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EX-32.2 - EXHIBIT 32.2 - Resource Apartment REIT III, Inc.rareitiii-20180930x10qex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource Apartment REIT III, Inc.rareitiii-20180930x10qex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Apartment REIT III, Inc.rareitiii-20180930x10qex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Apartment REIT III, Inc.rareitiii-20180930x10qex311.htm
EX-10.11 - EXHIBIT 10.11 - Resource Apartment REIT III, Inc.reitiii-kensingtonnotexex1.htm
EX-10.10 - EXHIBIT 10.10 - Resource Apartment REIT III, Inc.reitiii-kensingtonloanagmt.htm
EX-10.9 - EXHIBIT 10.9 - Resource Apartment REIT III, Inc.reitiii-kensingtonpsa3rdam.htm
EX-10.8 - EXHIBIT 10.8 - Resource Apartment REIT III, Inc.reitiii-kensingtonpsa2ndam.htm
EX-10.7 - EXHIBIT 10.7 - Resource Apartment REIT III, Inc.reitiii-kensingtonpsa1stam.htm
EX-10.6 - EXHIBIT 10.6 - Resource Apartment REIT III, Inc.reitiii-kensingtonpsaxex106.htm
EX-10.5 - EXHIBIT 10.5 - Resource Apartment REIT III, Inc.reitiii-matthewsnotexex105.htm
EX-10.4 - EXHIBIT 10.4 - Resource Apartment REIT III, Inc.reitiii-matthewsloanagmtxe.htm
EX-10.3 - EXHIBIT 10.3 - Resource Apartment REIT III, Inc.reitiii-matthewspsaxex103.htm

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

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-55923
 reitiiilogocoolgreya09.jpg
RESOURCE APARTMENT REIT III, Inc.   
(Exact name of registrant as specified in its charter)
Maryland
 
47-4608249
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1845 Walnut Street, 18th Floor, Philadelphia, PA, 19103
(Address of principal executive offices) (Zip code)
 
 
 
 (215) 231-7050
(Registrant's telephone number, including area code)
 
 
 
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 þ No o 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer                  o
Non-accelerated filer  þ 
 
Smaller reporting company þ
 
 
Emerging growth company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
As of November 8, 2018, there were 632,499 outstanding shares of Class A common stock, 1,106,347 outstanding shares of Class T common stock, 6,045,704 outstanding shares of Class R common stock and 203,100 outstanding shares of Class I common stock of Resource Apartment REIT III, Inc.



RESOURCE APARTMENT REIT III, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 
 
PAGE
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 






Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expects," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We are dependent on Resource REIT Advisor, LLC (our "Advisor") to select investments and conduct our operations. Our Advisor has a limited operating history and limited experience operating a public company. This limited experience makes our future performance difficult to predict.
Our executive officers and some of our directors are also officers, directors, managers or key professionals of our Advisor, Resource Securities LLC (our "Dealer Manager") and other entities affiliated with Resource Real Estate, LLC (our "Sponsor"). As a result, these individuals face conflicts of interest, including significant conflicts created by our Advisor’s compensation arrangements with us and other programs sponsored by our Sponsor and conflicts in allocating time among us and these other programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
We pay substantial fees to and expenses of our Advisor, its affiliates and participating broker-dealers, which payments increase the risk that our stockholders will not earn a profit on their investment.
Our Advisor and its affiliates receive fees in connection with transactions involving the acquisition and management of our investments. These fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us.
There is no limit on the amount we can borrow to acquire a single real estate investment, but pursuant to our charter, we may not leverage our assets with debt financing such that our borrowings would be in excess of 300% of our net assets unless a majority of our independent directors find substantial justification for borrowing a greater amount.
We may lack property diversification if we do not raise substantial funds in our initial public offering.
Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our Advisor. To the extent these distributions exceed our net income or net capital gain, a greater proportion of your distributions will generally represent a return of capital as opposed to current income or gain, as applicable.
We may experience adverse business developments or conditions similar to those affecting certain programs sponsored by our Sponsor, which could limit our ability to make distributions and could decrease the value of an investment in us.
Our failure to qualify as a real estate investment trust for federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders.
All forward-looking statements should be read in light of the risks described above and identified in the "Risk Factors" section of our Registration Statement on Form S-11 (File No. 333-207740) filed with the Securities and Exchange Commission, as the same may be amended and supplemented from time to time.



PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED BALANCE SHEETS
 
 
September 30,
2018
 
December 31, 2017
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental properties, net
 
$
136,516,203

 
$
29,443,089

Identified intangible assets, net
 
1,416,819

 
321,468

Total investments
 
137,933,022

 
29,764,557

 
 
 
 
 
Cash
 
20,305,468

 
23,752,810

Restricted cash
 
1,683,013

 
192,064

Tenant receivables, net
 
63,135

 
2,138

Due from related parties
 
2,729

 
4,571

Subscriptions receivable
 
696,500

 
413,084

Prepaid expenses and other assets
 
444,325

 
188,332

Deferred offering costs
 
5,556,588

 
5,409,942

Total assets
 
$
166,684,780

 
$
59,727,498

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 
 
 

Mortgage notes payable, net
 
$
100,001,925

 
$
22,778,370

Accounts payable and accrued expenses
 
935,665

 
257,060

Accrued real estate taxes
 
933,793

 

Due to related parties
 
12,061,726

 
9,021,884

Tenant prepayments
 
83,125

 
21,078

Security deposits
 
263,406

 
62,724

Distributions payable
 
862,507

 
453,877

Total liabilities
 
$
115,142,147

 
$
32,594,993

 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Preferred stock, par value $0.01: 10,000,000 shares authorized, none issued and outstanding
 

 

Convertible stock, par value $0.01: 50,000 shares authorized, issued and outstanding
 
500

 
500

Class A common stock, par value $0.01: 25,000,000 shares authorized, 631,414 and 621,754 issued and outstanding, respectively
 
6,314

 
6,218

Class T common stock, par value $0.01: 25,000,000 shares authorized, 1,103,386 and 1,081,226 issued and outstanding, respectively
 
11,034

 
10,812

Class R common stock, par value $0.01: 750,000,000 shares authorized, 5,582,690 and 2,058,008 issued and outstanding, respectively
 
55,827

 
20,580

Class I common stock, par value $0.01: 75,000,000 shares authorized, 191,190 and 36,118 issued and outstanding, respectively
 
1,912

 
361

Additional paid-in capital
 
63,143,857

 
32,323,424

Accumulated other comprehensive loss
 
(30,970
)
 
(11,192
)
Accumulated deficit
 
(11,645,841
)
 
(5,218,198
)
Total stockholders’ equity
 
$
51,542,633

 
$
27,132,505

Total liabilities and stockholders’ equity
 
$
166,684,780

 
$
59,727,498


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


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
2,101,119

 
$
521,581

 
$
4,645,983

 
$
622,735

Utilities income
 
90,218

 
19,603

 
204,423

 
19,603

Ancillary tenant fees
 
35,187

 
3,247

 
66,433

 
3,247

Total revenues
 
2,226,524

 
544,431

 
4,916,839

 
645,585

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Rental operating - expenses
 
422,733

 
104,687

 
906,013

 
133,653

Rental operating - payroll
 
224,508

 
74,326

 
503,040

 
74,326

Rental operating - real estate taxes
 
382,050

 
57,550

 
689,242

 
69,184

    Subtotal- rental operating
 
1,029,291

 
236,563

 
2,098,295

 
277,163

Acquisition costs
 

 
823,411

 

