2

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        As used herein, the terms “we,” “our,” “us,” and “the Company” refers to Hartman Short Term Income Properties XX, Inc. and our consolidated subsidiaries, except where the context requires otherwise.

Note 1 — Organization and Business

Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009.  The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2011.  Effective July 16, 2013, the Company is offering $200,000,000 of its common shares to the public in its follow-on offering at a price of $10.00 per share and up to $19,000,000 of its common shares to our stockholders pursuant to the Company’s distribution reinvestment plan (the “DRIP”). The offering price for shares offered in the follow-on offering was determined by the Company’s board of directors.  The Company’s board of directors may change the price at which the Company offers shares to the public from time to time during the follow-on offering, but not more frequently than quarterly, to reflect changes in the Company’s estimated per-share net asset value and other factors the Company’s board of directors deems relevant.

The Company was originally a majority owned subsidiary of Hartman XX Holdings, Inc.  Hartman XX Holdings, Inc. is a Texas corporation wholly owned by Allen R. Hartman.  The Company sold 19,000 shares to Hartman XX Holdings, Inc. at a price of $10.00 per share.  The Company has also issued 1,000 shares of convertible preferred shares to its advisor, Hartman Advisors LLC (“Advisor”), at a price of $10.00 per share.   The Advisor is owned 70% by Allen R. Hartman, the Company’s Chief Executive Officer and Chairman of the Board of Directors, and 30% by Hartman Income REIT Management, Inc. (the “Property Manager”). The Property Manager is a wholly owned subsidiary of Hartman Income REIT, Inc. Allen R. Hartman beneficially owns approximately 20% of the Property Manager.

Substantially all of our business is conducted through Hartman XX Limited Partnership, a Texas limited partnership formed on April 11, 2014 (the “Operating Partnership”).  We are the sole member of Hartman XX REIT GP LLC, a Texas limited liability company, formed to serve as the sole general partner of the Operating Partnership.  We are the sole limited partner of the Operating Partnership.  The Company’s membership interests in the limited liability company subsidiaries which own the Company’s investments are owned by the Operating Partnership or its wholly owned subsidiaries.

As of September 30, 2015, we had issued 12,318,394 shares of our common stock in our initial and follow-on offerings, including 782,738 shares of our common stock pursuant to the DRIP, resulting in gross offering proceeds of $117,507,976.  Total shares issued and outstanding as of September 30, 2015 include 38,875 shares of our common stock issued as non-employee compensation to members of our board of directors and certain executives of our Property Manager.

The management of the Company is through the Advisor.  Management of the Company’s properties is through the Property Manager. D.H. Hill Securities LLLP (the “Dealer Manager”) serves as the dealer manager of the Company’s public offerings. These parties receive compensation and fees for services related to the offering and for the investment and management of the Company’s assets. These parties will receive fees during the offering, acquisition, operational and liquidation stages.

       As of September 30, 2015, we owned 14 commercial properties comprising approximately 2,199,562 square feet plus three pad sites.  We own seven properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and one property located in San Antonio, Texas.  As of September 30, 2014, we owned four commercial properties located in Richardson, Arlington, and Dallas, Texas and two commercial properties located in Houston, Texas, for a total of six commercial properties, comprising approximately 1,103,647 square feet plus three pad sites.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2014 are derived from our audited consolidated financial statements as of that date.  The unaudited consolidated financial statements as of September 30, 2015 have been prepared by us in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X, on a basis consistent with the annual audited consolidated financial statements. The consolidated financial statements presented herein reflect all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the financial position of the Company as of September 30, 2015, and the results of consolidated operations for the three and nine months ended September 30, 2015 and 2014, the consolidated statement of stockholders’ equity for the nine months ended September 30, 2015 and the consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014.  The results of the nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015.

The consolidated financial statements herein are condensed and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

        These unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries.  All significant intercompany balances and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

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

Reclassifications

We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net loss, total assets, total liabilities or stockholders’ equity.

Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  Cash and cash equivalents as of September 30, 2015 and December 31, 2014 consisted of demand deposits at commercial banks.

Restricted Cash

Restricted cash represents cash for which the use of funds is restricted by certain loan documents.  As of September 30, 2015 and December 31, 2014, the Company had a restricted cash balance of $7,100,000, respectively, which represents amounts set aside as impounds to be disbursed to the Company (i) upon its achieving incremental occupancy and gross income thresholds at the Richardson Heights Property and the Bent Tree Green Property, and

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(ii) upon the completion of certain agreed upon capital repairs at the Cooper Street Property and the Mitchelldale Property.  Restricted cash includes $6,500,000 of loan proceeds and $600,000 in cash, which have been deposited in an escrow account with a loan servicer.

Financial Instruments

       The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accrued rent and accounts receivable, accounts payable and accrued expenses and due from (to) related parties.  The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.  Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its notes payable approximates fair value.

Revenue Recognition

Our leases are accounted for as operating leases.  Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases.  Revenue is recognized on a straight-line basis over the terms of the individual leases.  Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space.  When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in accrued rent and accounts receivable, net.  In accordance with Accounting Standards Codification (“ASC”) 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement and other revenues in the period the related costs are incurred.

Real Estate

Allocation of Purchase Price of Acquired Assets

       Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).

The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.

The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships

8

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in real estate assets in the consolidated balance sheets and are being amortized to expense over the remaining term of the respective leases.

The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net loss.

