as a reduction of proceeds raised on the date of issue. Our ongoing offering of up to a maximum of 900,000 units, consisting of one share of Series A Redeemable Preferred Stock, or Series A Preferred Stock, and one warrant, or Warrant, to purchase 20 shares of Common Stock, or Units, generally closes on a bimonthly basis in variable amounts. Such offering is referred to herein as the Follow-on Offering, pursuant to our registration statement on Form S-3 (registration number 333-183355), as may be amended from time to time. Deferred offering costs related to the Follow-on Offering and Shelf Offering (as defined in Note 6) are reclassified to the stockholders’ equity section of the consolidated balance sheet as a reduction of proceeds raised on a pro-rata basis equal to the ratio of total Units or value of shares issued to the maximum number of Units, or the value of shares, as applicable, that are expected to be issued.

Revenue Recognition

Rental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of rental agreements, typically of 13 months’ duration. Differences from the straight-line method, which recognize the effect of any up-front concessions and other adjustments ratably over the lease term, are recorded in the appropriate period, to the extent that adjustments to the straight-line method are material. The Company evaluates the collectability of amounts due from residents and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of residents to make required payments then due under lease agreements. The balance of amounts due from residents are generally deemed uncollectible 30 days beyond the due date, at which point they are fully reserved.

Rental revenue from tenants' operating leases in the Company's retail shopping centers is recognized on a straight-line basis over the term of the lease regardless of when payments are due. Revenue based on "percentage rent" provisions that provide for additional rents that become due upon achievement of specified sales revenue targets (as specified in each lease agreement) is recognized only after the tenant exceeds its specified sales revenue target. Revenue from reimbursements of the tenants' share of real estate taxes, insurance and common area maintenance, or CAM, costs are recognized in the period in which the related expenses are incurred. Lease termination revenues are recognized ratably over the revised remaining lease term after giving effect to the termination notice or when tenant vacates and the Company has no further obligations under the lease. Rents and tenant reimbursements collected in advance are recorded as prepaid rent within other liabilities in the accompanying consolidated balance sheets. The Company estimates the collectability of the tenant receivable related to rental and reimbursement billings due from tenants and straight-line rent receivables, which represent the cumulative amount of future adjustments necessary to present rental revenue on a straight-line basis, by taking into consideration the Company's historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms.

The Company may provide retail tenants an allowance for the construction of leasehold improvements. These leasehold improvements are capitalized and depreciated over the shorter of the useful life of the improvements or the remaining lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of minimum rent. Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease. When the Company is the owner of the leasehold improvements, recognition of lease revenue commences when the lessee is given possession of the leased space upon completion of tenant improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date is the date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements.

8

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015



Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans or notes using the effective interest method. In the event that a loan or note is refinanced with the proceeds of another loan issued by the Company, any unamortized loan fee revenue from the first loan will be recognized as interest revenue over the term of the new loan. Direct loan origination fees and origination or acquisition costs applicable to real estate loans are amortized over the lives of the loans as adjustments to interest income. The accrual of interest on all these instruments ceases when there is concern as to the ultimate collection of principal or interest, which is generally a delinquency of 30 days in required payments of interest or principal. Any payments received on such non-accrual loans are recorded as interest income when the payments are received. Real estate loan assets are reclassified as accrual-basis once interest and principal payments become current. Certain real estate loan assets include limited purchase options and either exit fees or additional amounts of accrued interest. Exit fees will be treated as additional consideration for the acquired project if the Company purchases the subject property. Additional accrued interest becomes due in cash to the Company on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in the associated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by the Company or one of its affiliates) and (iv) any other repayment of the loan.

Promotional fees received from service providers at the Company’s properties are deferred and recognized on a straight-line basis over the term of the agreement.