 
906,644

Property management fees
 
2,575

 
2,776

 
6,936

 
7,538

Management fees - related parties
 
338,741

 
82,938

 
765,232

 
96,395

General and administrative
 
636,156

 
342,956

 
1,591,276

 
883,360

Loss on disposal of assets
 
38,196

 
185,114

 
44,684

 
185,114

Depreciation and amortization expense
 
1,435,935

 
345,351

 
3,150,881

 
394,050

Total expenses
 
3,480,894

 
2,019,109

 
7,657,304

 
2,750,264

Loss before other income (expense)
 
(1,254,370
)
 
(1,474,678
)
 
(2,740,465
)
 
(2,104,679
)
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Other income
 

 

 

 
1,500

Interest income
 
51,621

 
3,902

 
121,835

 
9,386

Interest expense
 
(734,763
)
 
(132,007
)
 
(1,533,487
)
 
(157,987
)
Net loss
 
$
(1,937,512
)
 
$
(1,602,783
)
 
$
(4,152,117
)
 
$
(2,251,780
)
 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
 
Designated derivatives, fair value adjustments
 
(2,508
)
 
(9,396
)
 
(19,778
)
 
(9,396
)
Total other comprehensive loss
 
(2,508
)
 
(9,396
)
 
(19,778
)
 
(9,396
)
Comprehensive loss
 
$
(1,940,020
)
 
$
(1,612,179
)
 
$
(4,171,895
)
 
$
(2,261,176
)












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


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS - (continued)
(unaudited)

 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
Class A common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class A common stockholders
 
$
(173,925
)
 
$
(524,863
)
 
$
(454,122
)
 
$
(952,550
)
Net loss per Class A share, basic and diluted
 
$
(0.28
)
 
$
(0.85
)
 
$
(0.73
)
 
$
(1.76
)
Weighted average Class A common shares outstanding, basic and diluted
 
629,450

 
616,733

 
626,180

 
540,022

 
 
 
 
 
 
 
 
 
Class T common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class T common stockholders
 
$
(330,529
)
 
$
(935,090
)
 
$
(869,726
)
 
$
(1,214,317
)
Net loss per Class T share, basic and diluted
 
$
(0.30
)
 
$
(0.87
)
 
$
(0.80
)
 
$
(1.78
)
Weighted average Class T common shares outstanding, basic and diluted
 
1,098,193

 
1,068,753

 
1,090,752

 
682,945

 
 
 
 
 
 
 
 
 
Class R common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class R common stockholders
 
$
(1,399,996
)
 
$
(130,032
)
 
$
(2,770,590
)
 
$
(77,304
)
Net loss per Class R share, basic and diluted
 
$
(0.28
)
 
$
(0.77
)
 
$
(0.72
)
 
$
(1.37
)
Weighted average Class R common shares outstanding, basic and diluted
 
5,043,308

 
167,935

 
3,874,540

 
56,594

 
 
 
 
 
 
 
 
 
Class I common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class I common stockholders
 
$
(33,062
)
 
$
(12,798
)
 
$
(57,679
)
 
$
(7,609
)
Net loss per Class I share, basic and diluted
 
$
(0.21
)
 
$
(0.77
)
 
$
(0.52
)
 
$
(1.37
)
Weighted average Class I common shares outstanding, basic and diluted
 
155,389

 
16,527

 
110,174

 
5,570



The accompanying notes are an integral part of these consolidated financial statements.
6


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
(unaudited)

 
 
Common Stock
 
Convertible Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total
 
 
A Shares
 
T Shares
 
R Shares
 
I Shares
 
A Shares
 
T Shares
 
R Shares
 
I Shares
 
Shares
 
Amount
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance, at January 1, 2018
 
621,754

 
1,081,226

 
2,058,008

 
36,118

 
$
6,218

 
$
10,812

 
$
20,580

 
$
361

 
50,000

 
$
500

 
$
32,323,424

 
$
(11,192
)
 
$
(5,218,198
)
 
$
27,132,505

Issuance of common stock
 

 

 
3,448,192

 
154,721

 

 

 
34,481

 
1,548

 

 

 
34,373,720

 

 

 
34,409,749

Offering costs
 

 

 

 

 

 

 

 

 

 

 
(4,545,256
)
 

 

 
(4,545,256
)
Cash distributions declared
 

 

 

 

 

 

 

 

 

 

 

 

 
(2,275,526
)
 
(2,275,526
)
Common stock issued through distribution reinvestment plan
 
9,660

 
24,314

 
77,435

 
351

 
96

 
243

 
775

 
3

 

 

 
1,018,367

 

 

 
1,019,484

Other comprehensive loss
 

 

 

 

 

 

 

 

 

 

 

 
(19,778
)
 

 
(19,778
)
Net loss
 

 

 

 

 

 

 

 

 

 

 

 

 
(4,152,117
)
 
(4,152,117
)
Share redemptions
 

 
(2,154
)
 
(945
)
 

 

 
(21
)
 
(9
)
 

 

 

 
(26,398
)
 

 

 
(26,428
)
Balance, at September 30, 2018
 
631,414

 
1,103,386

 
5,582,690

 
191,190

 
$
6,314

 
$
11,034

 
$
55,827

 
$
1,912

 
50,000

 
$
500

 
$
63,143,857

 
$
(30,970
)
 
$
(11,645,841
)
 
$
51,542,633




The accompanying notes are an integral part of this consolidated financial statement.
7



RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(4,152,117
)
 
$
(2,251,780
)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Loss on disposal of assets
 
44,684

 
185,114

Depreciation and amortization
 
3,150,881

 
394,050

Amortization of deferred financing costs
 
75,474

 
5,390

Realized loss on change in fair value of interest rate cap
 
10

 

Changes in operating assets and liabilities:
 
 
 
 
Tenant receivable, net
 
(60,997
)
 
67

Due from related parties
 
1,842

 
4,971

Prepaid expenses and other assets
 
(133,296
)
 
285,774

Due to related parties
 
454,906

 
982,779

Accounts payable and accrued expenses
 
927,583

 
13,040

Tenant prepayments
 
47,804

 
16,912

Security deposits
 
85,239

 
7,222

Net cash provided by (used in) operating activities
 
442,013

 
(356,461
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Property acquisitions
 
(31,473,100
)
 
(6,892,659
)
Capital expenditures
 
(965,824
)
 
(22,965
)
Net cash used in investing activities
 
(32,438,924
)
 
(6,915,624
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Net proceeds from issuance of common stock
 
32,001,277

 
15,719,233

Redemptions of common stock
 
(26,428
)
 

Payments on borrowings
 
(25,604
)
 
(22,091
)
Payment of deferred financing costs
 
(1,061,315
)
 
(324,285
)
Distributions paid on common stock
 
(847,412
)
 
(118,380
)
Net cash provided by financing activities
 
30,040,518

 
15,254,477

 
 
 
 
 
Net (decrease) increase in cash and restricted cash
 
(1,956,393
)
 
7,982,392

Cash and restricted cash at beginning of period
 
23,944,874

 
3,359,269

Cash and restricted cash at end of period
 
$
21,988,481

 
$
11,341,661

 
 
 
 
 
Reconciliation to consolidated balance sheets:
 
 
 
 
Cash
 
$
20,305,468

 
$
10,914,545

Restricted Cash
 
1,683,013

 
427,116

Cash and restricted cash at end of period
 
$
21,988,481

 
$
11,341,661


The accompanying notes are an integral part of these consolidated financial statements.
8

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(unaudited)