Depreciation and amortization

       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. In-place leases are amortized using the straight-line method over the weighted average years calculated on terms of all of the leases in-place when acquired.

Impairment

       We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of September 30, 2015.

Projections of expected future 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 release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.

Fair Value Measurement

Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as quoted prices in active markets.

Level 2:

Directly or indirectly observable inputs, other than quoted prices in active markets.

Level 3:

Unobservable inputs in which there is little or no market data, which require a reporting entity to

develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:

Market approach:

Prices and other relevant information generated by market transactions involving

identical or comparable assets or liabilities.

Cost approach:

Amount required to replace the service capacity of an asset (replacement cost).

Income approach:

Techniques used to convert future amounts to a single amount based on market

expectations (including present-value, option-pricing, and excess-earnings models).

The Company’s estimates of fair value were determined using available market information and appropriate valuation methods.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.  The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

Accrued Rent and Accounts Receivable

       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rent and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.

Deferred Loan and Leasing Commission Costs

       Loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method.  Leasing commissions are amortized using the straight-line method over the term of the related lease agreements.  

Goodwill

       GAAP requires the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired.  The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount.  If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test.  In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event the net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. No goodwill impairment has been recognized in the accompanying consolidated financial statements.

Organization and Offering Costs

The Company has incurred certain expenses in connection with organizing the Company. These costs principally relate to professional and filing fees. For the three months ended September 30, 2015 and 2014, such costs totaled $296,447 and $148,163, respectively.  For the nine months ended September 30, 2015 and 2014, such costs totaled $652,671 and $365,032, respectively.

Organization and offering costs will be reimbursed by the Advisor to the extent that organization and offering costs ultimately exceed 1.5% of gross offering proceeds.  As of September 30, 2015 and December 31, 2014, respectively, the amount of offering and organizational expenses incurred in excess of 1.5% of gross offering proceeds was cumulatively $642,320 and $535,023 for the Company’s initial and follow-on offerings.  No demand has been made of the Advisor for reimbursement as of September 30, 2015 and no receivable has been recorded with respect to the excess costs as of that date.  The Company expects the excess cost to diminish as additional offering proceeds are received. Selling commissions in connection with the offering are recorded and charged to additional paid-in capital.

Stock-Based Compensation

The Company follows ASC 718, Compensation-Stock Compensation (“ASC 718”) with regard to issuance of stock in payment of services.  ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements.  The compensation cost is measured based on the fair value of the equity or liability instruments issued.

10

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

       Stock-based compensation expense is included in general and administrative expense in the accompanying consolidated statements of operations.

Advertising

       The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses in the accompanying consolidated statements of operations.  Advertising costs totaled $13,070 and $9,215 for the three months ended September 30, 2015 and 2014, respectively.  Advertising costs totaled $42,689 and $23,320 for the nine months ended September 30, 2015 and 2014, respectively.

Income Taxes

We have elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP).  As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions.  Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders.  However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT.

For the three months ended September 30, 2015 and 2014, the Company incurred a net loss of $2,754,205 and $1,024,674, respectively.  For the nine months ended September 30, 2015 and 2014, the Company incurred a net loss of $5,456,555 and $2,843,711, respectively.  The Company does not currently anticipate forming any taxable REIT subsidiaries or otherwise generating future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance in that no future taxable income is expected.  Accordingly no deferred tax benefit or deferred tax asset has been recorded in the accompanying consolidated financial statements.

The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination.  Accordingly, the Company has not recognized a liability related to uncertain tax positions.

Loss Per Share

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.  The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock.  As of September 30, 2015 and 2014, there were no shares issuable in connection with these potentially dilutive securities.  These potentially dilutive securities were excluded from the computations of diluted net loss per share for the three and nine months ended September 30, 2015 and 2014 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive.

11

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Concentration of Risk

We maintain cash accounts in two U.S. financial institutions.  The terms of these deposits are on demand to minimize risk.  The balances of these accounts may exceed the federally insured limits.  No losses have been incurred in connection with these deposits.

The geographic concentration of the Company’s real estate assets makes it susceptible to adverse economic developments in the State of Texas. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

The sole tenant of the Gulf Plaza property represents 10.2% and 18.7% of rental revenues for the nine months ended September 30, 2015 and 2014, respectively.

Note 3 — Real Estate

Real estate assets consisted of the following:

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the fair value of the assets acquired and liabilities assumed based upon our initial purchase price allocations as of the respective acquisition dates:

We identify and record the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms.  With respect to all properties owned by the Company, we consider all of the in-place leases to be market rate leases.

The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows:

Note 4 — Accrued Rent and Accounts Receivable, net

Accrued rent and accounts receivable, net, consisted of the following:

As of September 30, 2015 and December 31, 2014, we had an allowance for uncollectible accounts of $387,347 and $216,938, respectively.  For the three months ended September 30, 2015 and 2014, we recorded bad debt expense in the amount of $159,237 and $9,592, respectively, related to tenant receivables that we have specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness.  For the nine months ended September 30, 2015 and 2014, we recorded bad debt expense (recovery) in the amount of $170,409 and $(44,130), respectively.  Bad debt expense and any related recoveries are included in property operating expenses in the accompanying consolidated statements of operations.

