UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March~~June 3130, 2017

☐	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 333-200221

NexPoint Multifamily Capital Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

46-4106316

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

300 Crescent Court, Suite 700, Dallas, Texas		75201
(Address of Principal Executive Offices)		(Zip Code)

(972) 628-4100

(Telephone Number, Including Area Code)

N/A

(Former name, former address or former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐		Accelerated Filer	☐
Non-Accelerated Filer	☒	(Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May~~August 1110, 2017, the registrant had 1,~~120~~133,~~508~~334 shares of Class A common stock, $0.01 par value, outstanding and 0 shares of Class T common stock, $0.01 par value, outstanding.

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC.

Form 10-Q

~~March~~June 3130, 2017

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	2
	Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016	2
	Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016 (unaudited)	3
	Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	3
	Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2017 (unaudited)	4
	Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2017 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3537
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5154
Item 4.	Controls and Procedures	5255
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5356
Item 1A.	Risk Factors	5356
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5356
Item 3.	Defaults Upon Senior Securities	5457
Item 4.	Mine Safety Disclosures	5457
Item 5.	Other Information	5457
Item 6.	Exhibits	5457
Signatures		5658

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2017			December 31, 2016
	June 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Operating Real Estate Investments
Land (including from VIEs of $5,080 and $5,080, respectively)	$	5,080		$	5,080
Buildings and improvements (including from VIEs of $35,450 and $35,432, respectively)		35,450			35,432
Buildings and improvements (including from VIEs of $35,477 and $35,432, respectively)		35,477			35,432
Construction in progress (including from VIEs of $6 and $44, respectively)		6			44
Construction in progress (including from VIEs of $7 and $44, respectively)		7			44
Furniture, fixtures and equipment (including from VIEs of $1,039 and $1,013, respectively)		1,039			1,013
Furniture, fixtures and equipment (including from VIEs of $1,057 and $1,013, respectively)		1,057			1,013
Total Gross Operating Real Estate Investments		41,~~575~~621			41,569
Accumulated depreciation and amortization (including from VIEs of $2,316 and $1,927, respectively)		(2,316	)		(1,927	)
Accumulated depreciation and amortization (including from VIEs of $2,708 and $1,927, respectively)		(2,708	)		(1,927	)
Total Net Operating Real Estate Investments		3938,~~259~~913			39,642
Cash and cash equivalents (including from VIEs of $604 and $282, respectively)		1,117			456
Cash and cash equivalents (including from VIEs of $250 and $282, respectively)		1,628			456
Restricted cash (including from VIEs of $346 and $227, respectively)		346			227
Restricted cash (including from VIEs of $223 and $227, respectively)		223			227
Accounts receivable (including from VIEs of $19 and $39, respectively)		169			164
Accounts receivable (including from VIEs of $16 and $39, respectively)		77			164
Prepaid and other assets (including from VIEs of $10 and $23, respectively)		42			87
Prepaid and other assets (including from VIEs of $52 and $23, respectively)		612			87
Preferred equity investment		5,~~250~~388			5,250
TOTAL ASSETS	$	46,~~183~~841		$	45,826
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage payable, net (including from VIEs of $26,757 and $26,745, respectively)		26,757			26,745
Mortgage payable, net (including from VIEs of $26,770 and $26,745, respectively)		26,770			26,745
Credit facility, net		10,~~991~~970			10,944
Accounts payable and other accrued liabilities (including from VIEs of $107 and $171, respectively)		745			851
Accounts payable and other accrued liabilities (including from VIEs of $111 and $171, respectively)		1,325			851
Accrued real estate taxes payable (including from VIEs of $293 and $193, respectively)		293			193
Accrued real estate taxes payable (including from VIEs of $199 and $193, respectively)		199			193
Accrued interest payable (including from VIEs of $62 and $58, respectively)		66			58
Accrued interest payable (including from VIEs of $66 and $58, respectively)		66			58
Security deposit liability (including from VIEs of $65 and $65, respectively)		65			65
Security deposit liability (including from VIEs of $66 and $65, respectively)		66			65
Prepaid rents (including from VIEs of $34 and $47, respectively)		34			47
Prepaid rents (including from VIEs of $90 and $47, respectively)		90			47
Distributions payable		6162			52
Due to affiliates		~~234~~240			227
Total Liabilities		39,~~246~~788			39,182
Stockholders' Equity:
12.5% Series A Cumulative Preferred stock, $.01 par value; 10,000,000 shares authorized; 125 and 0 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively		—			—
12.5% Series A Cumulative Preferred stock, $.01 par value; 10,000,000 shares authorized; 125 and 0 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		—			—
Class A Common stock, $.01 par value; 500,000,000 shares authorized; 1,056,321 and 975,824 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively		11			10
Class A Common stock, $.01 par value; 500,000,000 shares authorized; 1,128,490 and 975,824 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		11			10
Class T Common stock, $.01 par value; 500,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2017 and December 31, 2016		—			—
Class T Common stock, $.01 par value; 500,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2017 and December 31, 2016		—			—
Additional paid-in capital		1011,~~354~~002			9,483
Accumulated deficit		(4,~~049~~543	)		(3,471	)
Accumulated other comprehensive loss		(25	)		(25	)
Noncontrolling interests		~~646~~608			647
Total Stockholders' Equity		67,~~937~~053			6,644
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	46,~~183~~841		$	45,826

See Notes to Consolidated Financial Statements

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Revenues
Rental income	$	~~887~~900		$	~~842~~869		$	1,787		$	1,711
Other income		~~110~~127			88107			237			195
Total revenues		~~997~~1,027			~~930~~976			2,024			1,906
Expenses
Property operating expenses		~~236~~217			~~196~~243			453			439
Real estate taxes and insurance		~~114~~115			~~113~~111			229			224
Property management fees (related party)		30			28
Property management fees (1)		31			30			61			58
Asset management fees (related party)		86			—
Asset management fees (2)		87			82			173			82
Corporate general and administrative expenses		~~289~~235			~~155~~376			524			531
Organization expenses		7			15—			14			15
Property general and administrative expenses		4451			3442			95			76
Depreciation and amortization		~~389~~392			~~523~~345			781			868
Total expenses		1,~~195~~135			1,~~064~~229			2,330			2,293
Operating loss		(~~198~~108	)		(~~134~~253	)		(306	)		(387	)
Interest expense		(~~368~~358	)		(~~282~~368	)		(726	)		(650	)
Equity in income of preferred equity investment		~~143~~145			—166			288			166
Net loss		(~~423~~321	)		(~~416~~455	)		(744	)		(871	)
Net loss attributable to noncontrolling interests		(1	)		(7	)
Net income (loss) attributable to noncontrolling interests		1			1			—			(6	)
Net loss attributable to NexPoint Multifamily Capital Trust, Inc.		(~~422~~322	)		(~~409~~456	)		(744	)		(865	)
Distributions declared to Series A preferred stockholders		(3	)		—
Net income attributable to Series A preferred stockholders		4			—			7			—
Net loss attributable to common stockholders	$	(~~425~~326	)	$	(~~409~~456	)	$	(751	)	$	(865	)
Other comprehensive loss
Unrealized losses on interest rate cap		—			(42	)		—			(6	)
Total comprehensive loss		(~~423~~321	)		(~~420~~457	)		(744	)		(877	)
Comprehensive loss attributable to noncontrolling interests		(1	)		(7	)
Comprehensive income (loss) attributable to noncontrolling interests		1			1			—			(6	)
Comprehensive loss attributable to NexPoint Multifamily Capital Trust, Inc.	$	(~~422~~322	)	$	(~~413~~458	)	$	(744	)	$	(871	)
Weighted average Class A common shares outstanding - basic (see Note 2)		1,~~024~~119			~~476~~674			1,071			575
Weighted average Class A common shares outstanding - diluted (see Note 2)		1,~~035~~128			~~477~~683			1,082			580
Loss per Class A common share - basic and diluted (see Note 2)	$	(0.4229	)	$	(0.8668	)	$	(0.70	)	$	(1.50	)
Distributions declared per Class A common share	$	0.~~148~~149		$	—		$	0.297		$	—

(1)	Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling interest members of the Company (see Notes 4 and 10).

(2)	Fees incurred to the Company’s advisor (see Notes 1 and 10).

See Notes to Consolidated Financial Statements

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

(Unaudited)

	Preferred Stock				Class A Common Stock				Class T Common Stock										Accumulated
	Number of Shares		Par Value		Number of Shares		Par Value		Number of Shares		Par Value		Additional Paid- in Capital			Accumulated Deficit			~~Accumulated~~ Other Comprehensive Loss			Noncontrolling Interests			Total Stockholders' Equity
Balances, December 31, 2016		—	$	—		975,824	$	10		—	$	—	$	9,483		$	(3,471	)	$	(25	)	$	647		$	6,644
Issuance of Class A common stock						80149,~~497~~666		1						~~744~~1,385			—			—			—			~~745~~1,386
Issuance of Series A cumulative preferred stock		125		—										125			—			—			—			125
Commissions on sales of Series A cumulative preferred stock														(6	)		—			—			—			(6	)
Amortization of stock-based compensation														8			—			—			—			8
Vesting of stock-based compensation						3,000								15			—			—			—			15
Distributions declared on Class A common stock														—			(~~153~~321	)		—			—			(~~153~~321	)
Distributions declared on Series A cumulative preferred stock														—			(37	)		—			—			(37	)
Net loss														—			(422	)		—			(1	)		(423	)
Distributions to noncontrolling interests														—			—			—			(39	)		(39	)
Balances, March 31, 2017		125	$	—		1,056,321	$	11		—	$	—	$	10,354		$	(4,049	)	$	(25	)	$	646		$	6,937
Net loss														—			(744	)		—			—			(744	)
Balances, June 30, 2017		125	$	—		1,128,490	$	11		—	$	—	$	11,002		$	(4,543	)	$	(25	)	$	608		$	7,053

See Notes to Consolidated Financial Statements

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	For the Six Months Ended June 30,
	2017			2016
Cash flows from operating activities
Net loss	$	(~~423~~744	)	$	(~~416~~871	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		~~389~~781			~~523~~868
Equity in income of preferred equity investment		(~~143~~288	)		—(166	)
Distributions from preferred equity investment		~~143~~208			—166
Amortization of deferred financing costs		5981			1264
Amortization of stock-based compensation		8			—
Vesting of stock-based compensation		15			6
Changes in operating assets and liabilities:
Accounts receivable		~~(21~~25	)		(3494	)
Prepaid and other assets		4525			(3364	)
Accounts payable and other accrued liabilities		3423			~~110~~296
Due to affiliates		713			21109
Net cash provided by operating activities		98139			~~183~~314
Cash flows from investing activities
Additions to operating real estate investment		(51	)		(216	)
Preferred equity investment origination		—			(6,000	)
Net cash used in investing activities		(51	)		(216	)
Additions to operating real estate investment		(93	)		(383	)
Net cash used in investing activities		(93	)		(6,383	)
Cash flows from financing activities
Proceeds from issuance of Class A common stock		617			1,993
Credit facility proceeds received		—			14,136
Bridge loan payments		—			(10,000	)
Deferred financing costs paid		(30	)		(120	)
Proceeds from issuance of Class A common stock		1,117			1,996
Proceeds from issuance of Series A cumulative preferred stock		125			—
Payments of commissions on sale of Series A cumulative preferred stock		(6	)		—
Distributions to Class A common stockholders		(338	)		—
Distributions to noncontrolling interests		—			(7	)
Distributions to Series A preferred stockholders		(7	)		—
Net cash provided by financing activities		733			1,986
Distributions to noncontrolling interests		(39	)		(13	)
Net increase in cash and restricted cash		780			1,953
Net cash provided by financing activities		1,122			5,999
Net increase (decrease) in cash and restricted cash		1,168			(70	)
Cash and restricted cash, beginning of period		683			969
Cash and restricted cash, end of period	$	1,~~463~~851		$	~~2,922~~899

See Notes to Consolidated Financial Statements

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Supplemental Disclosure of Cash Flow Information
Interest paid	$	~~301~~636	$	~~267~~584
Supplemental Disclosure of Noncash Investing and Financing Activities
Supplemental Disclosure of Noncash Activities
Increase in distributions payable		910		—
Capitalized construction costs included in accounts payable and other accrued liabilities		—4		12165
Change in fair value on derivative instruments designated as hedges		—		46
Distributions paid to Class A common stockholders through common stock issuances pursuant to the distribution reinvestment plan		~~144~~273		—
Deferred offering costs included in prepaid and other assets and accounts payable and other accrued liabilities (see Note 2)		550		—
Noncash contribution by Advisor		—		376

See Notes to Consolidated Financial Statements

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Multifamily Capital Trust, Inc. (the “Company”) was incorporated on November 12, 2013 as a Maryland corporation, and intends to elect to be taxed as a real estate investment trust (“REIT”) ~~unless~~beginning itwith ~~does~~its ~~not~~2017 ~~meet~~tax ~~the qualifications to be taxed as a REIT~~year. The Company is externally managed by NexPoint Real Estate Advisors II, L.P. (the “Advisor”) pursuant to an advisory agreement, as amended, dated August 10, 2015 and renewed on August 10, 2016 (the “Advisory Agreement”). Substantially all of the Company’s assets are owned by NexPoint Multifamily Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company is the sole general partner and a limited partner of the OP. The special limited partner of the OP is the Advisor.