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource Apartment REIT III, Inc. (the "Company") was organized in Maryland on July 15, 2015. The Company is offering up to $1.1 billion of shares of its common stock, consisting of up to $1.0 billion of shares in its primary offering and up to $100.0 million of shares pursuant to its distribution reinvestment plan (the "DRIP"). The Company’s primary offering will close on April 27, 2019. Through July 2, 2017, the Company offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock in its primary offering and commenced offering shares of Class R and Class I common stock.
The initial prices per share for each class of shares of the Company's common stock through June 30, 2018 were as follows:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$

 
$

 
$
9.52

 
$
9.13

Offering Price under the DRIP
 
$
9.60

 
$
9.09

 
$
9.14

 
$
8.90

On June 29, 2018, the Company determined its net asset value ("NAV") per share. Effective July 2, 2018, the price per share for each class of shares of the Company's common stock became:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$

 
$

 
$
9.68

 
$
9.28

Offering Price under the DRIP
 
$
9.05

 
$
9.05

 
$
9.05

 
$
9.05

As of September 30, 2018, the Company has raised aggregate gross offering proceeds (excluding the DRIP) of approximately $70.0 million from the sale of 601,207 Class A shares, 1,049,996 Class T shares, 5,497,905 Class R shares and 190,706 Class I shares of common stock.
Resource REIT Advisor, LLC (the "Advisor"), an indirect wholly-owned subsidiary of Resource America, Inc. ("RAI"), contributed $200,000 to the Company in exchange for 20,000 shares of Class A common stock on August 10, 2015. On June 29, 2016, RAI purchased 222,222 shares of Class A common stock for $2.0 million in the offering. On August 5, 2016, the Advisor exchanged 5,000 shares of Class A common stock for 50,000 shares of convertible stock. Under limited circumstances, these shares may be converted into shares of the Company's Class A common stock satisfying the Company's obligation to pay the Advisor an incentive fee and diluting its other stockholders’ interest in the Company.
RAI is a wholly-owned subsidiary of C-III Capital Partners, LLC ("C-III"), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III controls the Advisor, Resource Securities LLC ("Resource Securities"), the Company's dealer manager, and Resource Apartment Manager III, LLC (the "Manager"), the Company's property manager. C-III also controls all of the shares of the Company's common stock held by RAI and the Advisor.
The Company’s objective is to take advantage of Resource Real Estate, LLC’s (the "Sponsor") multifamily investing and lending platforms to invest in apartment communities in order to provide the investor with growing cash flow and increasing asset values. The Company intends to acquire underperforming apartments which it will renovate and stabilize in order to increase rents. To a lesser extent, the Company may also seek to originate and acquire commercial real estate debt secured by apartments having the same characteristics.
The Company elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, for the year ended December 31, 2017. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes all of its REIT taxable income to its stockholders. The Company also operates its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

The consolidated financial statements and the information and tables contained in the notes thereto are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), pertaining to interim financial statements in Form 10-Q. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2017. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the nine months ended September 30, 2018 may not necessarily be indicative of the results of operations for the full year ending December 31, 2018.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with GAAP.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary
 
Number of Units
 
Property Location
Resource Apartment REIT III Holdings, LLC
 
N/A
 
N/A
Resource Apartment REIT III OP, LP
 
N/A
 
N/A
RRE Payne Place Holdings, LLC
 
11
 
Alexandria, VA
RRE Bay Club Holdings, LLC
 
220
 
Jacksonville, FL
RRE Tramore Village Holdings, LLC
 
324
 
Austell, GA
RRE Matthews Reserve Holdings, LLC
 
212
 
Matthews, NC
RRE Kensington Holdings, LLC
 
204
 
Riverview, FL
 
 
971
 
 
 
N/A - Not Applicable

All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Company does not evaluate performance on a relationship-specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.
Concentration of Risk
As of September 30, 2018, the Company's real estate investments in Florida represented approximately 41% of the net book value of its rental property assets. As a result, the geographic concentration of the Company's portfolio makes it susceptible to adverse economic developments in the Florida real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, weather and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers”, which replaced most existing revenue recognition guidance in GAAP.  Under the new standard, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. On January 1, 2018, the Company adopted ASU No. 2014-09 using the modified retrospective approach. The majority of the Company’s revenue is derived from residential rental income and other lease income, which are scoped out from this standard and included in the current lease accounting framework, and will be accounted for under ASU No. 2016-02, "Leases", as discussed below. Revenue streams that are in the scope of the new standards include (but are not limited to) administrative and late fees and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties.  The accounting for these revenue streams were not affected by the adoption of ASU No. 2014-09, nor was there a cumulative effect of initially applying the standard.
In August 2016, FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which addresses eight specific cash flow issues with the objective of reducing existing diversity in practice.  On January 1, 2018, the Company adopted ASU No. 2016-15 and the adoption did not have a material effect on its consolidated financial statements and disclosures.
In November 2016, FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which provides guidance on the classification of restricted cash in the statement of cash flows. On January 1, 2018, the Company adopted ASU No. 2016-18. As a result of adopting the new guidance, $38,443 and $380,940 of restricted cash, which was previously included as operating and investing cash outflows within the consolidated statements of cash flows for the nine months ended September 30, 2017, respectively, has been removed and is now included in the cash and restricted cash line items at the beginning and the end of period.
In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of Business," which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. On January 1, 2018, the Company adopted ASU No. 2017-01. During the nine months ended September 30, 2018, the Company acquired three investment properties which did not meet the revised definition of a business and, accordingly, accounted for the acquisitions as asset acquisitions. For investment property additions accounted for as business combinations, acquisition fees and acquisition costs were included in acquisition costs on the consolidated statements of operations and comprehensive loss. For investment property additions accounted for as asset acquisitions, all such costs are included in the purchase price that is allocated between land, building and improvements, furniture, fixtures, and equipment and intangible assets on the consolidated balance sheets, based on their respective fair values. The Company believes all future acquisitions will be accounted for as asset acquisitions, not business combinations.
 Accounting Standards Issued But Not Yet Effective
In February 2016, FASB issued ASU No. 2016-02, "Leases" and amended by ASU No. 2018-09, “Codification Improvements" in July 2018, which is intended to improve financial reporting about leasing transactions and requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In September 2017, FASB issued ASU No. 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provides additional implementation guidance on the previously issued ASU No. 2016-02.  ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is continuing to evaluate this guidance; however, the Company expects that its operating leases where it is the lessor will be accounted for on its balance sheet similar to its current accounting with the underlying leased asset recognized as real estate. For leases in which the Company is the lessee, primarily consisting of a parking space lease and office equipment leases, the Company expects to recognize a right-of-use asset and a lease liability equal to the present value of