The PAC Rewards program allows residents in the Company's multifamily communities to accumulate reward points on a monthly basis for actions such as resident referrals and making rent payments online. Once a property has been enrolled on the program, a resident must rent an apartment from the Company for at least 14 months before reward points may be redeemed for services or upgrades to a resident’s unit. The Company accrues a liability for the estimated cost of these future point redemptions, net of a 35% breakage fee, which is the Company’s current estimate of rewards points that will not be redeemed. In accordance with Staff Accounting Bulletin 13.A.3c, the Company deems its obligations under PAC Rewards as inconsequential to the delivery of services according to the lease terms. Therefore, the expense related to the PAC Rewards Program is included in property operating and maintenance expense on the consolidated statements of operations.
    
Discontinued Operations

The Company evaluates all disposal groups for held-for-sale classification for which such disposal represents (or will represent) a strategic shift which will have a significant effect on the Company's results or operations and financial results.

New Accounting Pronouncements    

In May 2014, the FASB issued Accounting Standards Update 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. ASU 2014-09 may be applied using either a full retrospective or a modified approach upon adoption. The Company is currently evaluating the impact this standard may have on its financial statements.

In August 2014, the FASB issued Accounting Standards Update 2014-15 (“ASU 2014-15”), Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This new guidance requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures.  ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter, early adoption is permitted.  The Company is currently in the process of evaluating the impact the adoption of ASU 2014-15 will have on its financial statements.

In February 2015, the FASB issued Accounting Standards Update 2015-02 ("ASU 2015-02"), Consolidation (Topic 810): Amendments to the Consolidation Analysis. This new guidance specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will be required to consolidate the limited partnership. ASU 2015-02 is effective on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new

9

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015


standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity/capital as of the beginning of the period of adoption or retrospectively to each period presented. The Company has not yet selected a transition method and is currently in the process of evaluating the impact the adoption of ASU 2015-02 will have on its financial statements.

In April 2015, the FASB issued Accounting Standards Update 2015-03 ("ASU 2015-03"), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This new guidance requires that the balance of unamortized debt issuance costs related to non-revolving debt instruments to be shown in the liabilities section of the consolidated balance sheets as a reduction of the principal amount of the associated debt, rather than as an asset. ASU 2015-03 is effective on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a retrospective approach by restating prior period comparative consolidated balance sheets. The Company's adoption of ASU 2015-03, which was effective June 30, 2015, did not materially impact its financial position or results of operations.

In September 2015, the FASB issued Accounting Standards Update 2015-16 ("ASU 2015-16"), Business Combinations: Simplifying the Accounting for Measurement Period Adjustments. This new guidance requires that the acquirer recognize adjustments to provisional amounts initially recorded in the purchase price allocation, including any effect on earnings, that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective on January 1, 2016 and is prospective in adoption method. The Company does not expect the adoption of ASU 2015-16 to materially impact its financial position or results of operations.

3. Real Estate Assets
At September 30, 2015, the Company's real estate assets included seventeen multifamily communities with 5,416 total units and twelve grocery-anchored shopping centers with approximately 954,000 square feet of gross leasable area. At September 30, 2014, the Company owned ten multifamily communities with 3,326 total units and nine grocery-anchored shopping centers with approximately 632,000 square feet of gross leasable area.

The Company acquired the following multifamily communities during the nine months ended September 30, 2015:
Acquisition date
 
Property
 
Location
 
Approximate purchase price (millions)
 
Units
 
 
 
 
 
 
 
 
 
9/3/2015
 
Citi Lakes
 
Orlando, Florida
 
$
63.4

 
346

7/31/2015
 
Avenues at Creekside
 
San Antonio, Texas
 
$
56.2

 
395

6/30/2015
 
CityPark View
 
Charlotte, North Carolina
 
$
32.7

 
284

6/24/2015
 
Aster at Lely
 
Naples, Florida
 
$
52.5

 
308

5/21/2015
 
Venue at Lakewood Ranch
 
Sarasota, Florida
 
$
47.4

 
237

2/13/2015
 
Avenues at Cypress (1)
 
Houston, Texas
 
(1) 

 
240

2/13/2015
 
Avenues at Northpointe (1)
 
Houston, Texas
 
(1) 

 
280

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,090


(1) Avenues at Cypress and Avenues at Northpointe are referred to collectively as the Houston Portfolio, which was acquired for approximately $76.0 million.