The Company’s primary investment objectives are to provide current income for stockholders through the payment of cash distributions, preserve and return stockholders’ capital contributions and realize capital appreciation on the Company’s assets. All assets may be acquired and operated by the Company alone or jointly with another party.

~~The~~On August 12, 2015, the Company’s isregistration ~~offering~~statement on Form S-11 (File No. 333-200221) (the “Registration Statement”) for ~~sale~~a continuous offering of a maximum of $1.1 billion of common stock, $0.01 par value per share (the “Continuous Offering”), which ~~consists~~consisted of $1.0 billion in shares of common stock in the Company’s primary offering and $100 million in shares of common stock pursuant to the Company’s distribution reinvestment plan (the “DRIP”), was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). The initial offering price for the shares sold in the primary offering iswas $10.00 per Class A share of common stock and $9.58 per Class T share of common stock. The initial offering price for the shares sold in the DRIP iswas $9.50 per Class A share of common stock and $9.10 per Class T share of common stock. The Company reserves the right to reallocate the shares of common stock it is offering between the primary offering and the DRIP. The offering is being conducted on a “reasonable best efforts” basis, pursuant to a registration statement on Form S-11 (Registration No. 333-200221) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). Highland Capital Funds Distributor, Inc. (the “Dealer Manager”), an entity under common ownership with the Advisor, ~~serves~~served as the dealer manager of the Continuous Offering.

~~The~~Through ~~Company~~July ~~will~~26, ~~provide~~2017, ~~its~~the ~~stockholders~~Company ~~with~~sold anshares ~~initial~~of ~~estimated~~Class ~~net~~A ~~asset~~common ~~value~~stock ~~(“NAV”)~~and ~~per~~Class ~~share~~T ~~of each class of its~~ common stock ~~based~~pursuant onto athe ~~valuation~~Continuous asOffering ofcarried out in a ~~date~~manner noconsistent ~~later~~with ~~than~~offerings ~~150~~of ~~days~~non-listed ~~from~~REITs. ~~March~~On 24July 21, ~~2018~~2017, or the ~~second~~Company ~~anniversary~~filed ofa ~~the~~post-effective ~~date~~amendment to the ~~Company~~Registration ~~broke~~Statement ~~escrow~~to interminate the Continuous Offering, ~~although~~and ~~the~~deregister ~~Company~~all ~~may~~of ~~provide~~its anunsold ~~estimated~~shares ~~NAV~~of ~~based~~Class onA acommon ~~valuation~~stock ~~prior~~and toClass ~~such~~T ~~date~~common stock. IfThe ~~the~~post-effective ~~Company~~amendment ~~provides~~was andeclared ~~estimated~~effective ~~NAV~~by onthe aSEC ~~date~~on ~~prior~~July to26, ~~the~~2017. ~~conclusion~~On ofJuly ~~the~~21, ~~Offering~~2017, (the ~~“NAV~~Company ~~pricing~~filed ~~date”),~~a ~~the~~registration ~~Company’s~~statement ~~board~~on ofForm ~~directors~~S-11 (the ~~“Board”)~~"Underwritten ~~may~~Offering ~~determine~~Registration Statement") to ~~modify~~register ~~the~~shares ~~public~~of ~~offering~~its ~~price~~common stock to ~~reflect~~be ~~the~~sold ~~estimated~~in ~~per~~an ~~share~~underwritten ~~NAV.~~public ~~After~~offering (the ~~NAV~~"Underwritten ~~pricing~~Offering"). ~~date,~~If ~~the~~declared ~~per~~effective ~~share~~by ~~purchase~~the ~~price~~SEC, inthere ~~the~~can ~~Offering~~be ~~will~~no ~~vary~~assurance ~~quarterly~~that ~~and~~the Company will be ~~equal~~able to complete the ~~per~~Underwritten ~~share NAV plus applicable commissions and fees~~Offering.

~~Substantially~~Upon ~~all~~a ofsuccessful ~~the~~completion ~~net proceeds~~ of the Underwritten Offering, ~~are~~the ~~used~~Company towill ~~directly~~change orits ~~indirectly~~strategy ~~acquire, own, operate~~ and ~~selectively~~primarily ~~develop~~focus ~~well-located~~on ~~“core”~~originating and ~~“core-plus”~~structuring ~~multifamily~~preferred ~~properties~~equity ininvestments, ~~large~~alternative ~~cities~~structured ~~and~~financing ~~suburban~~investments, ~~markets~~mezzanine ofdebt, ~~large~~bridge ~~cities,~~financing ~~primarily~~and infirst ~~the~~mortgage ~~Southeastern~~loans ~~and~~in ~~Southwestern~~properties ~~United~~benefiting ~~States.~~from ~~The~~significant ~~Company~~tenant ~~also~~diversification ~~originates~~and ~~preferred~~short-term ~~equity~~lease ~~investments~~structures, ~~with~~including ~~operators~~multifamily, ofstorage ~~well~~and select-~~located~~service ~~“core”~~ and ~~“core~~extended-~~plus”~~stay ~~multifamily~~hospitality properties. ~~Investing~~The inCompany ~~both~~will ~~direct~~intend ~~property~~to ~~investments~~target ~~and~~its ~~preferred~~structured ~~equity~~financings ~~investments~~in isstabilized ~~designed~~and towell ~~minimize~~located ~~potential~~properties, ~~losses~~primarily ~~during~~located ~~market~~in ~~downturns~~large cities and ~~maximize~~suburban ~~risk~~markets ~~adjusted~~of ~~total~~large ~~returns~~cities toin the ~~Company’s~~United ~~stockholders~~States, inwhich ~~all~~have ~~market~~been ~~cycles.~~well-maintained, Tohave ~~the~~few ~~extent~~deferred ~~practical,~~maintenance ~~the~~issues ~~Company~~and ~~implements~~are aowned ~~modest~~by ~~value-add~~experienced ~~component~~and onhigh ~~“core-plus”~~quality ~~properties~~operators. ~~that~~The ~~consists,~~Company onexpects ~~average,~~the size of ~~investing~~its ~~$1,000~~investments -will $4vary significantly,~~000~~ ~~per~~but ~~unit~~generally inexpects ~~the~~them ~~first~~to ~~24-36~~range ~~months~~in ofvalue ~~ownership,~~from in$5 anmillion ~~effort~~ to ~~add~~$20 ~~value~~million. toThe ~~the~~primary ~~asset’s~~investment ~~exterior~~objectives ~~and~~will ~~interior.~~be ~~The~~to ~~Company’s~~provide ~~modest value~~long-~~add~~term, ~~program~~superior isrisk-adjusted ~~implemented~~total atreturns on the ~~direction~~Company’s ~~and~~investments ~~supervision~~through ofall ~~the~~market ~~Advisor.~~cycles, ~~The~~provide ~~Company~~attractive ~~may~~current ~~also~~income ~~seek~~ to ~~invest~~stockholders inthrough ~~multifamily~~quarterly ~~housing~~cash ~~debt~~distributions and ~~mezzanine~~preserve ~~debt~~and ~~in situations where the risk/~~return ~~correlation~~capital iscontributions. ~~more~~The ~~attractive~~Company ~~than~~believes ~~direct~~that ~~investments~~these ininvestment ~~common~~opportunities ~~equity~~best ~~and~~meet ~~originations~~its ofprimary ~~preferred~~investment ~~equity~~objectives ~~investments.~~as ~~The~~they ~~Company~~contractually ~~may~~provide ~~also~~a ~~invest~~high inpercentage ~~common~~of ~~and~~total ~~preferred~~return ~~stock~~from ofcurrent ~~both~~pay, ~~publicly~~are ~~traded~~structured ~~and~~to ~~private~~mitigate ~~real~~impairments ~~estate~~in ~~companies.~~the Asinvestments, ofand ~~March~~potentially ~~31,~~provide ~~2017~~equity-like, ~~the~~long-term ~~Company~~total ~~owned~~return ~~one~~opportunities, ~~multifamily~~with ~~property~~lower ~~and~~risk ~~had~~than ~~one~~a ~~preferred~~typical direct equity investment in areal ~~multifamily property~~estate.

~~Pursuant~~If to the ~~terms~~Company’s ofcommon ~~the~~stock ~~Offering,~~is ~~offering~~not ~~proceeds~~listed ~~were~~on ~~held~~a innational ansecurities ~~escrow~~exchange ~~account~~by ~~until~~150 ~~the~~days ~~Company~~after ~~raised~~March ~~the~~24, ~~minimum~~2018, ~~offering~~or ~~amount~~the second anniversary of ~~$2.0~~the ~~million~~date (the ~~“Minimum~~Company ~~Offering~~broke ~~Requirement”).~~escrow Onin ~~March~~the ~~24,~~Continuous ~~2016~~Offering, the Company ~~met~~will ~~the~~provide ~~Minimum~~its ~~Offering~~stockholders ~~Requirement~~with ~~and~~an ~~the~~initial ~~proceeds~~estimated ~~held~~net inasset ~~escrow~~value ~~were~~(“NAV”) ~~released~~per toshare ~~the~~of ~~Company,~~its ~~thus~~Class ~~allowing~~A ~~the~~common ~~Company~~stock tobased ~~commence~~on ~~material~~a ~~operations.~~valuation Asconducted ofby ~~March~~an ~~31,~~independent ~~2017,~~third-party ~~the~~valuation ~~Company had received a total of $5~~firm.5 ~~million~~The ofCompany ~~gross~~may ~~offering~~provide ~~proceeds,~~an ~~including~~estimated ~~approximately~~NAV ~~$283,500~~based ofon ~~distributions~~a ~~reinvested~~valuation ~~through~~prior ~~the~~to ~~DRIP~~such date.

OnSubstantially ~~April 7,~~all ~~2016,~~of the ~~Company~~net ~~acquired~~proceeds ~~from~~of ~~Highland~~the ~~Capital~~Continuous ~~Management~~Offering were used to directly or indirectly acquire, ~~L.P.~~own, ~~the~~operate ~~Company’s~~and ~~sponsor~~selectively ~~(the~~develop well-located “~~Sponsor~~core”), ~~the~~and ~~Sponsor’s~~“core-plus” ~~indirect~~multifamily ~~95%~~properties ~~interest~~in ~~(valued~~large atcities ~~approximately~~and ~~$39.6~~suburban ~~million)~~markets of large cities, primarily in athe ~~330-unit~~Southeastern ~~multifamily~~and ~~residential~~Southwestern ~~community~~United ~~located~~States. inThe ~~Phoenix,~~Company ~~Arizona,~~also ~~known~~originates aspreferred ~~Estates~~equity oninvestments ~~Maryland~~with (operators of well-located “~~Estates~~core”). ~~The~~and ~~Sponsor~~“core-plus” ~~contributed~~multifamily ~~Estates~~properties. toInvesting ~~the~~in ~~Company~~both atdirect ~~the~~property ~~original~~investments ~~cost~~and topreferred ~~the~~equity ~~Sponsor~~investments ofis ~~approximately~~designed ~~$39.6~~to ~~million,~~minimize ~~less~~potential ~~assumed~~losses ~~debt~~during ~~encumbering~~market ~~the~~downturns ~~property,~~and inmaximize ~~exchange~~risk ~~for~~adjusted ~~approximately~~total ~~434,783~~returns ~~shares~~to of the Company’s ~~Class A~~stockholders ~~common~~in ~~stock,~~all $0market cycles.01 ~~par~~To ~~value,~~the atextent ~~$9.20 per share~~practical, ~~reflecting~~ the ~~fact~~Company ~~that~~implements ~~selling~~a ~~commissions~~modest ~~and~~value-add component on

~~dealer~~“core-plus” ~~manager~~properties ~~fees~~that ~~were~~consists, ~~not~~on ~~paid~~average, inof ~~connection~~investing ~~with~~$1,000 - $4,000 per unit in the ~~sale.~~first ~~The~~24-36 ~~Company~~months of ownership, ~~pursuant~~in an effort to add value to the ~~agreement~~asset’s ~~entered~~exterior ~~into~~and ~~for~~interior. ~~the~~The ~~acquisition~~Company’s ofmodest ~~Estates~~value-add (program is implemented at the ~~“Contribution~~direction ~~Agreement”),~~and ~~then~~supervision ~~transferred~~of the ~~acquired~~Advisor. ~~interests~~The Company may also seek to invest in multifamily housing debt and mezzanine debt in situations where the OPrisk/return correlation is more attractive than direct investments in ~~exchange~~common ~~for~~equity ~~approximately~~and ~~434,783~~originations ~~partnership~~of ~~units~~preferred equity investments. The Company may also invest in common and preferred stock of both publicly traded and private real estate companies. As of June 30, 2017, the OPCompany owned one multifamily property and had one preferred equity investment in a multifamily property.