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense on a straight-line basis over the term of the lease.
In July 2018, FASB issued ASU No. 2018-11, “Leases: Targeted Improvements” an additional amendment to ASU No. 2016-02.  Although the Company is still evaluating this guidance, the Company believes it will apply the practical expedient allowed in this new guidance to combine lease and associated nonlease components by class of underlying asset.  In addition, the Company is expected to utilize the optional method for adopting the new leasing guidance and not restate comparative periods. 
In June 2016, FASB issued ASU No. 2016-03 "Financial Instruments - Credit Losses", which requires measurement and recognition of expected credit losses for financial assets held. The standard update is effective for the Company beginning January 1, 2019. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2016-03 to have a significant impact on its consolidated financial statements due to the fact that the Company did not have instruments subject to this guidance at September 30, 2018.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which alters the current goodwill impairment testing procedures. ASU No. 2017-04 will be effective for the Company beginning December 15, 2019. Early application is permitted. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2017-04 to have a significant impact on its consolidated financial statements due to the fact that the Company did not have any goodwill subject to this guidance at September 30, 2018.
In August 2017, FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for the Company on January 1, 2019, with early adoption permitted in any interim period. The Company is continuing to evaluate this guidance and assessing the impact of this guidance on its consolidated financial statements; however, it does not expect the adoption of ASU No. 2017-12 to have a significant impact on its consolidated financial statements.
In July 2018, FASB issued ASU No. 2018-09, "Codification Improvements". This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company is evaluating this guidance to determine the impact it may have on its consolidated financial statements; however, it does not expect the adoption of ASU No. 2018-09 to have a significant impact on its consolidated financial statements.
In August 2018, FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. This update removes, modifies and adds certain disclosure requirements in the FASB Accounting Standards Codification ("ASC") 820, “Fair Value Measurement”. ASU No. 2018-13 will be effective for the Company beginning January 1, 2020 and early adoption is permitted.  The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2018-13 to have a significant impact on its consolidated financial statements.
Real Estate Investments
The Company records acquired rental properties at fair value on the acquisition date. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates the asset using the straight line method. The Company anticipates the estimated useful lives of its assets by class as follows:
Buildings
27.5 years
Building improvements
5.0 to 27.5 years
Furniture, fixtures, and equipment
3.0 to 5.0 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Weighted average remaining term of related lease


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

Improvements and replacements in excess of $1,000 are capitalized when they have a useful life greater than or equal to one year. The Manager earns a construction management fee of 5% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of a property to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. There were no impairment losses recorded on long lived assets during the three and nine months ended September 30, 2018 and 2017.
Loans Held for Investment
The Company records acquired real estate loans at cost and reviews them for potential impairment at each balance sheet date. A loan receivable is considered impaired when it becomes probable, based on current information, that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or the fair value of the collateral. If a loan is deemed to be impaired, the Company will record a reserve for loan losses through a charge to income for any shortfall. Failure to recognize impairment would result in the overstatement of the carrying values of the Company’s real estate loans receivable and an overstatement of the Company’s net income.
The Company may acquire real estate loans at a discount due to credit quality. Revenues from these loans are recorded under the effective interest method. Under this method an effective interest rate ("EIR") is applied to the cost basis of the real estate loan receivable. The EIR that is calculated when the real estate loan is acquired remains constant and is the basis for subsequent impairment testing and income recognition. If the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate loan receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the real estate loan receivable has been fully recovered.
Interest income from loans receivable will be recognized based on the contractual terms of the debt instrument. Fees related to any buydown of the interest rate will be deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income. Closing costs related to the purchase of a loan receivable will be amortized over the term of the loan and accreted as an adjustment against interest income. There were no loans held for investment on the Company's consolidated balance sheets as of both September 30, 2018 and December 31, 2017.
Allocation of Purchase Price of Acquired Assets
On January 1, 2018, the Company adopted ASU 2017-01. Acquisitions that do not meet the definition of a business under this guidance are accounted for as asset acquisitions. In most cases, the Company believes acquisitions of real estate will no longer be considered a business combination as in most cases substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if the Company determines that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, the Company will then perform an assessment to determine whether the set is a business by using the framework outlined in the ASU. If the Company determines that the acquired asset is not a business, the Company will allocate the cost of the acquisition including transaction costs to the assets acquired or liabilities assumed based on their related fair value.
Upon the acquisition of real properties, the Company allocates the purchase price to tangible assets, consisting of land, building, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

and below-market leases, as applicable, other value of in-place leases and value of tenant relationships, based in each case on their fair values.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that 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) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases, which the Company expects will range from one month to one year.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are determined by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered in the analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the fair value of these assets and liabilities, which could impact the amount of the Company’s reported net income.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease. The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are approximately $6.7 million and $42,000 for the 12 month periods ending September 30, 2019 and 2020, respectively, and none thereafter.
Revenue is primarily derived from the rental of residential housing units for which the Company receives minimum rents and utility reimbursements pursuant to underlying tenant lease agreements. The Company also receives other ancillary fees for administration of leases, late payments, amenities and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties.  As discussed earlier, the Company adopted ASU No. 2014-09 beginning January 1, 2018.  A performance obligation is a promise in a contract to transfer a distinct good or service to a customer.  The Company records the utility reimbursement income and ancillary charges in the period when the performance obligation is completed, either at a point in time or on a monthly basis as the service is utilized. 




RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

Tenant Receivables
Tenant receivables are stated in the consolidated financial statements as amounts due from tenants net of an allowance for uncollectible receivables. Payment terms vary and receivables outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the general economy and the industry as a whole. The Company writes off receivables when they become uncollectible. At September 30, 2018 and December 31, 2017, there were allowances for uncollectible receivables of $0 and $370, respectively.
Income Taxes
The Company elected to be taxed as a REIT commencing with its taxable year ended December 31, 2017. As a REIT, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries ("TRSs"). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. At September 30, 2018 and December 31, 2017, the Company did not treat any of its subsidiaries as a TRS.
While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity.
Legislation commonly known as the Tax Cuts and Jobs Act ("TCJA") was signed into law on December 22, 2017. The TCJA makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations (including REITs), generally effective for taxable years beginning after December 31, 2017. The Company is continuing to evaluate this legislation but it does not expect it to have a significant impact.
Earnings Per Share
Basic earnings per share are computed by dividing net income (loss) attributable to common stockholders for each period by the weighted-average common shares outstanding during the period for each share class. Diluted net income (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. None of the 50,000 shares of convertible stock (discussed in Note 10) are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of September 30, 2018 (were such date to represent the end of the contingency period). For the purposes of calculating earnings per share, all common shares and per share information in the financial statements have been retroactively adjusted for the effect of any stock dividends and stock splits. For the three and nine months ended September 30, 2018 and 2017, common shares potentially issuable to settle distributions payable are excluded from the calculation of diluted earnings per share calculations, as their inclusion would be anti-dilutive.
In accordance with ASC 260-10-45, "Earnings Per Share", the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on their relative percentage of each class