13

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 — Deferred Loan and Leasing Commission Costs, net

Costs which have been deferred consist of the following:

Note 6 — Notes Payable

The Company is a party to a $30.0 million revolving credit agreement (the “TCB Credit Facility”) with Texas Capital Bank.  The borrowing base of the TCB Credit Facility may be adjusted from time to time subject to the lender’s underwriting with respect to real property collateral.    The TCB Credit Facility was secured by the Richardson Heights Property, the Cooper Street Property, the Bent Tree Green Property and the Parkway Property.  On June 13, 2014, the Company entered into a modification agreement pursuant to which the Richardson Heights Property, the Cooper Street Property, and the Bent Tree Green Property were released as collateral for the TCB Credit Facility.  On July 2, 2014, the Company entered into a further modification agreement of the TCB Credit Facility to add the Gulf Plaza Property as collateral and the borrowing base of the TCB Credit Facility, as further modified, was increased to $7.0 million.  On January 23, 2015, the TCB Credit Facility was modified to add the Timbercreek and Copperfield properties as collateral and the borrowing base of the TCB Credit Facility was increased to $9.9 million.  On November 10, 2015, the TCB Credit Facility was modified to include a property commonly known as One Technology Center to the borrowing base.  As further modified, the borrowing base has increased to $20.925 million.  The TCB Credit Facility note, as currently modified, bears interest at greater of 4.25% per annum or the bank’s prime rate plus 1% per annum.  The interest rate was 4.50% per annum as of September 30, 2015.  All borrowings under the TCB Credit Facility mature on May 9, 2017.

The outstanding balance under the TCB Credit Facility was $3,400,000 and $0 as of September 30, 2015 and December 31, 2014, respectively.  As of September 30, 2015 the amount available to be borrowed is $6.5 million.  As of September 30, 2015, we were in compliance with all loan covenants.

The Company is a party to a $15.525 million revolving credit agreement (the “EWB Credit Facility”) with East West Bank.  The borrowing base of the EWB Credit Facility may be adjusted from time to time subject to the lender’s underwriting with respect to real property collateral.    The EWB Credit Facility is secured by the Commerce Plaza Hillcrest, Corporate Park Plaza and 400 North Belt properties.  The EWB Credit Facility note bears interest at greater of 3.75% per annum or the bank’s prime rate plus 0.50%.  The interest rate was 3.75% per annum as of September 30, 2015.  The loan matures on August 24, 2017.

The outstanding balance under the EWB Credit Facility was $13,840,000 as of September 30, 2015.  As of September 30, 2015 the amount available to be borrowed is $1,685,000.  As of September 30, 2015, we were in compliance with all loan covenants.

On October 13, 2015 the Company entered into a second revolving credit agreement with East West Bank (the “EWB II Credit Facility”).  The borrowing base of the EWB II Credit Facility is $9.9 million and may be adjusted from time to time subject to the lender’s underwriting with respect to the real property collateral.    The EWB Credit Facility is secured by the Ashford Crossing and Skymark Tower properties.  The EWB II Credit Facility note bears interest at greater of 3.75% per annum or the bank’s prime rate plus 0.50%.  The loan matures on August 24, 2017.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of the mortgage notes payable as of September 30, 2015:

(1)

Each promissory note contains a call option wherein the holder of the promissory note may declare the outstanding balance due and payable on either July 1, 2024, July 1, 2029, July 1, 2034, or July 1, 2039.  

(2)

In connection with the loans secured by the Richardson Heights Property and the Bent Tree Green Property, we entered into a reserve agreement with the lender which requires that loan proceeds of $5,525,000 and $975,000, respectively, be deposited with the loan servicer.  The escrowed loan proceeds will be released to us upon satisfactory showing of increased annualized rental income from new lease agreements as set forth in the reserve agreement. Under the terms of the reserve agreement, we may draw upon the escrow reserve funds until December 31, 2016.  Thereafter, the lender shall have the right to draw any remaining escrow reserve funds and apply such funds to one or more of the loans as the lender may determine in its sole discretion.

(3)

In connection with the loans secured by the Cooper Street Property and the Mitchelldale Property, we entered into a post-closing agreement with the lender requiring the short term escrow of $600,000 for certain capital repairs to be completed during 2014 together with the delivery of certain other documents as set forth in the post-closing agreement.   The lender has extended the time for completing certain capital repairs and matters related to the post-closing agreement until March 27, 2015.  As of September 30, 2015, the lender has been advised of post-closing matters covered by the extension agreement which remain incomplete.  Loan proceeds and other reserve funds held pursuant to the reserve agreement and the post-closing agreement are recorded as restricted cash on the accompanying consolidated balance sheets.

On June 13, 2014, the Company, through the Operating Partnership, entered into four term loan agreements with an insurance company, each loan being secured by a collateral property.  Each of the loans secured by the Richardson Heights Property, the Cooper Street Property, the Bent Tree Green Property and the Mitchelldale Property require monthly payments of principal and interest due and payable on the first day of each month.  Monthly payments are based on a 27 year loan amortization.  Each of the loan agreements are subject to customary covenants, representations and warranties which must be maintained during the term of the loan agreements.  As of September 30, 2015, we were in compliance with all loan covenants.  Each of the loan agreements are secured by a deed of trust, assignment of licenses, permits and contracts, assignment and subordination of the management agreements and assignment of rents.  The terms of the security instruments provide for the cross collateralization/cross default of the each of the loans.