AsPursuant to the terms of ~~March~~the ~~31,~~Continuous ~~2017~~Offering, offering proceeds were held in an escrow account until the Company ~~had~~raised ~~issued~~the 1minimum offering amount of $2.0 million (the “Minimum Offering Requirement”). On March 24,~~034~~ 2016,~~099~~ ~~shares~~the ofCompany ~~Class~~met Athe ~~common~~Minimum ~~stock~~Offering Requirement and the proceeds held in escrow were released to the ~~Offering~~Company, ~~including~~thus 29allowing the Company to commence material operations. As of June 30,~~843~~ ~~shares~~2017, the Company had received a total of ~~Class~~$6.2 Amillion ~~common~~of ~~stock~~gross ~~issued~~offering ~~pursuant~~proceeds, toincluding approximately $412,700 of distributions reinvested through the DRIP.

AsOn April 7, 2016, the Company ~~accepts~~acquired ~~subscriptions~~from ~~and~~Highland ~~issues~~Capital ~~shares~~Management, ofL.P., ~~its~~the ~~common~~Company’s ~~stock~~sponsor in (the ~~Offering~~“Sponsor”), the ~~Company~~Sponsor’s ~~will~~indirect ~~transfer~~95% ~~substantially~~interest ~~all~~(valued ofat ~~its~~approximately ~~acquired~~$39.6 ~~interests~~million) in ~~investments~~a 330-unit multifamily residential community located in Phoenix, Arizona, known as Estates on Maryland (“Estates”). The Sponsor contributed Estates to the OPCompany asat athe ~~contribution~~original cost to the Sponsor of approximately $39.6 million, less assumed debt encumbering the property, in exchange for ~~partnership~~approximately ~~units~~434,783 ~~and~~shares of the Company’s ~~percentage~~Class A ~~ownership~~common stock, $0.01 par value, at $9.20 per share, reflecting the fact that selling commissions and dealer manager fees were not paid in connection with the sale. The Company, pursuant to the agreement entered into for the acquisition of Estates (the “Contribution Agreement”), then transferred the acquired interests to the OP ~~will~~in ~~increase~~exchange ~~proportionately~~for approximately 434,783 partnership units in the OP.

As of June 30, 2017, the Company had issued 1,103,268 shares of Class A common stock in the Continuous Offering, including 43,456 shares of Class A common stock issued pursuant to the DRIP.

2. Summary of Significant Accounting Policies

Common Control

The contribution of Estates by the Sponsor was accounted for as a combination of entities under common control; therefore, the Company accounted for the acquisition at historical cost in a manner similar to the pooling of interest method. Information included in the accompanying unaudited consolidated financial statements is presented as if Estates had been combined throughout the periods presented in which common control existed; the amounts included relating to Estates were determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). As such, the acquisition of Estates by the Company was deemed to be made on the date it was purchased by the Sponsor, which was August 5, 2015 (the “Original Acquisition Date”). Therefore, the accompanying unaudited consolidated financial statements are presented reflecting the acquisition of Estates as if it occurred on the Original Acquisition Date, rather than on April 7, 2016, the date on which the Company actually acquired Estates from the Sponsor.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with ~~U.S. Generally Accepted Accounting Principles (“~~GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC. The accompanying unaudited consolidated financial statements include the accounts of the Company and the OP and its subsidiaries. Because the Company is the sole general partner and a limited partner of the OP and has unilateral control over its management and major operating decisions (even if additional limited partners are admitted to the OP), the accounts of the OP are consolidated in the Company’s consolidated financial statements. The Company consolidates entities in which it controls more than 50% of the voting equity. Investments in real estate joint ventures over which the Company has the ability to exercise significant influence, but for which it does not have financial or operating control, are accounted for using the equity method of accounting. The Company has one investment accounted for using the equity method of accounting that is reflected on the accompanying unaudited consolidated financial statements as “Preferred equity investment.” All intercompany balances and transactions are eliminated in consolidation.

In addition, the Company evaluates relationships with other entities to identify whether there are variable interest entities (“VIEs”) as required by FASB ASC 810, Consolidation (“FASB ASC 810”), and to assess whether the Company is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with FASB ASC 810.

On January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which amends the current consolidation guidance affecting both the VIE and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The OP meets the criteria as a VOE; and as the Company holds a majority of the voting interest of the OP, the Company consolidates the OP. Substantially all of the Company’s assets and liabilities represent those assets and liabilities of the OP. All of the Company’s debt is an obligation of the OP.

InOn ~~the~~January ~~opinion~~1, of2016, the Company’s ~~management,~~adopted ~~the~~Accounting ~~accompanying~~Standards ~~unaudited~~Update ~~consolidated~~(“ASU”) ~~financial~~No. ~~statements~~2015-02, ~~include~~Amendments ~~all~~to ~~adjustments~~the ~~and~~Consolidation ~~eliminations~~Analysis (“ASU 2015-02”), ~~consisting~~which ~~only~~amends ofthe ~~normal~~current ~~recurring~~consolidation ~~items~~guidance ~~necessary~~affecting ~~for~~both ~~their~~the ~~fair~~VIE ~~presentation~~and invoting ~~conformity~~interest ~~with~~entity ~~GAAP~~(“VOE”) consolidation models. The ~~financial~~standard ~~statements~~does ofnot ~~the~~add ~~Company’s~~or ~~subsidiaries~~remove ~~are~~any ~~prepared~~of ~~using~~the ~~accounting~~characteristics ~~policies~~in ~~consistent~~determining ~~with~~if ~~those~~an ofentity ~~the~~is ~~Company.~~a ~~The~~VIE ~~unaudited~~or ~~consolidated~~VOE, ~~financial~~but ~~statements,~~rather ~~and~~enhances the ~~notes~~way ~~thereto,~~the ~~included~~Company inassesses ~~this~~some ~~quarterly~~of ~~report~~these oncharacteristics. ~~Form~~The ~~10-Q~~OP ~~should~~meets bethe ~~read~~criteria inas ~~conjunction~~a ~~with~~VOE; and as the Company’s ~~audited~~holds ~~financial~~a ~~statements~~majority ~~for~~of the ~~year~~voting ~~ended~~interest ~~December~~of 31the OP, ~~2016~~the ~~and~~Company ~~notes~~consolidates ~~thereto~~the ~~included~~OP. inSubstantially ~~its~~all ~~annual~~of ~~report~~the onCompany’s ~~Form~~assets ~~10-K,~~and ~~filed~~liabilities ~~with~~represent ~~the~~those ~~SEC~~assets onand ~~March~~liabilities ~~28,~~of ~~2017~~the OP. ~~There~~All ~~have~~of ~~been no significant changes to~~ the Company’s ~~significant~~debt ~~accounting~~is ~~policies~~an ~~during~~obligation of the ~~three months ended March 31, 2017~~OP.

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements include all adjustments and eliminations, consisting only of normal recurring items necessary for their fair presentation in conformity with GAAP. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company. The unaudited consolidated financial statements, and the notes thereto, included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016 and notes thereto included in its annual report on Form 10-K, filed with the SEC on March 28, 2017. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2017.

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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Real Estate Investments

Upon acquisition of real estate investments, except from related parties, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets in accordance with FASB ASC 805, Business Combinations, and the recently adopted ASU 2017-01, Clarifying the Definition of a Business (Topic 805) (“ASU 2017-01”), which the Company adopted on January 1, 2017 (see “Recent Accounting Pronouncements” below). The Company believes most future acquisition costs will be capitalized in accordance with ASU 2017-01. Prior to the Company’s adoption of ASU 2017-01, acquisition costs were expensed as incurred.

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see “Fair Value Measurements” below), is based on management’s estimate of the property’s “as-if” vacant fair value. The “as-if” vacant fair value is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of the debt is recorded as a premium or discount and amortized to interest expense over the life of the debt assumed. Preferred equity investments are recorded at the value invested by the Company at the date of origination and accounted for under the equity method of accounting.

Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs associated with the development and improvement of the Company’s real estate assets are capitalized as incurred. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:

Land		Not depreciated
Buildings		30 years
Improvements		15 years
Furniture, fixtures, and equipment		3 years
Intangible lease assets		6 months

Impairment

Real estate assets are reviewed for impairment periodically whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate asset based on estimated future cash flows and the estimated liquidation value of such real estate asset, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value.

The Company considers various factors to determine if a decrease in the value of its equity method investments is other-than-temporary. These factors include, but are not limited to, age of the investment, the Company’s intent and ability to retain its investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. After determining an other-than-temporary decrease in the value of an equity method investment has occurred, the Company estimates the fair value of its investment by estimating the proceeds the Company would receive upon a hypothetical liquidation of the investment at the date of measurement.

~~For~~The Company considers various factors to determine if a decrease in the ~~three~~value ~~months~~of ~~ended~~its ~~March~~equity 31method investments is other-than-temporary. These factors include, ~~2017~~but ~~and~~are ~~2016~~not limited to, age of the investment, the Company’s ~~did~~intent ~~not~~and ~~record~~ability ~~any~~to ~~impairment~~retain ~~charges~~its ~~related~~investment toin ~~real~~the ~~estate~~entity, ~~assets~~the orfinancial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. After determining an other-than-temporary decrease in the value of an equity method ~~investments~~investment has occurred, the Company estimates the fair value of its investment by estimating the proceeds the Company would receive upon a hypothetical liquidation of the investment at the date of measurement.

For the three and six months ended June 30, 2017 and 2016, the Company did not record any impairment charges related to real estate assets or equity method investments.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value and may consist of investments in money market accounts. There are no restrictions on the use of the Company’s cash balance.

Restricted Cash

Restricted cash is comprised of security deposits, operating escrows, and renovation value-add reserves. Security deposits are held until they are due to tenants and are credited against the balance. Operating escrows are required and held by the joint venture’s first mortgage lender(s) for items such as real estate taxes, insurance, and required repairs. Lender held escrows are released back to the joint venture upon the borrower’s proof of payment of such expenses. Renovation value-add reserves are funds identified to finance the Company’s value-add renovations at its properties and are not required to be held in escrow by a third party. The Company may reallocate these funds, at its discretion, to pursue other investment opportunities. The following is a summary of the restricted cash held as of ~~March~~June 3130, 2017 and December 31, 2016 (in thousands):

	March 31, 2017		December 31, 2016
	June 30, 2017		December 31, 2016
Security deposits	$	6566	$	65
Operating escrows		~~281~~157		162
	$	~~346~~223	$	227

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related debt using the straight-line method, which approximates the effective interest method. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to interest expense. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheet. Amortization of deferred financing costs, of less than $0.1 million and ~~less~~$0.1 ~~than~~million, is included in interest expense on the accompanying unaudited consolidated statements of operations and comprehensive loss for the three months ended June 30, 2017 and 2016, respectively. Amortization of deferred financing costs, of $0.1 million and $0.1 million, is included in interest expense on the accompanying unaudited consolidated statements of operations and comprehensive loss for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016, respectively. The following is a summary of the Company’s outstanding debt and deferred financing costs, net of accumulated amortization, as of ~~March~~June 3130, 2017 and December 31, 2016 (in thousands):

	March 31, 2017			December 31, 2016
	June 30, 2017			December 31, 2016
Mortgage payable	$	26,919		$	26,919
Deferred financing costs, net		(~~162~~149	)		(174	)
Mortgage payable, net	$	26,~~757~~770		$	26,745
Credit facility	$	11,000		$	11,000
Deferred financing costs, net		(930	)		(56	)
Credit facility, net	$	10,~~991~~970		$	10,944

Noncontrolling Interests

Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in the joint venture in the multifamily property that the Company consolidates. The Company reports its joint venture partners’ interests in its consolidated real estate joint ventures and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investment’s net income or loss and equity contributions and distributions. These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder based on its economic ownership percentage.

Accounting for Joint Ventures

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with FASB ASC 810. The Company first evaluates whether each entity is a VIE. Under the VIE model, the Company consolidates an entity when it has the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.

to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements with terms of typically one year or less. Rental income is recognized when earned. This policy effectively results in rental income recognition on the straight-line method over the related terms of the leases. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, pets, administrative, application and other fees and are recognized when earned.

Equity in Income

The Company recognizes equity in income earned on a stated investment return from preferred equity investments it originates. Equity in income on the Company’s preferred equity investments is recorded under the equity method of accounting. The Company does not ~~accrue~~recognize ~~a receivable for its~~ equity in income earned on its preferred equity investments if there is a reason to doubt the Company’s ability to collect such income.