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

of shares to the total number of outstanding shares. The Company did not have any participating securities outstanding other than Class A common stock, Class T common stock, Class R common stock and Class I common stock during the periods presented (see Note 10).
Organization and Offering Costs
Organization and offering costs (other than selling commissions, dealer manager fees, and distribution and shareholder servicing fees) of the Company are initially being paid by the Advisor on behalf of the Company.
Pursuant to the advisory agreement between the Company and the Advisor, the Company is obligated to reimburse the Advisor for organization and other offering costs paid by the Advisor on behalf of the Company, up to an amount equal to 4.0% of gross offering proceeds as of the termination of the initial public offering if the Company raises less than $500.0 million in the primary portion of the initial public offering and 2.5% of gross offering proceeds as of the termination of the initial public offering if the Company raises $500.0 million or more in the primary portion of the initial public offering.
On April 13, 2018, the board of directors approved an amendment to the advisory agreement that provides that the Company is not responsible for the reimbursement of any unreimbursed organization and offering expenses or operational expenses incurred by the Advisor on the Company’s behalf through March 31, 2018 until after the termination of the primary portion of the Company’s ongoing initial public offering. Additionally, the amendment provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by the Advisor on the Company’s behalf through March 31, 2018 will be reimbursed ratably starting after the termination of the primary portion of the Company’s ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses.
As of September 30, 2018, the Company has incurred approximately $8.1 million for public offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal and similar costs. As of September 30, 2018, the Advisor has advanced approximately $7.8 million of these costs on behalf of the Company and the Company has paid approximately $300,000 of these costs directly.
As of September 30, 2018, the Company has charged approximately $2.6 million of offering costs to equity, which represents the portion of deferred offering costs allocated to each share of common stock sold in the public offering. Deferred offering costs of $5.6 million represent the portion of the total offering costs incurred that have not yet been charged to equity. Upon completion of the public offering, any deferred offering costs in excess of the limit on organization and offering costs discussed above, will be charged back to the Advisor.
Organization costs, which include all expenses incurred by the Company in connection with its formation, including but not limited to legal fees and other costs to incorporate, are expensed as incurred. There can be no assurance that the Company's plans to raise capital will be successful. Prior to the Company breaking escrow, the Advisor incurred $104,266 of formation and other operating expenses on the Company's behalf, which will not be reimbursed to the Advisor.
Outstanding Class T shares issued in the Company's primary offering are subject to a 1% annual distribution and shareholder servicing fee for five years from the date on which such shares were issued. The Company will cease paying the distribution and shareholder servicing fee on each Class T share prior to the fifth anniversary of its issuance on the earliest of the following, should any of these events occur: (i) the date at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from the Company's primary offering (i.e., excluding proceeds from sales pursuant to the DRIP); (ii) the date on which the Company lists its common stock on a national securities exchange; and (iii) the date of a merger or other extraordinary transaction in which the Company is a party and in which the common stock is exchanged for cash or other securities. The Company cannot predict if or when any of these events will occur.
Outstanding Class R shares issued in the Company's primary offering are also subject to a 1% annual distribution and shareholder servicing fee.  The Company will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from its primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of its assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

a lower limit, provided that, in the case of a lower limit, the agreement between the Resource Securities and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and Resource Securities advises the Company's transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through its distribution reinvestment plan).
The Company records distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares are issued. The liability will be relieved over time, as the fees are paid to the Dealer Manager, or as the fees are adjusted (if the fees are no longer payable pursuant to the conditions described above.) For issued Class T shares, the Company has accrued an estimate of total distribution and shareholder servicing fees of $486,618 for the full five year period at September 30, 2018 based on a total of 5% of the gross proceeds from all Class T shares sold, of which the Company paid $137,608 cumulatively through September 30, 2018. For issued Class R shares, the Company has accrued an estimate of total distribution and shareholder servicing fees of $1,558,885 at September 30, 2018 based on a total of 3% of the gross proceeds from all Class R shares sold, of which the Company paid $266,701 cumulatively through September 30, 2018. The total accrual of approximately $1.6 million is included in due to related parties on the Company's consolidated balance sheet at September 30, 2018.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The impact of the reclassifications made to prior year amounts are not material and did not affect net loss.

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
    The following table presents the Company's supplemental cash flow information:
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Non-cash operating, financing and investing activities:
 
 
 
 
Offering costs payable to related parties
 
$
1,677,608

 
$
2,534,176

Offering costs payable to third parties
 
(18,898
)
 
(59,377
)
Distribution and shareholder servicing fee payable to related parties
 
651,678

 
579,029

Cash distributions on common stock declared but not yet paid
 
862,507

 
91,561

Stock issued from distribution reinvestment plan
 
1,019,484

 
115,774

Stock dividend issued
 

 
251,567

Subscriptions receivable
 
696,500

 
676,851

Escrow deposits funded directly by mortgage notes payable
 
486,106

 
347,318

 
 
 
 
 
Non-cash activity related to acquisitions:
 
 
 
 
Mortgage notes payable used to acquire real property
 
77,748,894

 
21,172,682

 
 
 
 
 
Cash paid during the year for:
 
 
 
 
Interest
 
$
1,340,308

 
$
92,819








RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

NOTE 4 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. The following table presents a summary of the components of the Company's restricted cash:
 
 
September 30, 2018
 
December 31, 2017
Real estate taxes
 
$
558,498

 
$
32,115

Insurance
 
438,932

 
8,227

Capital improvements
 
685,583

 
151,722

Total
 
$
1,683,013

 
$
192,064

In addition, the Company designated unrestricted cash for capital expenditures of approximately $10.5 million and $1.9 million at September 30, 2018 and December 31, 2017, respectively.

NOTE 5 - ACQUISITIONS
On March 22, 2018, the Company, through its wholly-owned subsidiary, purchased a multifamily community located in Austell, Georgia ("Tramore Village"). Tramore Village, constructed in 1999, contains 324 units plus amenities, including private garages for each unit, a clubhouse, pool, fitness center and business center. Tramore Village encompasses 348,804 rentable square feet. At September 30, 2018, Tramore Village was 94% leased.
On August 29, 2018, the Company, through its wholly-owned subsidiary, purchased a multifamily community located in Matthews, North Carolina ("Matthews Reserve"). Matthews Reserve, constructed in 1998, contains 212 units plus amenities, including a swimming pool, clubhouse, a fitness center, playgrounds, and a dog park. Matthews Reserve encompasses 199,744 rentable square feet. At September 30, 2018, Matthews Reserve was 96% leased.
On September 14, 2018, the Company, through its wholly-owned subsidiary, purchased a multifamily community located in Riverview, Florida ("The Park at Kensington"). The Park at Kensington, constructed in 1990, contains 204 units plus amenities, including a swimming pool, clubhouse, a fitness center, and a dog park. The Park at Kensington encompasses 205,471 rentable square feet. At September 30, 2018, The Park at Kensington was 95% leased.














RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

The following table presents the allocated contract purchase price, acquisition fee, and acquisition costs of the Company's three acquired properties during the nine months ended September 30, 2018:
 
 
Contract Purchase Price
 
Acquisition Fee (1)
 
Acquisition Costs (2)
 
Total Real Estate, Cost
Tramore Village
 
 
 
 
 
 
 
 
Land
 
$
6,549,731

 
$
144,847

 
$
34,503

 
$
6,729,081

Building and Improvements
 
36,220,010

 
801,006

 
190,800

 
37,211,816

Furniture, fixtures and equipment
 
654,973

 
14,485

 
3,450

 
672,908

Intangible Assets
 
925,286

 
20,463

 
4,874

 
950,623

 
 
$
44,350,000

 
$
980,801

 
$
233,627

 
$
45,564,428

 
 
 
 
 
 
 
 
 
Matthews Reserve
 
 
 
 
 
 
 
 
Land
 
$
4,023,750

 
$
88,239

 
$
26,799

 
$
4,138,788

Building and Improvements
 
28,738,626

 
630,223

 
191,407

 
29,560,256

Furniture, fixtures and equipment
 
372,197

 
8,162

 
2,479

 
382,838

Intangible Assets
 
665,427

 
14,592

 
4,432

 
684,451

 
 
$
33,800,000

 
$
741,216

 
$
225,117

 
$
34,766,333

 
 
 
 
 
 
 
 
 
The Park at Kensington
 
 
 
 
 
 
 
 
Land
 
$
3,052,176

 
$
66,511

 
$
33,588

 
$
3,152,275

Building and Improvements
 
24,634,579

 
536,818

 
271,095

 
25,442,492

Furniture, fixtures and equipment
 
360,000

 
7,845

 
3,962

 
371,807

Intangible Assets
 
653,245

 
14,235

 
7,189

 
674,669

 
 
$
28,700,000

 
$
625,409

 
$
315,834

 
$
29,641,243


(1)     Represents acquisition fee of 2% of the cost of investments acquired by the Advisor on behalf of the Company.
(2)    Represents transaction costs paid at both closing and post-closing, excluding Acquisition Fees.