The loan secured by the Energy Plaza I & II Property requires monthly payments of principal and interest due and payable on the tenth day of each month.  Monthly payments are based on a 30 year loan amortization.  The loan agreement is subject to customary covenants, representations and warranties which must be maintained during the term of the loan agreement.  As of September 30, 2015, we were in compliance with all loan covenants.  The loan agreement is secured by a deed of trust, assignment of licenses, permits and contracts, assignment and subordination of the management agreements and assignment of rents.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 — Loss Per Share

       Basic loss per share is computed using net loss attributable to common stockholders and the weighted average number of common shares outstanding.  Diluted earnings per share reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share.

Note 8 — Income Taxes

       Federal income taxes are not provided for because we qualify as a REIT under the provisions of the Internal Revenue Code and because we have distributed and intend to continue to distribute all of our taxable income to our stockholders. Our stockholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our stockholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.

Taxable income (loss) differs from net income (loss) for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.

Note 9 — Related Party Transactions

The Advisor, Hartman Advisors LLC, is a Texas limited liability company owned 70% by Allen R. Hartman, our Chief Executive Officer and Chairman of the Board of Directors and 30% by the Property Manager.  The Advisor is a variable interest entity which consolidates for financial reporting purposes with Hartman Income REIT, Inc. and subsidiaries, of which approximately 20% is beneficially owned by Allen R. Hartman.

For the three months ended September 30, 2015 and 2014, we paid the Advisor $267,644 and $158,231, respectively, for asset management fees.  For the nine months ended September 30, 2015 and 2014 we paid the Advisor $695,679 and $389,728, respectively, for asset management fees.  Acquisition fees paid to Advisor were $723,650 and $0 for the three months ended September 30, 2015 and 2014, respectively, and $1,262,400 and $828,125 for the nine months ended September 30, 2015 and 2014, respectively.

Property operating expenses include property management fees paid to our Property Manager of $254,152 and $158,429 for the three months ended September 30, 2015 and 2014, respectively.  Property management fees for the nine months ended September 30, 2015 and 2014, respectively, were $663,047 and $352,871.  For the three months ended September 30, 2015 and 2014, respectively, we paid our Property Manager $567,743 and $225,784 for leasing commissions and $76,027 and $40,390 for construction management fees.  For the nine months ended September 30, 2015 and 2014, respectively, we paid our Property Manager $757,533 and $859,265 for leasing commissions and $141,763 and $127,447 for construction management fees.  Lease commissions and construction

16

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

management fees are included in deferred loan and leasing commission costs and real estate assets, respectively, in the consolidated balance sheets.

       As of September 30, 2015 and December 31, 2014, respectively, the Company had a net balance due to the Property Manager and the Advisor of $191,509 and $538,970.

The Company had a net balance due from an affiliate, Hartman Short Term Income Properties XIX, Inc. (“Hartman XIX”), of $42,888 and $31,366 as of September 30, 2015 and December 31, 2014, respectively.  The balance due from Hartman XIX represents amounts due pursuant to the property and company management agreements among Hartman Income REIT Management and Hartman XIX and its subsidiaries.

Note 10 – Stockholders’ Equity

Common Stock

       Shares of our common stock entitle the holders thereof to one vote per share on all matters which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law.  The common stock has no preferences or preemptive, conversion or exchange rights.

       Under our articles of incorporation, we have authority to issue 750,000,000 common shares, $0.001 par value per share, and 200,000,000 preferred shares, $0.001 par value per share.

       As of September 30, 2015, the Company has accepted investors’ subscriptions for and issued 12,318,394 shares of the Company’s common stock in its initial and follow-on public offerings, including 782,738 shares of our common stock pursuant to our distribution reinvestment plan, resulting in gross proceeds to the Company of $117,507,976.

Preferred Stock

       Under our articles of incorporation the Company’s board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors shall have the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares.  As of September 30, 2015 and December 31, 2014, respectively, we have issued 1,000 shares of convertible preferred shares to the Advisor at a price of $10.00 per share.

Common Stock Issuable Upon Conversion of Convertible Preferred Stock

The Company’s outstanding shares of convertible preferred stock will convert to shares of common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of our common stock plus the aggregate market value of our common  stock (based on the  30-day  average closing price) meets  the  same 6% performance threshold, or (3) the Company’s advisory agreement with the Advisor expires without renewal or is terminated (other than because of a material breach by Advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the stockholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to

17

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.

Stock-Based Compensation

Pursuant to the Company’s Incentive Plan (as described below in Note 11 below) we award shares of restricted common stock to non-employee directors as compensation in part for their service as members of the board of directors of the Company.  These shares are fully vested when granted.  These shares may not be sold while an independent director is serving on the board of directors. The Company granted 1,500 shares of restricted common stock to independent directors as compensation for services for the three months ended September 30, 2015 and 2014, respectively and 4,500 shares of restricted common stock to independent directors as compensation for services for the nine months ended September 30, 2015 and 2014, respectively.  Based upon the estimated fair value per share, we recognized $15,000 as stock-based compensation expense for the three months ended September 30, 2015 and 2014, respectively and $45,000 as stock-based compensation expense for the nine months ended September 30, 2015 and 2014, respectively.  Stock-based compensation expense together with Incentive Plan compensation expense are included in general and administrative expenses in the accompanying consolidated statements of operations.

Distributions

The following table reflects the total distributions we have paid, including the total amount paid and amount paid per common share, in each indicated quarter:

The increase in same store revenues of $419,093 is attributable to revenue increases due to increased occupancy and rent increases for the Richardson Heights, Cooper Street, Bent Tree Green and Parkway properties.