Asset Management & Property Management Services

Asset management fee and property management fee expenses are recognized when incurred in accordance with the Advisory Agreement and the property management agreement, respectively (see Note 10).

Organization and Offering Expenses

Organization and offering expenses include all expenses (other than selling commissions, the dealer manager fee and the distribution fee) to be paid by the Company in connection with the Continuous Offering. ~~Organization~~Typically, organization and offering expenses ~~are~~were initially paid by the Advisor and its affiliates and ~~are~~were reimbursed by the Company with certain limitations discussed below. Organization and offering expenses include, but are not limited to: (1) legal, accounting, printing, mailing and filing fees; (2) charges of the Company’s escrow agent and transfer agent; and (3) due diligence expense reimbursements to participating broker-dealers.

Organization expenses, when recognized, are expensed by the Company on the accompanying unaudited consolidated statements of operations and comprehensive loss. Offering costs, when recognized, are treated as a reduction of the total proceeds. Until recognized, these expenses are deferred and will be paid to the Advisor and its affiliates from the proceeds of the Continuous Offering, but only to the extent the reimbursement would not exceed 1.0% of the gross offering proceeds. The Advisor is responsible for the payment of organization and offering expenses the Company incurs in excess of 1.0% of the gross offering proceeds.

For the period from November 12, 2013 (inception) to June 30, 2017, the Advisor and its affiliates incurred organization and offering expenses of approximately $2.7 million. For the period from November 12, 2013 (inception) to June 30, 2017, the Company recognized approximately $0.1 million of organization and offering expenses as reimbursable to the Advisor and its affiliates, the maximum amount allowed under the 1.0% of gross offering proceeds limitation on reimbursement to the Advisor and its affiliates. The remaining organization and offering expenses of approximately $2.6 million have not been accrued on the Company’s consolidated balance sheet as of June 30, 2017 and are not reimbursable under the current Advisory Agreement since the Continuous Offering was terminated on July 26, 2017. Upon an amendment to the current Advisory Agreement, an undetermined amount of these expenses may be reimbursed to the Advisor and its affiliates in connection with a subsequent offering of the Company’s common stock.

In connection with the Underwritten Offering, the Company has incurred approximately $550,000 of offering costs. The Company has recorded these costs in prepaid and other assets and accounts payable and other accrued liabilities on the consolidated balance sheet as of June 30, 2017. Upon a successful completion of the Underwritten Offering, these costs will be charged against the gross offering proceeds. If the Company decides to abort the Underwritten Offering, these costs, and any subsequent offering costs incurred in connection with the Underwritten Offering, will be reclassified to corporate general and administrative expenses on the consolidated statements of operations and comprehensive loss.

Operating Expenses

Operating expenses include, but are not limited to, payments of reimbursements to the Advisor and its affiliates for operating expenses paid on behalf of the Company, audit, legal, filing and tax fees, directors’ and officers’ liability insurance and ~~Board~~board of director fees. For more information on operating expenses and reimbursements to the Advisor and its affiliates, see Note 10.

Fees to Affiliates

Fees to affiliates include, but are not limited to, acquisition and disposition fees paid to the Advisor on qualifying assets that are acquired or sold, subject to certain limitations. For more information on fees to affiliates, see Note 10.

Income Taxes

The Company intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), ~~and~~beginning ~~expects~~with toits ~~qualify~~2017 astax ~~a REIT~~year. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to pass the “closely-held test” (in order for the Company to qualify as a REIT, no more than 50% in value of its outstanding stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year, beginning with the last half of 2018 assuming a valid 2017 REIT election, which the Company refers to as the “closely-held test”), and to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (a) 85% of its ordinary income, (b) 95% of its capital gain net income and (c) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, including creating taxable REIT subsidiaries to hold assets that generate material income that would not be consistent with the rules applicable for qualification as a REIT if held directly by the REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. ~~If the Company believes it will not qualify to be taxed as a REIT, it will not make an election to be taxed as a REIT.~~

If the Company were to fail to meet these requirements, it could be subject to federal income tax on all of its taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless it is entitled to relief under specific statutory provisions.

The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Company has no examinations in progress and none are expected at this time.

If the Company does not meet the qualifications to be taxed as a REIT, it will be taxed as a corporation for U.S. federal income tax purposes. The Company ~~believes~~did ~~there~~not ismeet the qualifications to be taxed as a ~~possibility~~REIT itfor ~~will~~its ~~not~~2016 ~~qualify~~tax toyear and will be taxed as a ~~REIT~~corporation for ~~the~~U.S. federal income tax purposes for its 2016 tax year. As such, the Company provides for income taxes using the asset and liability method under ASC 740. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes its tax positions and evaluates them by determining whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of ~~March~~June 3130, 2017. The Company and its subsidiaries may be subject to federal income tax as well as income tax of various state and local jurisdictions. When ~~applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive loss.~~

applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive loss.

Deferred Tax Assets

Deferred income taxes arise principally from temporary differences between book and tax recognition of income, expenses, and losses relating to financing and other transactions. As of ~~March~~June 3130, 2017 and December 31, 2016, the Company recognized total deferred tax assets, net of valuation allowances, based on the fact that itthe ~~may~~Company ~~choose~~did to not ~~elect~~qualify ~~to be taxed~~ as a REIT for the 2016 tax year. The deferred income taxes on the accompanying consolidated balance sheets at ~~March~~June 3130, 2017 (unaudited) and December 31, 2016 are comprised of the following (in thousands):

	March 31, 2017			December 31, 2016
	June 30, 2017			December 31, 2016
Net operating loss	$	~~421~~497		$	309
Partnership temporary differences		~~112~~148			75
Unreimbursed expenses		32			32
Total deferred tax assets		~~565~~677			416
Valuation allowance		(~~565~~677	)		(416	)
Net deferred tax assets	$	—		$	—

The valuation allowances at ~~March~~June 3130, 2017 and December 31, 2016 were primarily related to incurring cumulative net operating losses without generating sufficient future taxable income to recover the deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable losses and projections for future taxable income over the periods in which the deferred tax assets are deductible; management believes it is more likely than not that the Company will not realize the benefits of these deductible differences at ~~March~~June 3130, 2017.

Acquisition Costs

Acquisition costs include costs incurred to acquire assets and are expensed upon acquisition. The amount of acquisition costs incurred depends on the specific circumstances of each closing and are one-time costs associated with each acquisition. Upon the Company’s adoption of ASU 2017-01 on January 1, 2017, as discussed below in “Recent Accounting Pronouncements,” the Company believes most future transaction costs relating to ~~acquisition~~acquisitions of operating properties will be capitalized.

Reportable Segments

The Company has two reportable segments, with activities related to owning and operating multifamily properties and originating preferred equity investments in multifamily properties. The Company organizes and analyzes the operations and results of each of these segments independently, due to inherently different considerations for each segment. For more information regarding the Company’s reportable segments, see Note 3.

Upon a successful completion of the Underwritten Offering and deployment of the net proceeds, the Company expects to have a third reportable segment, with activities related to originating mezzanine, bridge, and mortgage loans in multifamily, storage and select-service hospitality properties.

Concentration of Credit Risk

The Company maintains cash balances with high quality financial institutions, including NexBank, SSB, an affiliate of the Advisor, and periodically evaluates the creditworthiness of such institutions and believes that the Company is not exposed to significant credit risk. Cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

Fair Value Measurements

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820, Fair Value Measurement and Disclosures, establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):

•

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

•

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.

•

Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes an independent third party to perform the allocation of value analysis for each property acquisition and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments are fair and consistent as of the measurement date.

Per Share Data

On August 12, 2015, the SEC declared effective the Company’s ~~registration statement on Form S-11 (~~Registration ~~No. 333-200221) related to the Offering~~Statement, as described above. The Company had no operating activities or earnings (loss) per share before August 12, 2015. In accordance with GAAP, the Company’s acquisition of Estates was determined to be a combination of entities under common control. As such, the acquisition of Estates by the Company (through the issuance of the Company’s Class A common stock) was deemed to be made on the date it was purchased by the Sponsor, which was August 5, 2015. In the accompanying unaudited consolidated financial statements, operations are shown from the Original Acquisition Date, although the Company did not commence material operations until March 24, 2016, the date the Company met the Minimum Offering Requirement and broke escrow in the Continuous Offering, enabling it to commence material operations and reimburse the Advisor and its affiliates for certain expenses incurred on the Company’s behalf. Accordingly, the Company has presented basic and diluted earnings (loss) per share for the three and six months ended ~~March~~June 3130, 2017 and 2016. Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings (loss) per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Non-vested shares of the Company’s restricted Class A common stock give rise to potentially dilutive shares of the Company’s Class A common stock but such shares were excluded from the computation of diluted loss per share because such shares were anti-dilutive during the period. For the three months ended ~~March~~June 3130, 2017 and 2016, the Company incurred a loss per share, on a basic and diluted basis, of $0.4229 and $0.8668, respectively. For the six months ended June 30, 2017 and 2016, the Company incurred a loss per share, on a basic and diluted basis, of $0.70 and $1.50, respectively.

Recent Accounting Pronouncements

Section 107 of the Jumpstart Our Business Startups Act (the “JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, the Company has elected to “opt out” of such extended transition period. Therefore, the Company intends to comply with new or revised accounting standards on the applicable dates on which the adoption of standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that the Company’s decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). The amendments in ASU 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendment will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The Company implemented the provisions of ASU 2015-01 as of January 1, 2016, which did not have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. ASU 2015-02 also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed through a contractual arrangement. The Company implemented the provisions of ASU 2015-02 as of January 1, 2016, as more fully described in Note 2 to the accompanying consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (“ASU 2015-03”), which changes the way reporting enterprises record debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The Company implemented the provisions of ASU 2015-03 and ASU 2015-15 as of January 1, 2016, which did not have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern, and to provide disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The Company implemented the provisions of ASU 2014-15 as of December 31, 2016, which did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which clarifies the presentation of restricted cash in the statements of cash flows. Under ASU 2016-18, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted ASU 2016-18 during the three months ended December 31, 2016 on a retrospective basis. As a result, net cash provided by operating activities ~~increased~~decreased by less than $0.1 million in the ~~three~~six months ended ~~March~~June 3130, 2016. Net cash used in investing activities ~~decreased~~increased by $0.2 million in the ~~three~~six months ended ~~March~~June 3130, 2016. Beginning-of-period cash and restricted cash increased by $0.4 million in 2016. The following is a summary of the Company’s cash and restricted cash total as presented in the accompanying unaudited consolidated statements of cash flows for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

	March 31, 2017		March 31, 2016
	June 30, 2017		June 30, 2016
Cash and cash equivalents	$	1,~~117~~628	$	~~2,648~~785
Restricted cash		~~346~~223		~~274~~114
Total cash and restricted cash	$	1,~~463~~851	$	~~2,922~~899

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, accrual of compensation cost, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this standard must be applied prospectively, retrospectively, or as of the beginning of the earliest comparative period presented in the year of adoption, depending on the type of amendment. The Company implemented the provisions of ASU 2016-09 as of January 1, 2017, on a prospective basis, which did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business and provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. ASU 2017-01 provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. The Company implemented the provisions of ASU 2017-01 as of January 1, 2017, which did not have a material impact on its consolidated financial statements. The Company believes most of its future acquisitions of properties will qualify as asset acquisitions and most future transaction costs associated with these acquisitions will be capitalized.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which amends ASU 2014-09 to defer the effective date by one year. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. The Company will implement the provisions of ASU 2014-09 as of January 1, 2018 at which time the Company expects to adopt the updated standard using the modified retrospective approach. However, as the majority of the Company’s revenue is from rental income related to leases, the Company does not expect ASU 2014-09 to have a material impact on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which changes certain recognition, measurement, presentation, and disclosure requirements for financial instruments. ASU 2016-01 requires all equity investments, except those accounted for under the equity method of accounting or resulting in consolidation, to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 also simplifies the impairment assessment for equity investments without readily determinable fair values, amends the presentation requirements for changes in the fair value of financial liabilities, requires presentation of financial instruments by measurement category and form of financial asset, and eliminates the requirement to disclose the methods and significant assumptions used in estimating the fair value of financial instruments. ASU 2016-01 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. The Company will implement the provisions of ASU 2016-01 as of January 1, 2018. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses specific cash flow items with the objective of reducing existing diversity in practice, including the treatment of distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017 and must be applied retrospectively to all periods presented; early adoption is permitted. The Company will implement the provisions of ASU 2016-15 as of January 1, 2018 and has determined the new standard will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard will be effective for the Company on January 1, 2019, with early adoption permitted. Based on a preliminary assessment, the Company expects most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an immaterial increase in the assets and liabilities on its consolidated balance sheets.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Company on January 1, 2020; early adoption is permitted on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

3. Segment Information

GAAP guidance requires that segment disclosures present the measure(s) used by the chief operating decision maker to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s chief operating decision maker is comprised of several members of the Advisor’s investment committee who use several generally accepted industry financial measures to assess the performance of the business for its reportable operating segments.