NOTE 6 - RENTAL PROPERTIES, NET
The following table presents the Company's investment in rental properties:
 
September 30, 2018
 
December 31, 2017
Land
$
18,761,123

 
$
4,740,979

Building and improvements
117,770,119

 
24,923,994

Furniture, fixtures, and equipment
2,025,812

 
256,992

Construction in progress
382,182

 
13,395

 
138,939,236

 
29,935,360

Less: accumulated depreciation
(2,423,033
)
 
(492,271
)
Total rental property, net
$
136,516,203

 
$
29,443,089

Depreciation expense for the three and nine months ended September 30, 2018 was $937,827 and approximately $1.9 million, respectively. Depreciation expense for the three and nine months ended September 30, 2017 was $184,618 and $205,446, respectively.
Loss on disposal of assets: During the three and nine months ended September 30, 2018, the Company recorded losses on the disposal of assets of $38,196 and $44,684, respectively, due to the replacement of appliances at its rental properties in


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

conjunction with unit upgrades. During each of the three and nine months ended September 30, 2017, the Company recorded losses on the disposal of assets of $185,114, due to the replacement of appliances at its rental properties in conjunction with unit upgrades.

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of in-place rental leases. The net carrying value of the acquired in-place leases at September 30, 2018 and December 31, 2017 was approximately $1.4 million and $321,468, respectively, net of the accumulated amortization of approximately $1.7 million and $451,775, respectively. At September 30, 2018, the weighted average remaining life of the rental leases was five months.
Amortization for the three months ended September 30, 2018 and 2017 was $498,108 and $160,734, respectively. Amortization for the nine months ended September 30, 2018 and 2017 was approximately $1.2 million and $188,604, respectively. At September 30, 2018, expected amortization for the in-place rental leases for the next 12 months is $1.4 million and none thereafter.

NOTE 8 - MORTGAGE NOTES PAYABLE, NET
The following table presents a summary of the Company's mortgage notes payable, net at September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
Collateral
 
Outstanding Borrowings
 
Deferred Financing Costs, net
 
Carrying Value
 
Outstanding borrowings
 
Deferred Financing Costs, net
 
Carrying Value
Payne Place
 
$
1,568,903

 
$
(30,693
)
 
$
1,538,210

 
$
1,594,507

 
$
(32,126
)
 
$
1,562,381

Bay Club
 
21,520,000

 
(268,069
)
 
21,251,931

 
21,520,000

 
(304,011
)
 
21,215,989

Tramore Village
 
32,625,000

 
(378,812
)
 
32,246,188

 

 

 

Matthews Reserve

23,850,000


(327,378
)

23,522,622







The Park at Kensington

21,760,000


(317,026
)

21,442,974







Total
 
$
101,323,903

 
$
(1,321,978
)
 
$
100,001,925

 
$
23,114,507

 
$
(336,137
)
 
$
22,778,370

The following table presents additional information about the Company's mortgage notes payable, net:
Collateral
 
Maturity Date
 
Annual Interest Rate
 
 
 
Average Monthly Debt Service
 
Average Monthly Escrow
Payne Place
 
1/1/2047
 
3.11%
 
(1)(5) 
 
$
6,948

 
$
2,084

Bay Club
 
8/1/2024
 
4.13%
 
(2)(6) 
 
77,231

 
41,743

Tramore Village
 
4/1/2025
 
4.06%
 
(3)(6) 
 
111,423

 
36,537

Matthews Reserve
 
9/1/2025
 
4.47%
 
(4)(6) 
 
90,075

 
21,010

The Park at Kensington
 
10/1/2025
 
4.36%
 
(4)(6) 
 
80,159

 
43,998

 
(1)
Fixed rate until January 1, 2020, when the fixed rate of the note changes to variable rate based on six-month LIBOR plus 2.25%, with an all-in interest rate floor of 2.50% and ceiling of 9.50%.
(2)    Variable rate based on one-month LIBOR of 2.26% (at September 30, 2018) plus 1.87%, with a maximum interest rate of 5.75%; see Note 13.
(3)     Variable rate based on one-month LIBOR of 2.26% (at September 30, 2018) plus 1.80%, with a maximum interest rate of 6.25%; see Note 13.
(4)     Fixed rate.
(5)    RAI co-guarantees this loan with the Company. See Note 9 for more details.
(6)    Monthly interest-only payment currently required.
    


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

All mortgage notes are collateralized by a first mortgage lien on the assets of the respective property named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty for a period of the term.
On March 22, 2018, the Company, through a wholly owned subsidiary, entered into a seven-year, $32.6 million secured mortgage loan with Berkadia Commercial Mortgage LLC, an unaffiliated lender, secured by Tramore Village (the "Tramore Mortgage Loan"). The Tramore Mortgage Loan matures on April 1, 2025. The Tramore Mortgage Loan bears interest at a rate of LIBOR plus 1.80%, with a maximum interest rate of 6.25%. Monthly payments are interest only for the first 36 months.
Beginning on May 1, 2021, the Company will pay both principal and interest on the Tramore Mortgage Loan based on a 30-year amortization period. Any remaining principal balance and all accrued and unpaid interest and fees will be due at maturity. The Company may prepay the Tramore Mortgage Loan in full at any time (1) after April 1, 2019 and until December 31, 2024 upon payment of a prepayment premium equal to 1% of the principal amount prepaid; and (2) after December 31, 2024 with no prepayment premium. The non-recourse carveouts under the loan documents for the Tramore Mortgage Loan are guaranteed by the Company.
On August 29, 2018, the Company, through a wholly owned subsidiary, entered into a seven-year secured mortgage loan with CBRE Capital Markets, Inc., an unaffiliated lender, for borrowings of approximately $23.9 million secured by Matthews Reserve (the “Matthews Mortgage Loan”). The Matthews Mortgage Loan matures on September 1, 2025. The Matthews Mortgage Loan bears interest at a fixed rate of 4.47%. Monthly payments are interest only for the first 36 months.
Beginning on October 1, 2021, the Company will pay both principal and interest on the Matthews Mortgage Loan based on 30-year amortization. Any remaining principal balance and all accrued and unpaid interest and fees will be due at maturity. After any lockout period (if any), prepayment in full is permitted on any scheduled payment date, provided a prepayment premium is paid. The prepayment premium will be based on the yield maintenance prepayment formula for any prepayment made prior to September 1, 2023. The prepayment premium will be 1% of the amount of principal being repaid for any prepayment made from (and including) September 1, 2023 through May 31, 2025. No prepayment premium is required after June 1, 2025. The non-recourse carveouts under the loan documents for the Matthews Mortgage Loan are guaranteed by the Company.
On September 14, 2018, the Company, through a wholly owned subsidiary, entered into a seven-year secured mortgage loan with CBRE Capital Markets, Inc., an unaffiliated lender, for borrowings of approximately $21.8 million secured by The Park at Kensington (the “Kensington Mortgage Loan”). The Kensington Mortgage Loan matures on October 1, 2025. The Kensington Mortgage Loan bears interest at a rate of 4.36%. Monthly payments are interest only for the first 36 months.
Beginning on November 1, 2021, the Company will pay both principal and interest on the Kensington Mortgage Loan based on 30-year amortization. Any remaining principal balance and all accrued and unpaid interest and fees will be due at maturity. After any lockout period (if any), prepayment in full is permitted on any scheduled payment date, provided a prepayment premium is paid. The prepayment premium will be based on the greater of (i) the yield maintenance prepayment formula and (ii) 1% of the amount of the principal being repaid, for any prepayment made prior to October 1, 2023. The prepayment premium will be 1% of the amount of principal being repaid for any prepayment made from (and including) October 1, 2023 through June 30, 2025. No prepayment premium is required after July 1, 2025. The non-recourse carveouts under the loan documents for the Kensington Mortgage Loan are guaranteed by the Company.
The following table presents the Company's annual principal payments on outstanding borrowings for each of the next five 12-month periods ending September 30, and thereafter:
2019
 