Property operating expenses – Property operating expenses consists of contract services, repairs and maintenance, utilities and property management fees.  For the three months ended September 30, 2015 and 2014, we had total property operating expenses of $2,242,030 and $947,204, respectively.  The following table presents a summary of the changes in total property operating expenses for the three months ended September 30, 2015 and 2014:

Asset management and acquisition fees – Asset management and acquisition fees are fees payable to our advisor in connection with our management and the acquisition of our properties.   For the three months ended September 30, 2015 and 2014, we paid the advisor $991,294 and $158,231, respectively, for asset management and acquisition fees. We had three acquisitions, Ashford Crossing, Corporate Park Place and Skymark Tower, during the three months ended September 30, 2015, versus no acquisitions during the three months ended September 30, 2014.

Organization and offering costs - We incur certain expenses in connection with our organization and the registration and sale of common shares.  These costs principally relate to professional and filing fees. For the three months ended September 30, 2015 and 2014, organization and offering costs were $296,447 and $148,163, respectively.  The increase is attributable to dealer manager fees for the three months ended September 30, 2015 versus the three months ended September 30, 2014.

Real estate taxes and insurance – Real estate taxes and insurance were $976,293 and $593,691 for the three months ended September 30, 2015 and 2014, respectively.  The increase in real estate taxes and insurance expense is a result of the increase in the value of assets under management as a result of property acquisitions.

General and administrative expense - General and administrative expenses were $338,299 and $214,420 for the three months ended September 30, 2015 and 2014, respectively. General and administrative expenses consist

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primarily of audit fees, transfer agent fees, other professional fees, independent director compensation and other share based compensation.  For the three months ended September 30, 2015, corporate level general and administrative expenses increased by a total of $123,879, including professional fees and expenses which increased by $28,292, advertising and promotions expense which increased by $15,717, non-capital leasing costs which increased by $29,149 and all other property general and administrative expenses which increased by $50,721.  We expect general and administrative expenses to increase in future periods as we acquire additional real estate and real estate related assets. We expect general and administrative expenses to decrease as a percentage of total revenue in future periods.

 Interest expense – Interest expense was $820,412 and $598,260 for the three months ended September 30, 2015 and 2014, respectively.  Interest expense increased as a result of the increase in notes payable from $59.6 million as of September 30, 2014 to $76.0 million as of September 30, 2015. The average outstanding amounts were $69.6 million and $49.7 million for the three months ended September 30, 2015 and September 30, 2014, respectively.

 Fees to affiliates – In addition to asset management and acquisition fees paid to our advisor and property management fees paid to our property manager, we pay leasing commissions and construction management fees to our property manager.  For the three months ended September 30, 2015 and 2014, respectively, we paid our property manager $254,152 and $158,429 for property management fees, $567,743 and $225,784 for leasing commissions and $76,027 and $40,390 for construction management fees.  The increase in property management fees, which are based on revenues, is substantially attributable to revenues for the three months ended September 30, 2015 for the “New stores” discussed above.  Construction management fees are based on building and tenant improvement managed by the property manager.  The $35,637 increase in construction management fees for the three month ended September 30, 2015 versus the three months ended September 30, 2014 is attributable to a 96% increase in applicable capital expenditures of $632,093.  Lease commissions and construction management fees are included in deferred loan and lease commission costs and real estate assets, respectively, in the consolidated balance sheets.

Comparison of the nine months ended September 30, 2015 versus the nine months ended September 30, 2014:

For purposes of the following discussion, “Same store” properties refer to the  Richardson Heights, Cooper Street, Bent Tree Green, Parkway, Gulf Plaza and Mitchelldale properties, and  “New store” properties refer to the Energy Plaza, Timbercreek, Copperfield, Hillcrest, 400 North Belt, Ashford Crossing, Corporate Park Place and Skymark Tower properties.  The Energy Plaza, Timbercreek and Copperfield properties were acquired on December 30, 2014. The Hillcrest and 400 North Belt properties were acquired in May 2015.  Ashford Crossing was acquired July 31, 2015.  Corporate Park Place was acquired August 24, 2015.  Skymark Tower was acquired September 2, 2015.

Revenues – The primary source of our revenue is rental revenues and tenant reimbursements.  For the nine months ended September 30, 2015 and 2014, we had total rental revenues and tenant reimbursements and other revenues of $17,442,051 and $8,517,449 respectively.

The following table presents a summary of the changes in total revenues for the nine months ended September 30, 2015 and 2014:

The increase in same store revenues of $3,575,514 is attributable to revenue increases due to increased occupancy and rent increases for the Richardson Heights, Cooper Street, Bent Tree Green and Parkway properties.

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Property operating expenses – Property operating expenses consists of contract services, repairs and maintenance, utilities and property management fees.  For the nine months ended September 30, 2015 and 2014, we had total property operating expenses of $4,945,214 and $2,100,777, respectively.  The increase in same store operating expenses of $555,422 is attributable to increase in occupancy.

The following table presents a summary of the changes in total property operating expenses for the nine months ended September 30, 2015 and 2014:

Asset management and acquisition fees – Asset management and acquisition fees are fees payable to our advisor in connection with our management and the acquisition of our properties.   For the nine months ended September 30, 2015 and 2014, we paid our advisor $695,679 and $389,728, respectively, for asset management fees.  For the nine months ended September 30, 2015 and 2014, we paid our advisor $1,262,400 and $828,125, respectively, for acquisition fees.  We acquired five properties during the nine months ended September 30, 2015, for an aggregate acquisition cost of $50,496,000. We acquired two properties during the nine months ended September 30, 2014, for an aggregate acquisition cost of $33,125,000.