The Company has two reportable segments, with activities related to owning and operating multifamily properties and originating preferred equity investments in multifamily properties. The Company’s operating multifamily properties segment generates rental income and other income through the operation of properties. The Company’s preferred equity investments segment earns equity in income on a stated investment return. The primary financial measure of segment profit and loss used by the chief operating decision maker is net operating income (“NOI”). NOI for the Company’s operating multifamily properties segment is defined as total revenues less total property operating expenses. NOI for the Company’s preferred equity investments segment is defined as equity in income of preferred equity investments less interest costs on debt used to finance such investments. Excluded from NOI for both of the Company’s reportable segments are: (1) asset management fees; (2) corporate general and administrative expenses; (3) fees to affiliates; (4) organization expenses; and (5) interest expense related to amortization of deferred financing costs and changes in fair value of derivative instruments designated as cash flow hedges. In addition to the aforementioned, excluded from NOI for the Company’s operating multifamily properties segment are: (1) certain property general and administrative expenses that are not reflective of the ongoing operations of the properties or are incurred on behalf of the Company at the properties; (2) depreciation and amortization; (3) interest costs on debt used to finance such acquisitions; and (4) equity in income of preferred equity investments.

The Company organizes and analyzes the operations and results of each of these segments independently, due to inherently different considerations for each segment. Such considerations include, but are not limited to, the nature and characteristics of the investment and investment strategies and objectives. The Company has not presented its results of operations for the three months ended March 31, 2016 by reportable segment due to the fact that it did not originate any preferred equity investments until the second quarter of 2016. As a result, there is no meaningful comparison of the results of operations of the Company’s two reportable segments between the periods.

The following table presents the Company’s assets as of ~~March~~June 3130, 2017 and December 31, 2016 by reportable segment (in thousands):

	March 31, 2017		December 31, 2016
	June 30, 2017		December 31, 2016
	(Unaudited)
ASSETS
Operating multifamily property	$	4039,~~238~~454	$	40,213
Preferred equity investment		5,~~250~~388		5,250
Other assets (1)		~~695~~1,999		363
TOTAL ASSETS	$	46,~~183~~841	$	45,826

(1)

Other assets consist of cash and cash equivalents, accounts receivable, and prepaid and other assets held at the Company level.

1617

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles the Company’s combined NOI for its reportable segments, as detailed in the tables below, for the three and six months ended ~~March~~June 3130, 2017 and 2016 to net loss, the most directly comparable GAAP financial measure (in thousands):

	For the Three Months Ended March 31, 2017
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	(Unaudited)
	2017			2016			2017			2016
Operating multifamily property	$	~~574~~621		$	553		$	1,195		$	1,113
Preferred equity investment		8279			123			161			123
Combined segment NOI		~~656~~700			676			1,356			1,236
Adjustments to reconcile to net loss:
Asset management fees		8687			82			173			82
Corporate general and administrative expenses		~~289~~235			376			524			531
Organization expenses		7			—			14			15
Property general and administrative expenses (1)		18			3			9			4
Depreciation and amortization		~~389~~392			345			781			868
Interest on debt - operating multifamily property (2)		~~248~~269			273			517			543
Amortization of deferred financing costs		5922			52			81			64
Net loss	$	(423	)
Interest rate cap expense		1			—			1			—
Net loss	$	(321	)	$	(455	)	$	(744	)	$	(871	)

(1)

Adjustment to net loss that excludes expenses for NOI that are not reflective of the ongoing operations of the property or were incurred on behalf of the Company at the property for expenses such as legal and other professional fees.

(2)

Includes interest costs on outstanding debt of approximately $32.7 million used to acquire Estates.

The following table presents the total revenues, total property operating expenses and NOI for the Company’s operating multifamily properties segment for the three and six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

Operating Multifamily Properties	For the Three Months Ended ~~March~~June 3130, ~~2017~~				For the Six Months Ended June 30,
	(Unaudited)
	2017		2016		2017		2016
Revenues
Rental income	$	~~887~~900	$	869	$	1,787	$	1,711
Other income		~~110~~127		107		237		195
Total revenues		~~997~~1,027		976		2,024		1,906
Operating expenses
Property operating expenses		~~236~~217		243		453		439
Real estate taxes and insurance		~~114~~115		111		229		224
Property management fees (related party)		30
Property management fees (1)		31		30		61		58
Property general and administrative expenses (1)		43
Property general and administrative expenses (2)		43		39		86		72
Total expenses		~~423~~406		423		829		793
Segment NOI	$	~~574~~621	$	553	$	1,195	$	1,113

(1) ~~Excludes~~Fees ~~expenses~~incurred ~~that~~to ~~are~~an ~~not~~unaffiliated ~~reflective~~third ofparty ~~the~~that ~~ongoing~~is ~~operations~~an affiliate of the ~~property~~noncontrolling orinterest ~~are~~members ~~incurred on behalf~~ of the Company at(see ~~the~~Note ~~property for expenses such as legal and other professional fees~~10).

~~The~~(2) ~~following~~Excludes ~~table~~expenses ~~presents~~that ~~the~~are ~~total~~not ~~equity~~reflective inof ~~income~~the ofongoing ~~its~~operations ~~preferred~~of ~~equity~~the ~~investment,~~property ~~total~~or ~~interest~~are ~~costs~~incurred on ~~debt~~behalf ~~and~~of ~~NOI for~~ the Company’s ~~preferred~~at ~~equity~~the ~~investments~~property ~~segment~~ for ~~the~~expenses ~~three~~such ~~months~~as ~~ended~~legal ~~March~~and ~~31,~~other ~~2017~~professional ~~(in thousands):~~fees.

Preferred Equity Investments	For the Three Months Ended March 31, 2017
	(Unaudited)
Other income and expenses
Equity in income of preferred equity investment	$	143
Interest on debt (1)		(61	)
Segment NOI	$	82

17The following table presents the total equity in income of its preferred equity investment, total interest costs on debt and NOI for the Company’s preferred equity investments segment for the three and six months ended June 30, 2017 and 2016 (in thousands):

(1) Includes interest costs on debt of approximately $5.25 million used to originate the Company’s preferred equity investment.

Preferred Equity Investments	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017				2016				2017				2016
Other income and expenses
Equity in income of preferred equity investment	$	145			$	166			$	288			$	166
Interest on debt		(66	)	(1)		(43	)	(2)		(127	)	(1)		(43	)	(2)
Segment NOI	$	79			$	123			$	161			$	123

(1)

Includes interest costs on debt of approximately $5.25 million used to originate the Company’s preferred equity investment in Overlook at Stone Oak Park (fka Springs at Stone Oak Village).

(2)

Includes interest costs on debt of approximately $4.0 million used to originate the Company’s preferred equity investment in Bell Midtown, which was redeemed in full on December 23, 2016.

4. Acquisitions and Originations

As of ~~March~~June 3130, 2017, through its consolidated and unconsolidated joint ventures, the Company holds investments in two multifamily properties. The following tables provide summary information regarding the Company’s acquisition and origination, which are either consolidated or accounted for under the equity method of accounting:

Operating Property Acquisition

Property Name

Location

Date Acquired

Effective Ownership Percentage at ~~March~~June 3130, 2017

Effective Ownership Percentage at December 31, 2016

Estates on Maryland

Phoenix, Arizona

April 7, 2016

(1)

Estates was acquired from the Sponsor on April 7, 2016; however, as the acquisition was determined to be a combination of entities under common control, the acquisition was deemed to be made on the date it was purchased by the Sponsor, which was August 5, 2015 (see Note 2).

In connection with its indirect equity investment in Estates, the Company, through the OP, directly holds a membership interest in a single-asset LLC that directly owns the property. This entity is deemed to be a VIE as the Company has disproportionate voting rights (in the form of substantive participating rights over all of the decisions that are made that most significantly affect economic performance) relative to the Company’s economic interests in the entity and substantially all of the activities of the entity are performed on the Company’s behalf. The Company is considered the primary beneficiary of the VIE as no single party meets both criteria to be the primary beneficiary, and the Company is the member of the related party group that has both the power to direct the activities that most significantly impact economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Within the related party group, the Company is the most closely associated to the VIE based on the purpose and design of the entity, the size of its ownership interests relative to the other investors, and the rights the Company holds with respect to the other investors’ equity interests, including the Company’s ability to preclude any transfers of its interests and ability to drag them along on the sale of the Company’s equity interest. This VIE is consolidated in the Company’s financial statements. The assets of this VIE can only be used to settle obligations of this entity, and the creditor of this entity has no recourse to the assets of other entities or the Company.

The other investors in Estates are BH Equities, LLC (“BH Equity”) and an affiliate of BH Equity. When this VIE was formed, BH Equity and its affiliate invested cash in the VIE and received a proportional share of the VIE. This VIE has a non-recourse mortgage that has standard scope non-recourse carve outs required by agency lenders and calls for protection by the borrower and the guarantor against losses by the lender for so-called “bad acts,” such as misrepresentations, and may include full recourse liability for more significant events such as bankruptcy. An affiliate of BH Equity provided a non-recourse carve out guarantee for the mortgage indebtedness currently outstanding relating to the VIE.

Preferred Equity Investment Origination

Property Name	Location	Number of Units		Date Originated	Amount of Investment (in thousands)		Current Pay Rate			Accrued Pay Rate (1)			Effective Ownership Percentage at ~~March~~June 3130, 2017
Springs at Stone Oak Village	San Antonio, Texas		360	August 19, 2016	$	5,250		8.0	%		3.0	%		35.0	%	(2)
Overlook at Stone Oak Park (fka Springs at Stone Oak Village)	San Antonio, Texas		360	August 19, 2016	$	5,250		8.0	%		3.0	%		35.0	%	(2)

(1) Payment of the accrued pay rate is optional; ~~and~~if not paid, the amount accrues monthly on a compounding basis ifand ~~not~~increases ~~paid~~the carrying amount of the investment on the consolidated balance sheet.

(2) Ownership interest is a preferred equity interest, through NREA SOV Investors, LLC, a wholly owned single-asset LLC, in CAF Stone Oak Village, LLC, which directly owns Overlook at Stone Oak Park (fka Springs at Stone Oak Village).

The Company, through the OP, has entered into joint ventures with unrelated third parties to originate preferred equity investments. The Company’s preferred equity investments are typically funded with a combination of debt and equity. The Company’s losses are limited to its investment and the Company does not guarantee any debt, capital payout, or other obligations associated with the joint ventures.

18The joint venture that the Company, through the OP, is invested in as of June 30, 2017 is deemed to be a VIE as it has equity investors that lack certain essential characteristics of a controlling financial interest. The Company has not, is not contractually required to, nor does it intend to, provide additional financial support to the joint venture beyond its original investment. The Company is not the primary beneficiary of this joint venture as it lacks the power to direct the activities that most significantly impact its economic performance and accounts for this interest under the equity method of accounting under FASB ASC 323-30, Investments in Partnerships, Joint Ventures, and Limited Liability Entities, on the Company’s consolidated financial statements.

The joint venture that the Company, through the OP, is invested in as of March 31, 2017 is deemed to be a VIE as it has equity investors that lack certain essential characteristics of a controlling financial interest. The Company has not, is not contractually required to, nor does it intend to, provide additional financial support to the joint venture beyond its original investment. The Company is not the primary beneficiary of this joint venture as it lacks the power to direct the activities that most significantly impact its economic performance and accounts for this interest under the equity method of accounting under FASB ASC 323-30, Investments in Partnerships, Joint Ventures, and Limited Liability Entities, on the Company’s consolidated financial statements.

5. Operating Real Estate Investments

As of ~~March~~June 3130, 2017, the Company has one consolidated investment in a multifamily property. The following table contains summary information of the Company’s consolidated investment as of ~~March~~June 3130, 2017 and December 31, 2016:

Property Name

Rentable Square Footage

Number of Units

Date Acquired

~~Average Effective Monthly Rent Per Unit (1)~~

Average Effective Monthly Rent Per Unit (1)

~~% Occupied as of March 31, 2017 (2)~~

% Occupied as of June 30, 2017 (2)

~~% Occupied as of December 31, 2016 (2)~~

% Occupied as of December 31, 2016 (2)

Estates on Maryland

324,431

330

4/7/2016

(3)

~~954~~$

963

~~95.2~~

%93.3

~~95.8~~

%95.8

(1) Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of ~~March~~June 3130, 2017 minus any tenant concessions over the term of the lease, divided by the number of units under commenced leases as of ~~March~~June 3130, 2017.

(2) Percent occupied is calculated as the number of units occupied as of ~~March~~June 3130, 2017 and December 31, 2016, respectively, divided by the total number of units, expressed as a percentage.