The purchase prices approximated the fair value of the acquired assets and assumed liabilities. The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. These purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities, but are preliminary and are subject to refinement for a period of up to one year from the closing date of each transaction.

10

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015


 
CityPark View
 
Aster at Lely
 
Venue at Lakewood Ranch
 
Houston Portfolio
Land
$
3,558,793

 
$
7,675,409

 
$
3,791,050

 
$
7,162,226

Buildings and improvements
23,797,764

 
37,661,901

 
37,574,391

 
54,217,075

Furniture, fixtures and equipment
4,562,148

 
6,132,384

 
5,375,690

 
13,078,872

Lease intangibles
737,790

 
1,030,306

 
669,369

 
1,571,827

Prepaids & other assets
99,124

 
106,717

 
80,201

 
150,326

Escrows
211,428

 

 
401,294

 
362,332

Accrued taxes
(105,756
)
 
(23,413
)
 
(216,252
)
 
(212,601
)
Security deposits, prepaid rents, and other liabilities
(40,152
)
 
(64,689
)
 
(35,157
)
 
(99,181
)
 
 
 
 
 
 
 
 
Net assets acquired
$
32,821,139

 
$
52,518,615

 
$
47,640,586

 
$
76,230,876

 
 
 
 
 
 
 
 
Cash paid
$
721,139

 
$
18,518,615

 
$
16,830,586

 
$
25,452,876

Real estate loan balance applied
10,000,000

 

 

 

Mortgage debt
22,100,000

 
34,000,000

 
30,810,000

 
50,778,000

 
 
 
 
 
 
 
 
Total consideration
$
32,821,139

 
$
52,518,615

 
$
47,640,586

 
$
76,230,876


The Company previously held loan investments which supported the development of of the CityPark View and Aster at Lely multifamily communities.
 
Avenues at Creekside
 
Citi Lakes
Land
$
5,983,724

 
$
5,558,033

Buildings and improvements
42,050,104

 
49,416,492

Furniture, fixtures and equipment
6,939,014

 
7,411,367

Lease intangibles
1,227,158

 
964,108

Prepaids & other assets
89,582

 
40,032

Escrows
1,058,468

 
280,863

Accrued taxes
(440,660
)
 
(187,792
)
Security deposits, prepaid rents, and other liabilities
(218,438
)
 
(80,629
)
 
 
 
 
Net assets acquired
$
56,688,952

 
$
63,402,474

 
 
 
 
Cash paid
$
15,063,952

 
$
18,952,474

Mortgage debt (1)
41,625,000

 
44,450,000

 
 
 
 
Total consideration
$
56,688,952

 
$
63,402,474

 
 
 
 
(1) Mortgage on Avenues at Creekside was assumed as part of the acquisition.




11

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015


Since the acquisition dates, contributions by the acquired properties to the Company's consolidated results of operations were:

 
CityPark View
 
Aster at Lely
 
Venue at Lakewood Ranch
 
Houston Portfolio
Three months ended September 30, 2015:
 
 
 
 
 
 
 
Revenue
$
941,000

 
$
1,256,000

 
$
1,085,000

 
$
2,187,000

Net income (loss)
$
(362,000
)
 
$
(560,000
)
 
$
(344,000
)
 
$
(670,000
)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015:
 
 
 
 
 
 
 
Revenue
$
941,000

 
$
1,256,000

 
$
1,462,000

 
$
5,209,000

Net income (loss)
$
(490,000
)
 
$
(774,000
)
 
$
(683,000
)
 
$
(2,422,000
)
 
 
 
 
 
 
 