Organization and offering costs - We incur certain expenses in connection with our organization and the registration and sale of common shares in our ongoing public offering.  These costs principally relate to professional and filing fees. For the nine months ended September 30, 2015 and 2014, organization and offering costs were $652,671 and $365,032, respectively.  The increase is attributable to the substantial increase in funds raised in our ongoing public offering for the nine months ended September 30, 2015 versus the nine months ended September 30, 2014.

Real estate taxes and insurance – Real estate taxes and insurance were $2,522,379 and $1,439,048 for the nine months ended September 30, 2015 and 2014, respectively.  The increase in real estate taxes and insurance expense is a result of the increase in the value of assets under management due to property acquisitions.

General and administrative expense - General and administrative expenses were $959,148 and $514,525 for the nine months ended September 30, 2015 and 2014, respectively. General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, independent director compensation and other share based compensation.  For the nine months ended September 30, 2015, corporate level general and administrative expenses increased by a total of $444,623, including accounting fees which increased by $3,375, fees incurred for property acquisition audits and progress billings with respect to our annual audit and other professional fees and expenses, which increased by $104,773, advertising and promotions expense which increased by $65,698, non-capital leasing costs which increased by $119,027 and all other property general and administrative expenses which increased by $151,750.  We expect general and administrative expenses to increase in future periods as we acquire additional real estate and real estate related assets.  We expect general and administrative expenses to decrease as a percentage of total revenue in future periods.

Interest expense – Interest expense was $2,338,433 and $1,093,585 for the nine months ended September 30, 2015 and 2014, respectively.  Interest expense increased as a result of the increase in notes payable from $59.6 million as of September 30, 2014 to $76.0 million as of September 30, 2015. The average outstanding amounts were $63 million and $28 million for the nine months ended September 30, 2015 and September 30, 2014, respectively.

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Fees to affiliates – In addition to asset management and acquisition fees paid to our advisor and property management fees paid to our property manager, we pay leasing commissions and construction management fees to our property manager.  For the nine months ended September 30, 2015 and 2014, respectively, we paid our property manager $663,047 and $352,871 for property management fees, $757,533 and $859,265 for leasing commissions and $141,763 and $127,447 for construction management fees.  The increase in property management fees, which are based on revenues, is substantially attributable to revenues for the nine months ended September 30, 2015 for the “New stores” discussed above.  Construction management fees are based on building and tenant improvement managed by our property manager.  Leasing commissions and construction management fees are included in deferred loan and leasing commission costs and real estate assets, respectively, in the consolidated balance sheets.

Funds from Operations and Modified Funds from Operations

Funds From Operations (“FFO”) is a non-GAAP financial measure defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, which we believe is an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT.  FFO is used by the REIT industry as a supplemental performance measure.  FFO is not equivalent to the Company’s net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper").  The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.  Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed.  We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative.  

 Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time.  An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset.  Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred.  While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

Historical accounting for real estate involves the use of GAAP.  Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP.  Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.  However, FFO and MFFO,

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as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance.  The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.  Management believes these fees and expenses do not affect our overall long-term operating performance.  Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation.  While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.  We will use the proceeds raised in our ongoing public offering to acquire properties, and intend to begin the process of achieving a liquidity event (i.e., listing of its common stock on a national exchange, a merger or sale of the Company or another similar transaction) within five to ten years of the completion of our offering.  The Investment Program Association (“IPA”), an industry trade group, has standardized a measure known as Modified Funds From Operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above.  MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended.  We  believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (i.e., the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place.  By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired.  We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.  Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after the our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010.  The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.  The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as

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other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses.  We do not currently exclude amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests.  Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income.  These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors.  All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and our cash flows generated, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.  Accordingly, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired.  MFFO that excludes such costs and expenses would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics as we do.  Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities.  In addition, we view fair value adjustments of derivatives 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 on-going operations and are therefore typically adjusted for when assessing operating performance.  The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in our ongoing public offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter.  As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner.  We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors.  For example, acquisitions costs are funded from the proceeds of our public offering and other financing sources and not from operations.  By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties.  Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance.  By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders.  FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.  MFFO has limitations as a performance measure in an offering such as our offering where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter.  MFFO is useful in assisting

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management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed.  FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO.  In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we may have to adjust our calculation and characterization of FFO or MFFO.

The following table summarizes our calculation of FFO and MFFO for three and nine months ended September 30, 2015 and 2014, including a reconciliation of such non-GAAP financial measures to our net loss:

Distributions

The following table summarizes the quarterly distributions we paid in cash and pursuant to our distribution reinvestment plan (DRIP) for the period from January 2014 through September 30, 2015:

(1)

Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 20 days following the end of such month.

(2)

Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan.

For the three months ended September 30, 2015 and 2014, we paid aggregate distributions of $1,946,868 and $1,237,568, respectively.  For the nine months ended September 30, 2015 and 2014, we paid aggregate distributions of $5,042,813 and $3,532,320, respectively.  For the three and nine months ended September 30, 2015 and 2014, cash provided by operating activities was $3,320,743 and $637,047 and $3,958,330 and $1,661,559, respectively.  Distributions paid to our stockholders for the three and nine months ended September 30, 2015 and 2014, were 171% and 51% and 78% and 47%, respectively, attributable to cash provided by operating activities, with the remainder being funded by offering proceeds.