(3)

As of ~~March~~June 3130, 2017, the major components of the Company’s consolidated investment in athe multifamily property were as follows (in thousands) (unaudited):

Property Name	Land		Buildings and Improvements			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Estates on Maryland	$	5,080	$	35,~~450~~477		$	67	$	1,~~039~~057		$	41,~~575~~621
Accumulated depreciation and amortization		—		(12,~~965~~270	)		—		(~~351~~438	)		(2,~~316~~708	)
Total	$	5,080	$	33,~~485~~207		$	67	$	~~688~~619		$	3938,~~259~~913

~~As of December 31, 2016, the major components of the Company’s consolidated investment in a multifamily property were as follows (in thousands):~~20

As of December 31, 2016, the major components of the Company’s consolidated investment in the multifamily property were as follows (in thousands):

Property Name	Land		Buildings and Improvements			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Estates on Maryland	$	5,080	$	35,432		$	44	$	1,013		$	41,569
Accumulated depreciation and amortization		—		(1,661	)		—		(266	)		(1,927	)
Total	$	5,080	$	33,771		$	44	$	747		$	39,642

For the three months ended ~~March~~June 3130, 2017 and 2016, depreciation expense was $0.4 million and $0.3 million, respectively. For the six months ended June 30, 2017 and 2016, depreciation expense was $0.8 million and $0.7 million, respectively.

For the three months ended ~~March~~June 3130, 2017 and 2016, the Company did not incur amortization expense related to intangible lease assets. For the six months ended June 30, 2017 and 2016, amortization expense related to the Company’s intangible lease assets was $0 and $0.2 million, respectively. Due to the six-month useful life attributable to intangible lease assets, the value of intangible lease assets on any acquisition prior to ~~September~~December 3031, 2016 has been fully amortized and the assets and related accumulated amortization have been written off as of ~~March~~June 3130, 2017.

6. Preferred Equity Investment

As of ~~March~~June 3130, 2017, the Company has one preferred equity investment accounted for under the equity method of accounting. The following table contains summary information of the Company’s preferred equity investment as of ~~March~~June 3130, 2017 and December 31, 2016:

Property Name	Date Originated	Number of Units		Carrying Value as of June 30, 2017 (in thousands)		~~Average~~Carrying ~~Effective~~Value ~~Monthly~~as ~~Rent~~of ~~Per~~December ~~Unit~~31, 2016 (1in thousands)		%Average ~~Occupied~~Effective asMonthly ofRent ~~March~~Per ~~31,~~Unit ~~2017~~ (21)			% Occupied as of ~~December~~June 3130, ~~2016~~2017 (2)			% Occupied as of December 31, 2016 (2)
Springs at Stone Oak Village	8/19/2016		360	$	5,250	$	1,094		86.9	%		87.2	%
Overlook at Stone Oak Park (fka Springs at Stone Oak Village)	8/19/2016		360	$	5,388	$	5,250	$	1,095			91.7	%		87.2	%

(2) Percent occupied is calculated as the number of units occupied as of ~~March~~June 3130, 2017 and December 31, 2016, respectively, divided by the total number of units, expressed as a percentage.

Summary financial information for the property underlying the Company’s preferred equity investment as of ~~March~~June 3130, 2017 and December 31, 2016 and for the three and six months ended ~~March~~June 3130, 2017 is as follows (in thousands):

	March 31, 2017		December 31, 2016
	June 30, 2017		December 31, 2016
	(Unaudited)
Balance Sheet:
Real estate, net	$	4544,~~382~~989	$	46,088
Other assets		1,~~239~~418		1,055
Total assets	$	46,~~621~~407	$	47,143
Mortgage payable, net	$	34,~~377~~364	$	34,390
Other liabilities		~~750~~1,243		363
Total liabilities		35,~~127~~607		34,753
Members' equity		1110,~~494~~800		12,390
Total liabilities and members' equity	$	46,~~621~~407	$	47,143

	For the Three Months Ended March 31, 2017
	(Unaudited)
Operating Statement:
Total revenues	$	1,129
Operating expenses		665
Operating income		464
Interest expense		321
Depreciation and amortization		707
Net loss	$	(564	)

	For the Three Months Ended June 30, 2017			For the Six Months Ended June 30, 2017
	(Unaudited)			(Unaudited)
Operating Statement:
Total revenues	$	1,116		$	2,245
Operating expenses		732			1,397
Operating income		384			848
Interest expense		(324	)		(645	)
Depreciation and amortization		(396	)		(1,103	)
Net loss	$	(336	)	$	(900	)

7. Debt

Mortgage Payable

The following table contains summary information concerning the mortgage debt of the Company as of ~~March~~June 3130, 2017 (dollars in thousands):

Property Name		Type	Term (months)		Amortization (months)		Outstanding Principal (1)			Interest Rate (2)		Max Note Rate (3)		Maturity Date
Estates on Maryland	(4)	Floating		60		360	$	26,919			23.8812%		6.00%	9/1/2020
Deferred financing costs, net of accumulated amortization of $81								(162	)
Deferred financing costs, net of accumulated amortization of $93								(149	)
							$	26,~~757~~770

(1)

Mortgage debt that is non-recourse to the Company and encumbers the multifamily property.

(2) Interest rate is based on one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin. One-month LIBOR, as of ~~March~~June 3130, 2017, was 01.~~9828~~2239%.

(3)

Represents the maximum rate payable on the note as a result of an interest rate cap (see Note 9).

(4)

Loan is full term interest-only and can be pre-paid starting in the 13th month through the 57th month of the term at par plus 1.0% of the unpaid principal balance and at par during the last three months of the term.

The mortgage is a non-recourse obligation subject to customary provisions. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events.

Credit Facility

On April 7, 2016, the OP and the Sponsor entered into a revolving credit agreement as borrowers of up to $15.0 million (the “Commitment”) with KeyBank, N.A. (“KeyBank”) as administrative agent and lender (the “Credit Facility”), and the OP immediately drew $14.1 million on the Credit Facility and paid the full balance of the $10.0 million bridge loan with KeyBank the Company assumed upon the acquisition of Estates. On April 7, 2016, the OP used $4.0 million of proceeds from the Credit Facility and $2.0 million of cash on hand to originate its $6.0 million preferred equity investment in Bell Midtown. The Credit Facility is non-amortizing during the term it is outstanding, is pre-payable at any time without penalty, and accrues interest at an annual rate of 4.0% plus one-month LIBOR. In connection with the Credit Facility, the Company and an affiliate of BH Equity provided a guarantee to KeyBank. The Company pledged certain assets and proceeds from the Continuous Offering to KeyBank as collateral for the Credit Facility. The OP also pledged certain assets and equity interests to KeyBank as collateral for the Credit Facility, including 50% of its interest in Estates and 50% of its interest in Bell Midtown. In addition, an affiliate of the Sponsor pledged registered equity securities to KeyBank as collateral for the Credit Facility.

On August 19, 2016, the OP and the Sponsor amended the Credit Facility (the “Amendment”) to, among other things, increase the Commitment from $15.0 million to $20.0 million, and the Company, through the OP, immediately drew $5.25 million on the Credit Facility to originate its preferred equity investment in Overlook at Stone Oak Park (fka Springs at Stone Oak Village). The Amendment reflects that, to the extent any principal payments are made on the outstanding principal balance, including any mandatory prepayment, at any time that the outstanding principal balance exceeds $15.0 million, the Commitment shall be permanently reduced by the amount of such prepayment and the amount prepaid shall not be available to be reborrowed. In connection with the Amendment, the OP pledged to KeyBank its 100% preferred equity interest in Overlook at Stone Oak Park (fka Springs at Stone Oak Village) as collateral for the Credit Facility. During the fourth quarter of 2016, using approximately $2.4 million of gross offering proceeds and $6.0 million of cash received from the redemption of the Company’s preferred equity investment in Bell Midtown, the Company reduced the principal balance of the Credit Facility to $11.0 million.

The Credit Facility was payable in full on April 7, 2017, but was amended on April 7, 2017 to extend the maturity date to June 30, 2017 (see Note 14). The Company continues to be in discussions with KeyBank to further extend the maturity date, alleviating the need to repay the Credit Facility in full on June 30, 2017. If the Company is unable to extend the maturity date of the Credit Facility and the Company does not have sufficient cash on hand to repay the outstanding principal balance on the maturity date, there is sufficient liquid collateral, in the form of registered equity securities (the “Collateral”), pledged from an affiliate of the Company’s Sponsor, to satisfy the Company’s obligations. The Collateral had a fair market value of approximately $22.7 million as of March 31, 2017. If the Collateral were used to satisfy the Company’s obligations on the Credit Facility, the Company would likely issue shares of its Class A common stock in an amount equal to the obligations that are relieved from the application of the Collateral. The Company does not believe there is a scenario whereby repayment of the Credit Facility would create a going concern issue for it whereby the Company would not be able to fund its operations for the next 12 months.

AsOn ofApril ~~March 31~~7, 2017, the ~~Company,~~OP ~~through~~and the OPSponsor amended the Credit Facility (the “Second Amendment”) to extend the maturity date to June 30, ~~has~~2017 ~~$11.0~~and ~~million~~terminate ~~outstanding~~the ~~under~~revolving feature of the Credit Facility. atThe Company paid an ~~interest~~amendment ~~rate~~fee of 4$27,500 in connection with the Second Amendment.~~98%.~~ ~~The~~On ~~Credit~~June ~~Facility~~30, ~~agreement~~2017, asthe OP and the Sponsor amended, ~~contains~~the ~~customary~~Credit ~~provisions~~Facility ~~with~~(the ~~respect~~“Third Amendment”) to ~~events~~extend ofthe ~~default,~~maturity ~~covenants~~date ~~and~~to ~~borrowing~~October ~~conditions~~2, 2017. ~~Certain~~In ~~prepayments~~conjunction ~~may~~with bethe ~~required~~Third ~~upon~~Amendment, athe ~~breach~~affiliate of ~~covenants~~BH orEquity ~~borrowing~~was ~~conditions~~released and discharged of the guarantee it had previously provided on the Credit Facility.

The Company continues to be in discussions with KeyBank to further extend the maturity date, alleviating the need to repay the Credit Facility in full on October 2, 2017. Additionally, a stated use of proceeds in the Underwritten Offering is to repay the Credit Facility in full. If the Company is unable to extend the maturity date of the Credit Facility, is unable to complete the Underwritten Offering prior to October 2, 2017, or the Company does not have sufficient cash on hand to repay the outstanding principal balance on the maturity date, there is sufficient liquid collateral, in the form of registered equity securities (the “Collateral”), pledged from an affiliate of the Company’s Sponsor, to satisfy the Company’s obligations. The Collateral had a fair market value of approximately $23.4 million as of June 30, 2017. If the Collateral were used to satisfy the Company’s obligations on the Credit Facility, the Company may issue shares of its Class A common stock in an amount equal to the obligations that are relieved from the application of the Collateral. The Company does not believe there is a scenario where repayment of the Credit Facility would create a going concern issue for it whereby the Company would not be able to fund its operations for the next 12 months.

As of June 30, 2017, the Company, through the OP, has $11.0 million outstanding under the Credit Facility at an interest rate of 5.22%. The Credit Facility agreement, as amended, contains customary provisions with respect to events of default, covenants and borrowing conditions. Certain prepayments may be required upon a breach of covenants or borrowing conditions.

Leverage Limit

Under the Company’s charter, the Company’s borrowings may not exceed 300% of its total “net assets” (as defined in the Company’s charter in accordance with the North American Securities Administrators Association Statement of Policy regarding Real Estate Investment Trusts (the “NASAA REIT Guidelines”)), as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of its investment (the “Leverage Limit”). However, over time, the Company intends to target a leverage ratio of 50%-60% loan-to-value. The Company may exceed the Leverage Limit if such excess is approved by a majority of its independent directors and disclosed to stockholders in its next quarterly report following such borrowing, along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments and there is no limitation on the amount the Company may borrow against any single improved property. The Company has sought and will continue to seek such independent director approval of borrowings in excess of the Leverage Limit until such point as the Company’s borrowings do not exceed the Leverage Limit. As a result of the debt incurred on the acquisition of Estates and the additional debt incurred from the investment in Overlook at Stone Oak Park (fka Springs at Stone Oak Village), borrowings of the Company exceeded the Leverage Limit. A majority of the Company’s independent directors approved borrowings in excess of the Leverage Limit. The Company’s independent directors determined that exceeding the Leverage Limit was justified because the Company was in the process of raising its equity capital in the Continuous Offering to acquire its portfolio. As a result, the Company expects that its debt levels will be higher until it has raised additional equity capital and repaid a portion of its initial leverage. If necessary, the Company expects to repay the Credit Facility by exchanging the Collateral, or with proceeds from a successful completion of the Underwritten Offering or from sales of its assets.

for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments and there is no limitation on the amount the Company may borrow against any single improved property. The Company expects that during the period of the Offering, it will seek such independent director approval of borrowings in excess of the Leverage Limit since the Company is in the process of raising its equity capital to acquire its portfolio. As a result of the debt incurred on the acquisition of Estates and the additional debt incurred from the investment in Springs at Stone Oak Village, borrowings of the Company exceeded the Leverage Limit. A majority of the Company’s independent directors approved borrowings in excess of the Leverage Limit. The Company’s independent directors determined that exceeding the Leverage Limit was justified because the Company is in the process of raising its equity capital to acquire its portfolio. As a result, the Company expects that its debt levels will be higher until it has raised equity capital and repaid a portion of its initial leverage.