$
63,662

2020
 
402,250

2021
 
650,218

2022
 
1,709,840

2023
 
1,815,560

Thereafter
 
96,682,373

 
 
$
101,323,903



RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the three months ended September 30, 2018 and 2017, amortization of deferred financing costs of $34,252 and $4,572, respectively, was included in interest expense. During the nine months ended September 30, 2018 and 2017, amortization of deferred financing costs of $75,474 and $5,390, respectively, was included in interest expense. Accumulated amortization at September 30, 2018 and December 31, 2017 was $100,563 and $22,314, respectively.
The following table presents the Company's estimated amortization of the existing deferred financing costs for the next five 12-month periods ending September 30, and thereafter:
2019
 
$
203,847

2020
 
203,755

2021
 
202,047

2022
 
199,267

2023
 
195,459

Thereafter
 
317,603

 
 
$
1,321,978


NOTE 9 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship with the Advisor
The Company is externally managed and advised by the Advisor. Pursuant to the terms of the advisory agreement, the Advisor provides the Company with its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of the Sponsor or one of its affiliates. The Company does not expect to have any employees. The Advisor is not obligated to dedicate any specific portion of its time or its employees' time to the Company’s business. The Advisor and any employees of the Sponsor or its affiliates acting on behalf of the Advisor, are at all times subject to the supervision and oversight of the Company’s board of directors and have only such functions and authority as the Company delegates to it. Effective April 28, 2018, the Company renewed the advisory agreement with the Advisor through April 27, 2019. The terms of the agreement are identical to those of the advisory agreement in effect through April 27, 2018 except that it includes the amendment described below.
During the course of the offering, the Advisor will provide offering-related services to the Company and will advance funds to the Company for both operating costs and organization and offering costs. These amounts will be reimbursed to the Advisor from the proceeds from the offering, subject to the aforementioned limits on organization and offering expense reimbursements, although there can be no assurance that the Company’s plans to raise capital will be successful. At September 30, 2018, the Advisor has advanced organization and offering costs on a cumulative basis on behalf of the Company of approximately $7.8 million.
The advisory agreement has a one-year term and may be renewed for an unlimited number of successive one-year terms upon the approval of the Conflicts Committee of the Company's board of directors. Under the advisory agreement, the Advisor will receive fees and will be reimbursed for its expenses as set forth below:
Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire or originate loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Advisor earns a monthly asset management fee equal to 0.083% (one-twelfth of 1.0%) of the cost of each asset at the end of each month, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.
Disposition fees. The Advisor will earn a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also will pay directly or reimburse the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs of up to 4.0% of gross offering proceeds if the Company raises less than $500.0 million in the primary offering and 2.5% of gross offering proceeds if the Company raises more than $500.0 million in the primary offering. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees. Prior to the Company breaking escrow, the Advisor incurred $104,266 of formation and other operating expenses the Company's behalf, which will not be reimbursed to the Advisor.
On April 13, 2018, the board of directors approved an amendment to the advisory agreement that provides that the Company is not responsible for the reimbursement of any unreimbursed organization and offering expenses or operational expenses incurred by the Advisor on the Company’s behalf through March 31, 2018 until after the termination of the primary portion of the Company’s ongoing initial public offering. Additionally, the amendment provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by the Advisor on the Company’s behalf through March 31, 2018 will be reimbursed ratably starting after the termination of the primary portion of the Company’s ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses.
Relationship with Resource Apartment Manager III, LLC
The Manager manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments that it manages and an oversight fee on any real property investments that are managed by third parties. Property management fees are deducted directly from the property's operating account by the property manager. Any property management fees paid to unaffiliated third party property managers in excess of 4.5% of actual gross receipts will be reimbursed to the Company by the Advisor. At September 30, 2018 and December 31, 2017, the Advisor owed the Company $1,640 and $4,192, respectively, for property management fees in excess of the 4.5% cap paid to the unaffiliated third party property manager.
Construction management fees. The Manager earns a construction management fee equal to 5.0% of actual aggregate costs to construct improvements to a property.
Debt servicing fees. The Manager will earn a debt servicing fee equal to 2.75% of gross receipts from real estate-related debt investments.
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company. The Company is obligated to reimburse the Manager or other affiliates for such shared operating expenses.
Relationship with Resource Securities
Resource Securities, an affiliate of the Advisor, serves as the Company’s dealer manager and is responsible for marketing the Company’s shares during the public offering.
Dealer manager fee and selling commissions. Pursuant to the terms of the amended and restated dealer manager agreement with Resource Securities, the Company generally pays Resource Securities a selling commission of up to 3.0% of gross offering proceeds from the sale of Class R shares and a dealer manager fee of up to 3.5% of gross offering proceeds from the sale of Class R shares (but the aggregate of such fees shall not exceed 5.5% of gross offering proceeds). The Company generally pays Resource Securities a dealer manager fee of up to 1.5% of gross offering proceeds from the sale of the Class I shares. Prior to July 3, 2017,


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

the Company generally paid Resource Securities selling commissions up to 7.0% of gross primary offering proceeds from the sale of Class A shares and up to 2.0% of gross primary offering proceeds from the sale of Class T shares and a dealer manager fee of up to 3.0% of gross primary offering proceeds from the sale of either Class A or Class T shares. Resource Securities allows all selling commissions earned and a portion of the dealer manager fee as a marketing fee to participating broker-dealers. No selling commissions or dealer manager fees are earned by Resource Securities in connection with sales under the distribution reinvestment plan. Additionally, the Company may reimburse Resource Securities for bona fide due diligence expenses. No selling commissions or dealer manager fees were paid in connection with the sales of Class A shares to the Advisor or RAI.
Distribution and shareholder servicing fee. Resource Securities is paid an annual fee of 1.0% of the purchase price (or, once reported, the NAV) per share of Class T common stock sold in the primary offering for five years from the date on which each share is issued up to a total of 5.0%. Resource Securities is also paid an annual fee of 1.0% of the purchase price (or, once reported, the NAV) per share of Class R common stock sold in the primary offering.  The Company will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10.0% of the gross proceeds from the primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the Company with or into another entity, or the sale or other disposition of all or substantially all of our assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between Resource Securities and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and Resource Securities advises the Company’s transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through the distribution reinvestment plan).
Relationship with RAI and C-III
Property loss pool. The Company's properties participate in a property loss self-insurance pool with other properties directly and indirectly managed by RAI and C-III, which is backed by a catastrophic insurance policy.   Substantially all of the receivables from related parties represent insurance deposits held in escrow by RAI and C-III related to the self-insurance pool which, if unused, will be returned to the Company. The pool covers losses up to $2.5 million, in aggregate, after a $25,000 deductible per incident. Claims beyond the insurance pool limits will be covered by the catastrophic insurance policy, which covers claims up to $250.0 million, after either a $25,000 or a $100,000 deductible per incident, depending on location and/or type of loss. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limited could have a material adverse effect on the Company's financial condition and operating results. During the three and nine months ended September 30, 2018, the Company paid $12,134 and $53,119, respectively, into the property loss insurance pool.
General liability loss pool. The Company's properties also participated in a general liability pool with other properties directly and indirectly managed by RAI and C-III until April 22, 2017. The pool covered claims up to $50,000 per incident through April 22, 2017. Effective April 23, 2017, the loss pool was eliminated and the Company now participates (with other properties directly and indirectly managed by RAI and C-III) in a general liability policy. The insured limit for the general liability policy is $76.0 million in total claims, after a $25,000 deductible per incident.
Internal audit fees. RAI performs internal audit services for the Company.
Other transactions. RAI co-guarantees the mortgage on Payne Place with the Company until such time as the Company achieves the following: (a) owns a minimum of five apartment complexes; (b) has a minimum net worth of $50.0 million; (c) has liquidity of no less than $5.0 million; and (d) has an aggregate portfolio leverage of no more than 65% (see Note 8 for further details). As of September 30, 2018, the Company is in the process of releasing RAI from the guaranty.
The Company paid The Planning & Zoning Resource Company, a subsidiary of C-III, $4,187 for zoning reports in connection with its acquisition of Tramore Village, Matthews Reserve, and The Park at Kensington during the nine months ended September 30, 2018.
The Company participates in a liability insurance program for directors and officers coverage with other C-III managed entities and subsidiaries for coverage up to $100.0 million