 
Acquisition costs incurred by the Company
$
276,000

 
$
438,000

 
$
889,000

 
$
1,116,000

Remaining amortization period of intangible
 
 
 
 
 
 
 
 assets and liabilities (months)
2.5

 
2.5

 
1.5

 
0


 
Avenues at Creekside
 
Citi Lakes
Three and nine months ended September 30, 2015:
 
 
 
Revenue
$
1,014,000

 
$
399,000

Net income (loss)
$
(591,000
)
 
$
(10,000
)
 
 
 
 
Acquisition costs incurred by the Company
$
853,000

 
$
1,612,000

Remaining amortization period of intangible
 
 
 
 assets and liabilities (months)
3.5

 
7.5


The Company acquired the following grocery-anchored shopping centers during the nine months ended September 30, 2015:
Acquisition date
 
Property
 
Location
 
Approximate purchase price (millions)
 
Gross leasable area
 
 
 
 
 
 
 
 
 
9/4/2015
 
Royal Lakes Marketplace (1)
 
Atlanta, Georgia
 
$
16.6

 
119,493

7/1/2015
 
Independence Square
 
Dallas, Texas
 
$
18.0

 
140,218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
259,711


(1) See Note 7 - Related Party Transactions

The purchase prices approximated the fair value of the acquired assets and assumed liabilities. The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. These purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities, but are preliminary and are subject to refinement for a period of up to one year from the closing date of each transaction.

12

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015


 
Independence Square
 
Royal Lakes Marketplace
Land
$
4,114,574

 
$
4,874,078

Buildings and improvements
13,123,553

 
9,921,403

Tenant improvements
566,857

 
517,191

In-place leases
1,567,944

 
957,093

Above-market leases
35,127

 
198,238

Leasing costs
392,451

 
365,629

Below-market leases
(1,775,506
)
 
(315,837
)
Other assets

 
88,553

Security deposits, prepaid rents, and other liabilities
(226,599
)
 
(145,581
)
 
 
 
 
Net assets acquired
$
17,798,401

 
$
16,460,767

 
 
 
 
Cash paid
$
17,798,401

 
$
6,660,767

Mortgage debt

(1) 
9,800,000

 
 
 
 
Total consideration
$
17,798,401

 
$
16,460,767


(1) On August 27, 2015, the Company entered into a mortgage note secured by the Independence Square property in the principal amount of $12,617,500.
 
Independence Square
 
Royal Lakes Marketplace
Three months and nine months ended September 30, 2015:
 
 
 
Revenue
$
488,000

 
$
92,000

Net income (loss)
$
(6,000
)
 
$
15,000

 
 
 
 
Acquisition costs incurred by the Company
$
569,000

 
$
239,000

Remaining amortization period of intangible
 
 
 
 assets and liabilities (years)
6.2

 
9.9


The Company's consolidated amortization and depreciation expense consisted of:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Depreciation:
 
 
 
 
 
 
 
 
Buildings and improvements
 
$
4,545,441

 
$
1,475,098

 
$
11,356,809

 
$
3,833,974

Furniture, fixtures, and equipment
 
2,999,399

 
1,248,832

 
7,695,830

 
3,521,459

 
 
7,544,840

 
2,723,930

 
19,052,639

 
7,355,433

Amortization:
 
 
 
 
 
 
 
 
Acquired intangible assets
 
2,982,982

 
460,618

 
7,343,400

 
1,432,040

Deferred leasing costs
 
7,207

 

 
7,207

 

Website development costs
 
1,457

 
1,191

 
6,517

 
3,572

Total depreciation and amortization
 
$
10,536,486

 
$
3,185,739

 
$
26,409,763

 
$
8,791,045



13

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015



4. Acquired Intangible Assets and Liabilities

The Company recorded the following acquired lease intangible assets and liabilities and related accumulated amortization, as of
September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
 