Schedule of Debt Maturities

The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to ~~March~~June 3130, 2017 are as follows (in thousands):

2017	$	11,000
2018		—
2019		—
2020		26,919
2021		—
Thereafter		—
Total	$	37,919

8. Stockholders’ Equity

Common Stock

Under the Company’s Articles of Incorporation, the total number of shares of common stock, $0.01 par value per share, initially authorized for issuance was 200,000. In connection with the Company’s formation, NexPoint Advisors, L.P., an affiliate of the Company, purchased 11.11 shares of the Company’s common stock for an aggregate purchase price of $100. On October 24, 2014, the Company authorized and sold approximately 22,222 shares of common stock to the Advisor for an aggregate purchase price of $200,000. On October 24, 2014, the Company repurchased the 11.11 shares previously held by NexPoint Advisors, L.P. in exchange for $100. On July 7, 2015, the Company filed its Amended and Restated Articles of Incorporation with the State Department of Assessments and Taxation of the State of Maryland (the “Amended and Restated Articles of Incorporation”). Among other things, the Amended and Restated Articles of Incorporation provided for Class A and Class T shares of the Company’s common stock and increased the aggregate number of authorized shares of common stock from 200,000 to 1,000,000,000, 500,000,000 of which are classified as Class A common stock, $0.01 par value per share (the “Class A Shares”), and 500,000,000 of which are classified as Class T common stock, $0.01 par value per share (the “Class T Shares”), and 10,000,000 shares of preferred stock, $0.01 par value per share. Upon filing the Amended and Restated Articles of Incorporation, each share of the Company’s common stock that was issued to the Advisor was converted to one share of the Company’s Class A common stock.

As of ~~March~~June 3130, 2017, the Company had issued 1,~~034~~103,~~099~~268 shares of its Class A common stock in the Continuous Offering, which consisted of the issuance of 434,783 shares to acquire a 95% interest in Estates and the issuance of ~~599~~668,~~316~~485 shares, including 2943,~~843~~456 shares issued pursuant to the DRIP, resulting in gross offering proceeds of approximately $56.52 million, including approximately $~~283~~412,~~500~~700 of distributions reinvested through the DRIP. During the ~~three~~six months ended ~~March~~June 3130, 2017, the Company recognized offering costs of less than $0.1 million. As of ~~March~~June 3130, 2017, the Company had issued a total of 1,~~056~~128,~~321~~490 shares of Class A common stock.

~~Class A Shares and Class T Shares are being publicly offered in any combination up to the maximum Offering amount.~~ The ~~share classes have different selling commissions, and there will be an ongoing distribution fee with respect to the primary Offering of Class T Shares. The~~ initial ~~Offering~~offering price for the shares in the ~~primary~~Continuous Offering iswas $10.00 per Class A Share and $9.58 per Class T Share. As of ~~March~~June 3130, 2017, no Class T shares had been issued.

Preferred Stock

Under the Company’s Amended and Restated Articles of Incorporation, the total number of shares of preferred stock authorized for issuance is 10,000,000.

On January 26, 2017, the Company sold 125 shares of 12.5% Series A Cumulative Non-Voting Preferred Stock, $0.01 par value per share (the “Series A Preferred Shares”), for $1,000 per Series A Preferred Share, pursuant to a private placement that was exempt from registration pursuant to Rule 506(b) of Regulation D under the Securities Act (the “Private Offering”) to 125 “accredited investors,” as such term is defined in Rule 501(a) of Regulation D under the Securities Act for aggregate gross proceeds of $125,000. The Company paid approximately $6,250 in commissions in connection with the sale of the Series A Preferred Shares in the Private Offering. The Company did not use general solicitation or advertising to market the Series A Preferred Shares. The outstanding Series A Preferred Shares are subject to redemption, at the Company’s election. In addition, the Series A Preferred Shares have a distribution and liquidation preference senior to the Company’s shares of common stock.

investors,” as such term is defined in Rule 501(a) of Regulation D under the Securities Act for aggregate gross proceeds of $125,000. The Company paid approximately $6,250 in commissions in connection with the sale of the Series A Preferred Shares in the Private Offering. The Company did not use general solicitation or advertising to market the Series A Preferred Shares. The outstanding Series A Preferred Shares are subject to redemption, at the Company’s election. In addition, the Series A Preferred Shares have a distribution and liquidation preference senior to the Company’s shares of common stock.

Distribution Reinvestment Plan

The Company ~~has~~ adopted the DRIP pursuant to which the Company’s stockholders may elect to purchase shares of common stock with distributions. The Company has the discretion to extend the offering period for the shares being offered pursuant to its prospectus under the DRIP beyond the termination of the Company’s primary Offering until the Company has sold all the shares allocated to the DRIP. The Company also may offer shares under the DRIP pursuant to a new registration statement. The Company reserves the right to reallocate the shares of common stock being offered between the ~~Company’s~~Continuous ~~primary~~ Offering and the DRIP. Any shares issued pursuant to the DRIP are subject to registration and renewal in any state in which such shares are offered and the offering of such shares is not exempt under applicable laws and regulations. On July 26, 2017, in connection with the termination of the Continuous Offering, the DRIP was terminated.

~~Until~~No ~~the~~dealer ~~NAV~~manager ~~pricing date~~fees, ~~the~~selling ~~Company~~commissions ~~will~~or ~~offer~~distribution ~~shares~~fees ~~under~~were ~~the~~paid ~~Company’s~~with ~~DRIP~~respect atto ~~$9.50~~shares ~~per~~purchased ~~Class A~~pursuant ~~Share~~to ~~and $9.10 per Class T Share, which is 95% of~~ the ~~primary~~DRIP; ~~offering price. Thereafter~~therefore, the Company ~~will~~retained ~~offer~~all ~~shares~~of ~~under its DRIP at~~ the ~~per~~proceeds ~~share~~from ~~NAV on~~ the ~~date~~reinvestment ~~that~~of ~~the distribution is payable~~distributions.

No dealer manager fees, selling commissions or distribution fees will be paid with respect to shares purchased pursuant to the DRIP; therefore, the Company will retain all of the proceeds from the reinvestment of distributions.24

Share Repurchase Program

In order to provide stockholders with the benefit of some interim liquidity, the Company’s board of directors (the “Board”) has adopted a share repurchase program that will enable stockholders the opportunity to potentially sell their shares back to the Company, subject to the conditions and limitations in the share repurchase program. Neither the Sponsor, the Advisor, the Dealer Manager, the directors nor their respective affiliates will receive a fee on any share repurchases. The terms of the share repurchase program are more flexible in cases involving the death or qualifying disability (as determined by the applicable governmental agency), of a stockholder.

Repurchases of shares, when requested, are at the Company’s sole discretion and generally are expected to be made quarterly until the NAV pricing date. Prior to the NAV pricing date, the Company will limit the number of shares repurchased during any calendar year to 5% of the weighted average number of shares of common stock outstanding during the prior calendar year. Funding for the share repurchase program will be derived from proceeds the Company maintains from the sale of shares under the DRIP and other operating funds, if any, as the Board, in its sole discretion, may reserve for this purpose. The Company cannot guarantee that the funds set aside for the share repurchase program will be sufficient to accommodate all requests made each year. Generally, the Company will pay repurchase proceeds, less any applicable tax or other withholding required by law, by the third business day following each quarterly financial filing. The repurchase price per share will be the Company’s then-current per share NAV.

Until the NAV pricing date, except with respect to repurchases sought within one year of a stockholder’s death or qualifying disability (as determined by the applicable governmental agency), common stockholders must hold their shares for at least one year in order to participate in the share repurchase program.

Prior to the time the Advisor begins calculating NAV, the price per share that the Company will pay to repurchase shares of its common stock will be as follows:

•

for stockholders who have continuously held their shares of common stock for at least one year, the price will be the lower of $9.25 and 92.5% of the amount paid for each such share;

•

for stockholders who have continuously held their shares of common stock for at least two years, the price will be the lower of $9.50 and 95.0% of the amount paid for each such share;

•

for stockholders who have continuously held their shares of common stock for at least three years, the price will be the lower of $9.75 and 97.5% of the amount paid for each such share;

•

for stockholders who have continuously held their shares of common stock for at least four years, the price will be the lower of $10.00 and 100% of the amount paid for each such share;

in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Company’s common stock.

The Board may amend the terms of the share repurchase program without stockholder approval. The Board may also amend, suspend or terminate the share repurchase program upon 30 days’ notice or reject any request for repurchase if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution.

Distributions

The Company’s long-term policy is to pay distributions solely from cash flow from operations. However, because the Company may receive income from investments at various times during the Company’s fiscal year and because the Company may need cash flow from operations during a particular period to fund capital expenditures and other expenses, the Company expects that at least during the early stages of the Company’s development and from time to time during the Company’s operational stage, the Company will declare distributions in anticipation of cash flow that the Company expects to receive during a later period, and the Company expects to pay these distributions in advance of its actual receipt of these funds. The Board has the authority under its organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances and the deferral of fees and expense reimbursements by the Advisor, in its sole discretion. The Company has not established a limit on the amount of offering proceeds it may use ~~from the Offering~~ to fund distributions. If the Company pays distributions from sources other than cash flow from operations, the Company will have fewer funds available for investments and stockholders’ overall return on their investment in the Company may be reduced.

To maintain the Company’s qualification as a REIT, the Company must make aggregate annual distributions to its stockholders of at least 90% of its REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If the Company meets the REIT qualification requirements, the Company generally will not be subject to federal income tax on the income that the Company distributes to its stockholders each year.

Distributions Declared

The Board previously approved daily distributions for the period from January 1, 2017 through February 28, 2017 that accrued at a rate of $0.00164 per day for each share of the Company’s Class A common stock which, if paid over a 365-day period, is equivalent to a 6.0% annualized distribution rate based on a purchase price of $10.00 per share of the Company’s Class A common stock. On March 16, 2017, the Board authorized the declaration of a special distribution to the Company’s Class A stockholders of record as of the close of business on March 16, 2017 of $0.0246 per Class A share, which is an amount equal to a daily distribution of $0.00164 per Class A share of common stock, for the period of March 1, 2017 to March 15, 2017. The Board has also approved and authorized the declaration of a daily distribution to the Company’s Class A stockholders of record as of the close of business on each day of the period commencing on March 16, 2017 and ending ~~June~~September 30, 2017. The distributions declared accrued daily to stockholders of record as of the close of business on each day and were payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month. The distributions declared were payable to stockholders from legally available funds. The Company did not declare any distributions during the ~~three~~six months ended ~~March~~June 3130, 2016. There is no guarantee that the Company will continue to pay distributions at this rate or at all.

Distributions declared on the Company’s Class A common stock during the three months ended ~~March~~June 3130, 2017 were approximately $~~153~~168,400, including approximately $137,000 attributable to the DRIP. Distributions declared on the Company’s Class A common stock during the six months ended June 30, 2017 were approximately $321,400, including approximately $~~133~~270,400 attributable to the DRIP.

Distributions declared on the Company’s Series A cumulative preferred stock during the three and six months ended ~~March~~June 3130, 2017 were approximately $24,000 and $6,700, respectively.

Distributions Paid

During the three and six months ended ~~March~~June 3130, 2017, the Company paid cash distributions on its common stock of approximately $335,~~400~~300 and $38,600, which related to distributions declared on the Company’s Class A common stock for each day in the period from March 1, 2017 through May 31, 2017 and December 1, 2016 through ~~February~~May 2831, 2017, respectively. Additionally, during the three and six months ended ~~March~~June 3130, 2017, 1513,~~133~~614 and 28,747 shares, respectively, of Class A common stock were issued pursuant to the DRIP for gross offering proceeds of approximately $~~143~~129,~~700.~~300 ~~The~~and Company did not pay any distributions related to its Series A cumulative preferred stock during the three months ended March 31, 2017. During the three months ended March 31, 2017, the Company paid total distributions of approximately $~~147~~273,~~100. The Company did not pay any distributions during the three months ended March 31~~000, ~~2016~~respectively.

During the three and six months ended June 30, 2017, the Company paid cash distributions of approximately $6,700 on the Company’s 12.5% Series A cumulative preferred stock for each day in the period from January 26, 2016 through June 30, 2017.

During the three and six months ended June 30, 2017, the Company paid total distributions of approximately $171,300 and $318,300, respectively. The Company did not pay any distributions during the six months ended June 30, 2016.