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Liquidity and Capital Resources

  As of September 30, 2015, we had issued 12,318,394 shares of our common stock in our initial and follow-on public offerings, including shares issued pursuant to our distribution reinvestment plan resulting in gross proceeds of $117,507,976.

Our principal demands for funds will be for real estate and real estate-related acquisitions, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations, and we expect to meet cash needs for acquisitions from the net proceeds of our ongoing public offering and from financings. 

There may be a delay between the sale of our shares and the purchase of properties or other investments, which could result in a delay in our ability to make distributions to our stockholders. Some or all of our distributions will be paid from other sources, such as from the net proceeds of our ongoing public offering, cash advances to us by our advisor, cash resulting from a waiver of asset management fees and borrowings secured by our assets in anticipation of future operating cash flow, until such time as we have sufficient cash flow from operations to fund fully the payment of distributions. We expect to have limited cash flow from operations available for distribution until we make substantial investments. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.

We use, and intend to use in the future, secured and unsecured debt to acquire properties and make other investments.  As of September 30, 2015, our outstanding secured debt was $76,003,613.  There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment.  Under our charter, we are prohibited from borrowing in excess of 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors and if such excess is disclosed to the stockholders in the next quarterly report along with the explanation for such excess borrowings.  Our board of directors has adopted a policy to limit our aggregate borrowings to approximately 50% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Such limitation, however, does not apply to individual real estate assets and only will apply once we have ceased raising capital in our public offering and invested substantially all of our capital.  As a result, we expect to borrow more than 50% of the contract purchase price of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent.

Our advisor may, but is not required to, establish capital reserves from gross offering proceeds, out of cash flow generated by operating properties and other investments or out of non-liquidating net sale proceeds from the sale of our properties and other investments. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures. Alternatively, a lender may require its own formula for escrow of capital reserves.

Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, 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.

Cash Flows from Operating Activities

Net cash provided by operating activities was $3,958,330 for the nine months ended September 30, 2015 versus net cash provided by operating activities of $1,661,559 for the nine months ended September 30, 2014.  As of September 30, 2014 we owned and operated six commercial real estate properties.  As of September 30, 2015, we owned and operated 14 commercial real estate properties.  We expect cash flows from operating activities to increase in future periods as a result of the properties we acquired during 2014 as well as the properties we have acquired in 2015.

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Cash Flows from Investing Activities

Net cash used in investing activities was $52,315,832 for the nine months ended September 30, 2015 versus $42,334,917 for the nine months ended September 30, 2014.  Additions to real estate for the nine months ended September 30, 2015 includes $50,496,000 attributable to the purchase of the Hillcrest, 400 North Belt, Corporate Park Place, Skymark Tower and Ashford Crossing property acquisitions versus $33,125,000 used to acquire new properties (Gulf Plaza and Mitchelldale Business Park) during the same period in 2014.  Acquisition deposits were $470,000 versus $500,000 for the nine months ended September 30, 2015 and 2014, respectively.  The increase in restricted cash was $0 versus $7,100,000 for the nine months ended September 30, 2015 and 2014, respectively.  The 2014 increase in restricted cash was attributable to the term loan financing of four of the six commercial real estate assets owned at that time.

Cash Flows from Financing Activities

Cash flows from financing activities consisted primarily of net proceeds from our term loan financing and proceeds from our ongoing public offering.  Net cash provided by financing activities for the nine months ended September 30, 2015 and 2014 was $48,264,505 versus $52,592,686, respectively, and consisted primarily of the following:

·

$36,464,390 and $9,927,572 respectively, of cash provided by offering proceeds related to our public offering, net of payments of commissions on sales of common stock of $(1,722,035) and $(516,647), respectively;

·

$181,105 and $1,329,728, respectively, of cash used to redeem common stock pursuant to our share redemption plan;

·

$2,433,675 and $1,814,583, respectively, of net cash distributions;

·

$(805,437) and $49,602,663, respectively, of cash (repaid) provided by net term loan proceeds and insurance premium financing;

·

$17,240,000 and $(2,300,000), respectively, of net cash advanced (repaid) under revolving credit facilities; and

·

$297,633 and $976,591, respectively, of cash paid to deferred loan costs

Contractual Commitments and Contingencies

We use, and intend to use in the future, secured and unsecured debt as a means of providing additional funds for the acquisition of our properties and our real estate-related assets. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. Under our charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets. We may borrow in excess of this amount if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with a justification for such excess. In such event, we will monitor our debt levels and take action to reduce any such excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of September 30, 2015, our borrowings were not in excess of 300% of the value of our net assets.

In addition to using our capital resources for investing purposes and meeting our debt obligations, we expect to use our capital resources to make certain payments to our advisor. We expect to make payments to our advisor or its affiliates in connection with the selection and origination or purchase of real estate and real estate-related investments, the management of our assets, the management of the development or improvement of our assets and costs incurred by our advisor in providing services to us.

As of September 30, 2015, we had notes payable with an aggregate principal amount of $76,003,613. For more information on our outstanding indebtedness, see Note 6 (Notes Payable) to the consolidated financial statements included in this quarterly report.

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The following is a summary of our contractual obligations as of September 30, 2015:

(1)

Amounts include principal payments only.

(2)

Projected interest payments are based on the outstanding principal amounts and weighted-average interest rates at September 30, 2015.

(3)

Purchase obligations were excluded from contractual obligations as there were no binding purchase obligations as of September 30, 2015.