Multifamily
 
Retail
 
Total
 
Multifamily
 
Retail
 
Total
In-place leases
$
22,037,582

 
$
11,449,941

 
$
33,487,523

 
$
15,837,024

 
$
9,221,651

 
$
25,058,675

Above-market leases

 
706,910

 
706,910

 

 
479,883

 
479,883

Customer relationships
1,588,277

 

 
1,588,277

 
1,588,277

 

 
1,588,277

Lease origination costs

 
3,342,250

 
3,342,250

 

 
2,606,321

 
2,606,321

  Acquired intangible assets
$
23,625,859

 
$
15,499,101

 
$
39,124,960

 
$
17,425,301

 
$
12,307,855

 
$
29,733,156

 
 
 
 
 
 
 
 
 
 
 
 
Less accumulated amortization of:
 
 
 
 
 
 
 
 
 
 
 
In-place leases
$
(19,513,807
)
 
$
(2,412,160
)
 
$
(21,925,967
)
 
$
(14,351,922
)
 
$
(892,714
)
 
$
(15,244,636
)
Above market leases

 
(172,145
)
 
(172,145
)
 

 
(49,795
)
 
(49,795
)
Customer relationships
(1,588,277
)
 

 
(1,588,277
)
 
(1,588,277
)
 

 
(1,588,277
)
Lease origination costs

 
(490,431
)
 
(490,431
)
 

 
(147,468
)
 
(147,468
)
Accumulated amortization
(21,102,084
)
 
(3,074,736
)
 
(24,176,820
)
 
(15,940,199
)
 
(1,089,977
)
 
(17,030,176
)
 
 
 
 
 
 
 
 
 
 
 
 
Acquired intangible assets, net
$
2,523,775

 
$
12,424,365

 
$
14,948,140

 
$
1,485,102

 
$
11,217,878

 
$
12,702,980

 
 
 
 
 
 
 
 
 
 
 
 
Below market lease liability
$
383,593

 
$
8,244,445

 
$
8,628,038

 
$
383,593

 
$
6,212,597

 
$
6,596,190

Less: accumulated amortization
(383,593
)
 
(912,118
)
 
(1,295,711
)
 
(383,593
)
 
(276,666
)
 
(660,259
)
Below market lease liability, net
$

 
$
7,332,327

 
$
7,332,327

 
$

 
$
5,935,931

 
$
5,935,931


The Company recognized amortization of acquired intangible assets and liabilities as follows:
 
Three months ended September 30,
 
2015
 
2014
Amortization expense
Multifamily
 
Retail
 
Total
 
Multifamily
 
Retail
 
Total
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Leases in place
$
2,183,437

 
$
668,053

 
$
2,851,490

 
$
297,021

 
$
140,663

 
$
437,684

Above-market leases (1)

 
45,585

 
45,585

 

 
6,049

 
6,049

Customer relationships

 

 

 

 

 

Lease origination costs

 
131,492

 
131,492

 

 
22,934

 
22,934

 
$
2,183,437

 
$
845,130

 
$
3,028,567

 
$
297,021

 
$
169,646

 
$
466,667

Intangible liabilities:
 
 
 
 
 
 
 
 
 
 
 
Below-market leases (1)
$

 
$
270,517

 
$
270,517

 
$

 
$
61,341

 
$
61,341

 
 
 
 
 
 
 
 
 
 
 
 
(1) Amortization of above and below market lease intangibles is recorded as a decrease and an increase to rental revenue, respectively.


14

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2015



 
Nine months ended September 30,
 
2015
 
2014
Amortization expense
Multifamily
 
Retail
 
Total
 
Multifamily
 
Retail
 
Total
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Leases in place
$
5,162,093

 
$
1,816,193

 
$
6,978,286

 
$
1,089,034

 
$
178,772

 
$
1,267,806

Above-market leases (1)

 
128,688

 
128,688

 

 
7,824

 
7,824

Customer relationships

 

 

 
131,030

 

 
131,030

Lease origination costs