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

The following table presents the Company's amounts receivable from and amounts payable to such related parties:
 
September 30, 2018
 
December 31, 2017
Due from related parties:
 
 
 
Advisor
$
1,640

 
$
4,192

RAI and affiliate - insurance funds held in escrow
368

 
379

Resource Securities
721

 

 
$
2,729

 
$
4,571

Due to related parties:
 
 
 
Advisor:
 
 
 
Acquisition-related reimbursements
$

 
$
6,533

Organization and offering costs
7,827,876

 
6,167,941

Operating expense reimbursements (including prepaid expenses)
2,444,164

 
1,810,658

 
10,272,040

 
7,985,132

Manager:
 
 
 
Property management fees
43,546

 
10,800

Operating expense reimbursements
28,543

 
3,592

 
72,089

 
14,392

RAI:
 
 
 
 Internal audit fee
11,750

 
3,500

Organization and offering costs
17,673

 

Operating expense reimbursements
8,672

 
6,625

 
38,095

 
10,125

Resource Securities:
 
 
 
Selling commissions and dealer-manager fees
38,308

 
22,720

Distribution and shareholder servicing fee
1,641,194

 
989,515

 
1,679,502

 
1,012,235

 
 
 
 
 
$
12,061,726

 
$
9,021,884














RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

The following table presents the Company's fees earned by and expenses incurred from such related parties:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Fees earned / expenses incurred:
 
 
 
 
 
 
 
Advisor:
 
 
 
 
 
 
 
Acquisition fees and acquisition-related reimbursements (1)
$
1,429,280

 
$
641,193

 
$
2,447,999

 
$
641,193

Asset management fees (2)
242,715

 
60,396

 
553,536

 
73,853

Debt financing fees (3)
228,050

 
107,600

 
391,175

 
107,600

Organization and offering costs (4)
244,534

 
676,441

 
1,677,364

 
2,534,177

Operating expense reimbursement (5)
349,260

 
173,729

 
830,616

 
487,934

 
 
 
 
 
 
 
 
Manager:
 
 
 
 
 
 
 
Property management fees (2)
$
96,025

 
$
22,542

 
$
211,695

 
$
22,542

Construction management fees (1)
20,603

 
336

 
48,769

 
336

Operating expense reimbursements (6)
16,713

 

 
43,110

 

 
 
 
 
 
 
 
 
RAI:
 
 
 
 
 
 
 
Internal audit fee (5)
$
11,750

 
$
3,500

 
$
27,000

 
$
9,750

Organization and offering costs (4)
17,673

 

 
17,673

 

 
 
 
 
 
 
 
 
Resource Securities:
 
 
 
 
 
 
 
Selling commissions and dealer-manager fees (7)
$
599,872

 
$
325,954

 
$
1,822,567

 
$
961,987

Distribution and shareholder servicing fee (7)
309,848

 
176,075

 
969,754

 
619,546

 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
The Planning & Zoning Resource Company (1)
$
2,207

 
$
1,079

 
$
4,187

 
$
1,079


(1)     Capitalized and included in Rental properties, net on the consolidated balance sheets.
(2)    Included in Management fees - related parties on the consolidated statements of operations and comprehensive loss.
(3)    Included in Mortgage notes payable on the consolidated balance sheets.
(4)
Organizational expenses were expensed when incurred and offering costs are included in Deferred offering costs and Stockholders' equity on the consolidated balance sheets.
(5)
Included in General and administrative on the consolidated statements of operations and comprehensive loss and excludes third party costs that are advanced by the Advisor.
(6)
Included in Rental operating expenses on the consolidated statements of operations and comprehensive loss.
(7)    Included in Stockholders' equity on the consolidated balance sheets.








RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2018
(unaudited)

NOTE 10 - EARNINGS PER SHARE
The following table presents a reconciliation of the Company's basic and diluted earnings/(loss) per share for the periods presented:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(1,937,512
)
 
$
(1,602,783
)
 
$
(4,152,117
)
 
$
(2,251,780
)
Less: Class A common stock cash distributions declared
86,722

 
81,555

 
251,790

 
119,955

Less: Class T common stock cash distributions declared
124,218

 
115,789

 
359,912

 
142,039

Less: Class R common stock cash distributions declared
688,371

 
35,094

 
1,597,300

 
35,094

Less: Class I common stock cash distributions declared
31,283

 
3,453

 
66,524

 
3,453

Undistributed net loss attributable to common stockholders
$
(2,868,106
)
 
$
(1,838,674
)
 
$
(6,427,643
)
 
$
(2,552,321
)
 
 
 
 
 
 
 
 
Class A common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class A common stockholders
$
(260,647
)
 
$
(606,418
)
 
$
(705,912
)
 
$
(1,072,505
)
Class A common stock cash distributions declared
86,722

 
81,555

 
251,790

 
119,955

Net loss attributable to Class A common stockholders
$
(173,925
)
 
$
(524,863
)
 
$
(454,122
)
 
$
(952,550
)
Net loss per Class A common share, basic and diluted
$
(0.28
)
 
$
(0.85
)
 
$
(0.73
)
 
$
(1.76
)
Weighted-average number of Class A common shares outstanding, basic and diluted (1)
629,450

 
616,733

 
626,180

 
540,022

 
 
 
 
 
 
 
 
Class T common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class T common stockholders
$
(454,747
)
 
$
(1,050,879
)
 
$
(1,229,638
)
 
$
(1,356,356
)
Class T common stock cash distributions declared
124,218

 
115,789

 
359,912

 
142,039

Net loss attributable to Class T common stockholders
$
(330,529
)
 
$
(935,090
)
 
$
(869,726
)
 
$
(1,214,317
)
Net loss per Class T common share, basic and diluted
$
(0.30
)
 
$
(0.87
)
 
$
(0.80
)
 
$
(1.78
)
Weighted-average number of Class T common shares outstanding, basic and diluted
1,098,193

 
1,068,753

 
1,090,752

 
682,945

 
 
 
 
 
 
 
 
Class R common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class R common stockholders
$
(2,088,367
)
 
$
(165,126
)
 
$
(4,367,890
)
 
$
(112,398
)
Class R common stock cash distributions declared
688,371

 
35,094

 
1,597,300

 
35,094

Net loss attributable to Class R common stockholders
$
(1,399,996
)
 
$
(130,032
)
 
$