Off-Balance Sheet Arrangements

       As of September 30, 2015, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements  (See Note 2 to the consolidated financial statements included in Item 1 to this quarterly report).

Subsequent Events

On November 10, 2015, we acquired a 14 story office building commonly known as One Technology Center, containing approximately 196,348 square feet of office space located in San Antonio, Texas, for an aggregate purchase price, exclusive of closing costs, of $19,575,000.  One Technology Center was 91% occupied by eight tenants and four rooftop tenants as of the acquisition date.  One Technology Center was acquired with funds from our ongoing public offering and proceeds from our revolving credit facility.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Form 10-Q, as of September 30, 2015, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2015, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported as and when required.

Changes in Internal Control over Financial Reporting

There have been no changes during the quarter ended September 30, 2015, in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes during the period ended September 30, 2015 in our “Risk Factors” as discussed in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2014.

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

During the three months ended September 30, 2015, we granted 1,500 shares of restricted common stock to our two independent directors as compensation for services as directors pursuant to our Incentive Plan.  The 1,500 shares of restricted common stock were issued to our independent directors in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

During the three months ended September 30, 2015, we fulfilled redemption requests and redeemed shares of our common stock pursuant to our share redemption program as follows:

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(1) We generally redeem shares in the month following the end of the fiscal quarter in which requests were received.

(2) Pursuant to the share redemption program, we currently redeem shares at prices determined as follows:

a.

For shares that have been held at least one year, the lesser of 90.0% of the price paid to acquire the shares or 90.0% of the offering price of shares in our most recent offering;

b.

For shares that have been held at least two years, the lesser of 92.5% of the price paid to acquire the shares or 92.5% of the offering price of shares in our most recent offering;

c.

For shares that have been held at least three years, the lesser of 95.0% of the price paid to acquire the shares or 95.0% of the offering price of shares in our most recent offering;

d.

For shares that have been held at least four years, the lesser of 97.5% of the price paid to acquire the shares or 97.5% of the offering price of shares in our most recent offering;

e.

Thereafter, the lesser of 100.0% of the price paid to acquire the shares or 90.0% of the net asset value per share, as determined by the board of directors.

Notwithstanding the foregoing, the redemption price for redemptions sought upon a stockholder’s death or disability or upon confinement to a long-term care facility, is available only for stockholders who purchased their shares directly from us or the persons specifically set forth in the share redemption program.

(3) The number of shares that may be redeemed pursuant to our share redemption program will not exceed (i) 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of the redemption and (ii) those share redemptions that can be funded with proceeds from our distribution reinvestment plan plus, if we had positive net operating cash flow for the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.

On February 9, 2010, our Registration Statement on Form S-11 (File No. 333-154750), registering a public offering of up to $273,750,000 in shares of our common stock, was declared effective by the SEC and we commenced our initial public offering.  In our initial public offering we offered up to 25,000,000 shares of our common stock to the public at $10.00 per share, with discounts available to certain categories of purchasers, and up to 2,500,000 shares of our common stock to our stockholders pursuant to our distribution reinvestment plan at a price of $9.50 per share. As of the termination of our initial public offering, we had issued a total of 4,455,678 shares of our common stock in our initial public offering, including 162,561 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in gross offering proceeds of $43,943,731.

On July 16, 2013, our Registration Statement on Form S-11 (File No. 333-185336), registering our follow-on public offering of up to $219,000,000 in shares of our common stock, was declared effective by the SEC.  In our follow-on offering, we are offering up to 20,000,000 shares of our common stock to the public at $10.00 per share and up to 2,000,000 shares of our common stock pursuant to our distribution reinvestment plan at $9.50 per share. As of September 30, 2015, we had accepted subscriptions for and issued 12,318,394 shares of our common stock in our initial and follow-on offerings, including 782,738 shares of our common stock pursuant to our distribution reinvestment plan, resulting in gross offering proceeds of $117,507,976.  As of September 30, 2015, we had 12,033,295 total shares of common stock issued and outstanding, including 38,875 shares of our common stock issued as non-employee compensation to members of our board of directors and certain executives of our Property Manager pursuant to our Incentive Plan.

As of September 30, 2015, we incurred selling commissions and other organization and offering costs in our initial and follow-on offerings in the amounts set forth in the table below.  The dealer manager re-allowed all of the selling commissions and a portion of the dealer manager fees to participating broker dealers.

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As of September 30, 2015, the net offering proceeds to us from our initial public offering and our follow-on offering, after deducting the total expenses incurred as described above, were $100,268,414 excluding $7,436,015 in offering proceeds from shares of our common stock issued pursuant to our distribution reinvestment plan.

We intend to use substantially all of the net proceeds from our public offerings to continue to invest in a portfolio of real properties. As of September 30, 2015, we had used $101,332,456 of the net proceeds from our public offerings, plus debt financing, to purchase our 14 investments in commercial properties. As of September 30, 2015, we had paid $3,945,300 of acquisition fees to our advisor.  For more information regarding how we used our net offering proceeds through September 30, 2015, see our financial statements included in this Quarterly Report.

Item 3. Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6.  Exhibits

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SIGNATURES

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

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

Date: November 13, 2015                                                        

              By: /s/ Allen R. Hartman

Allen R. Hartman,

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

Date: November 13, 2015                                               

              By: /s/ Louis T. Fox, III

Louis T. Fox, III,

Chief Financial Officer,

(Principal Financial and Principal Accounting Officer)

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