9. Fair Value Measures and Financial Instruments

From time to time, the Company records certain assets and liabilities at fair value. Real estate assets are recorded at fair value at acquisition and may be stated at fair value if they become impaired in a given period and may be stated at fair value if they are held for sale and the fair value of such assets is below historical cost. Additionally, the Company will record derivative financial instruments at fair value. The Company will also use fair value metrics to evaluate the carrying values of its real estate assets and for the disclosure of certain financial instruments.

for sale and the fair value of such assets is below historical cost. Additionally, the Company will record derivative financial instruments at fair value. The Company will also use fair value metrics to evaluate the carrying values of its real estate assets and for the disclosure of certain financial instruments.

Real Estate Acquisitions and Preferred Equity Originations

As of ~~March~~June 3130, 2017, and as further discussed in Notes 2 and 4, the Company had acquired a 95% interest in one multifamily property, Estates, for $39.6 million and has one preferred equity investment of $5.25 million in a multifamily property. The Company did not acquire any properties or originate any preferred equity investments during the ~~three~~six months ended ~~March~~June 3130, 2017. On January 1, 2017, the Company adopted ASU 2017-01, which requires an entity to capitalize acquisition costs associated with an acquisition that is determined to be an acquisition of an asset as opposed to an acquisition of a business. Upon acquisition of a property, the purchase price and related acquisition costs are allocated to land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets based on their estimated fair values using Level 3 inputs. If debt is assumed upon an acquisition, the debt is recorded based on its estimated fair value using Level 2 inputs. Preferred equity investments are recorded at the value invested by the Company at the date of origination and accounted for under the equity method of accounting.

As discussed in Note 2, fair value measurements at the time of acquisition are determined by management using available market information and appropriate valuation methodologies available to management. Critical estimates in valuing certain assets and liabilities and the assumptions of what marketplace participants would use in making estimates of fair value include, but are not limited to: future expected cash flows, estimated carrying costs, estimated origination costs, lease up periods and tenant risk attributes, as well as assumptions about the period of time the acquired lease will continue to be used in the Company’s portfolio and discount rates used in these calculations. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may not always reflect unanticipated events and changes in circumstances may occur. In making such estimates, management uses a number of sources, including appraisals, third party cost segregation studies or other market data, as well as information obtained in its pre-acquisition due diligence, marketing and leasing activities. Considerable judgment is necessary to interpret market data and estimate fair value. Accordingly, there can be no assurance that the estimates discussed herein, using Level 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate assets or other financial instruments. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

Derivative Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instrument is used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

The Company utilizes an independent third party to perform the market valuations on its derivative financial instruments. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contract, which determination was based on the fair value of the contract, was not significant to the overall valuation. As a result, the Company’s derivative held as of ~~March~~June 3130, 2017 and December 31, 2016 was classified as Level 2 of the fair value hierarchy.

25The Company’s objectives in using interest rate derivatives are to add stability to interest expense related to floating rate debt and to manage its exposure to interest rate movements. To accomplish this objective, the Company has an interest rate cap on its floating rate mortgage debt as part of its interest rate risk management strategy and feels the use of derivative financial instruments is the most efficient and cost-effective method for managing interest rate risk. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The interest rate cap obtained by the Company has a term of three years. During the three and six months ended June 30, 2017 and 2016, the interest rate cap was used to hedge the variable cash flows associated with the Company’s floating rate mortgage debt. The interest rate cap the Company employs caps the related floating interest rate at 6.0%.

The ~~Company’s~~effective ~~objectives~~portion of changes in ~~using~~the ~~interest~~fair ~~rate~~value of derivatives ~~are~~designated toand ~~add~~that ~~stability~~qualify toas ~~interest~~cash ~~expense~~flow ~~related~~hedges tois ~~floating~~recorded ~~rate~~in ~~debt~~other ~~and~~comprehensive toloss ~~manage~~(“OCI”) ~~its~~and ~~exposure~~subsequently toreclassified ~~interest~~into ~~rate~~earnings ~~movements.~~in Tothe ~~accomplish~~period ~~this~~that ~~objective,~~ the ~~Company~~hedged ~~has~~forecasted antransaction ~~interest~~affects ~~rate~~earnings. ~~cap~~Amounts onreported ~~its~~in ~~floating~~OCI ~~rate~~related ~~mortgage~~to ~~debt~~derivatives aswill ~~part~~be ofreclassified ~~its~~to interest ~~rate~~expense ~~risk~~as ~~management~~interest ~~strategy~~payments ~~and~~are ~~feels~~made ~~the~~on ~~use of derivative financial instruments is~~ the ~~most~~Company’s ~~efficient~~floating ~~and cost-effective method for managing interest~~ rate ~~risk~~debt. ~~Interest~~The ~~rate~~ineffective ~~caps~~portion ~~involve the receipt~~ of ~~variable-rate amounts from a counterparty if interest rates rise above~~ the ~~strike~~change ~~rate on the contract~~ in ~~exchange~~fair ~~for~~value anof ~~up-front premium. The interest rate cap obtained by~~ the ~~Company~~derivatives ~~has~~is arecognized ~~term~~directly ofin ~~three years~~earnings. During the three and six months ended ~~March~~June 3130, 2017 and 2016, the ~~interest~~Company ~~rate~~recorded ~~cap~~no ~~was~~ineffectiveness ~~used~~in earnings attributable to ~~hedge~~derivatives ~~the~~designated ~~variable~~as cash ~~flows~~flow ~~associated~~hedges. ~~with~~As ~~the~~of ~~Company’s~~June ~~floating~~30, ~~rate~~2016, ~~mortgage~~the ~~debt.~~Company ~~The~~had ~~interest~~one ~~rate~~derivative ~~cap~~designated ~~the~~as ~~Company~~a ~~employs~~cash ~~caps~~flow ~~the~~hedge ~~related~~of ~~floating~~ interest rate ~~at 6~~risk.~~0%.~~

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in other comprehensive loss (“OCI”) and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s floating rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017 and 2016, the Company recorded no ineffectiveness in earnings attributable to derivatives designated as cash flow hedges. As of March 31, 2016, the Company had one derivative designated as a cash flow hedge of interest rate risk. 27

As of ~~March~~June 3130, 2017, the Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk (dollars in thousands):

Product		Number of Instruments				Notional
Interest rate cap			1			$	26,919

Derivatives not designated as hedges are not speculative and would be used to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of ~~March~~June 3130, 2017 and 2016, the Company did not have any derivatives that were not designated as hedges in qualifying hedging relationships.

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the accompanying consolidated balance sheets as of ~~March~~June 3130, 2017 (unaudited) and December 31, 2016 (in thousands):

	Asset Derivative
	Balance Sheet Location	~~March~~June 3130, 2017		December 31, 2016
Derivative designated as hedging instrument:
Interest rate cap	Other assets	$	—	$	—

The table below presents the effect of the Company’s derivative financial instrument on the accompanying unaudited consolidated statements of operations and comprehensive loss for the three and six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

	Amount of gain (loss) recognized in OCI on derivative (effective portion)					Location of gain (loss) reclassified from accumulated OCI into income	Amount of gain (loss) reclassified from accumulated OCI into income (effective portion)					Location of gain (loss) recognized in income on derivative	Amount of gain (loss) recognized in income on derivative (ineffective portion)
	2017		2016			(effective portion)	2017			2016		(effective portion)	2017		2016
Derivative designated as hedging instrument:
For the three months ended March 31,
For the three months ended June 30,
Interest rate cap	$	—	$	(42	)	Interest expense	$	—(1	)	$	—	Interest expense	$	—	$	—
For the six months ended June 30,
Interest rate cap		—		(6	)	Interest expense		(1	)		—	Interest expense		—		—

Other Financial Instruments

Cash equivalents, rents and accounts receivables, accounts payable, accrued expenses and other liabilities are carried at amounts that reasonably approximate their fair values because of the short-term nature of these instruments. The fair value of amounts due to affiliates is not determinable due to the related party nature of such amounts.

Long-term indebtedness is carried at an amount that reasonably approximates its fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

10. Related Party Transactions

The Company has entered into the Advisory Agreement with the Advisor ~~and the Dealer Manager Agreement with the Dealer Manager with respect to the Offering~~. Pursuant to the Advisory Agreement ~~and the Dealer Manager Agreement~~, the Company is obligated to pay the Advisor ~~and the Dealer Manager~~ specified fees upon the provision of certain services related to the ~~Offering, the~~ investment of funds in real estate-related investments and the management of the Company’s assets and for other services (including, but not limited to, the disposition of assets). Subject to the limitations described below, the Company is also obligated to reimburse the Advisor and its affiliates for organization and offering expenses incurred by the Advisor and its affiliates on behalf of the Company. The Company may be obligated to reimburse the Advisor or its affiliates for acquisition and due diligence expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.

The Company entered into the Dealer Manager Agreement with the Dealer Manager with respect to the Continuous Offering. Pursuant to the Dealer Manager Agreement, the Company was obligated to pay the Dealer Manager specified fees upon the provision of certain services related to the Continuous Offering. The Continuous Offering terminated on July 26, 2017. The Dealer Manager will not participate in the Underwritten Offering.

Advisory Agreement

On August 10, 2015, the Company entered into the Advisory Agreement with the Advisor. The Advisory Agreement is subject to annual renewal by the Board. On August 8, 2016, the Board, including the independent directors, unanimously approved the renewal of the Advisory Agreement for a one-year term that expires on August 10, 2017 (see Note 14). Pursuant to the terms of the Advisory Agreement, the Company may pay the Advisor the fees described below:

Asset Management Fee to the Advisor

The Company pays the Advisor an asset management fee to manage the day-to-day affairs of the Company. The asset management fee is calculated on a monthly basis in an amount equal to 1/12th of 0.75% of the average of the aggregate book value of the Company’s gross assets (before reserves for depreciation or other non-cash reserves), which is not reduced by amounts borrowed to acquire such assets, and additional amounts used for improvements, computed by taking the average of the book value of the Company’s gross assets at the end of each month (or partial month), and is payable monthly in arrears. For the three months ended ~~March~~June 3130, 2017 and 2016, the Company incurred asset management fees to the Advisor of approximately $0.1 million and $0.1 ~~The~~million, ~~Company~~respectively. ~~did~~For ~~not~~the ~~incur~~six ~~any~~months ended June 30, 2017 and 2016, the Company incurred asset management fees to the Advisor ~~for~~of ~~the~~approximately ~~three~~$0.2 ~~months~~million ~~ended~~and ~~March~~$0.1 31million, ~~2016~~respectively.

Acquisition Fee

The Company may pay the Advisor an acquisition fee equal to 1.0% of the purchase price of each asset acquired, excluding any acquisition expenses. For the three and six months ended ~~March~~June 3130, 2017 and 2016, the Company did not incur any acquisition fees to the Advisor. In connection with the acquisition of Estates, the Company incurred acquisition fees payable to the Advisor of approximately $0.4 million, which are deemed to have been incurred on the Original Acquisition Date (see Note 2).

Organization and Offering Expenses

The Company will reimburse the Advisor and its affiliates for organization and offering expenses incurred on the Company’s behalf in connection with the Continuous Offering, but only to the extent the reimbursement ~~would~~does not exceed 1.0% of the gross offering proceeds atreceived ~~any~~in ~~point~~the inContinuous ~~time~~Offering. The Advisor is responsible for the payment of organization and offering expenses the Company incurs in excess of 1.0% of the gross offering proceeds. Organization and offering expenses (other than selling commissions, the dealer manager fee and the distribution fee) include, but are not limited to: (1) legal, accounting, printing, mailing and filing fees; (2) charges of the Company’s escrow agent and transfer agent; and (3) due diligence expense reimbursements to participating broker-dealers. For the period from November 12, 2013 (inception) to ~~March~~June 3130, 2017, the Advisor and its affiliates incurred organization and offering expenses of approximately $2.67 million. For the three and six months ended ~~March~~June 3130, 2017, the Company recognized less than $0.1 million in organization expenses and $0 in offering costs, the maximum amount allowed under the 1.0% of gross offering proceeds limitation on reimbursement to the Advisor and its affiliates. Subsequent to receiving $2.0 million in gross proceeds in the Continuous Offering and breaking escrow on March 24, 2016, the Company recognized less than $0.1 million in organization expenses for the three and six months ended June 30, 2016, and $0 and less than $0.1 million in offering costs for the three and six months ended ~~March~~June 3130, 2016, respectively, the maximum amount allowed under the 1.0% of gross offering proceeds limitation on reimbursement to the Advisor and its affiliates. The remaining organization and offering expenses of approximately $2.56 million have not been accrued on the Company’s consolidated balance sheet as of ~~March~~June 3130, 2017 and are not reimbursable under the current Advisory Agreement since the Continuous Offering was terminated on July 26, ~~but~~2017. ~~may~~Upon bean ~~accrued~~amendment into the ~~future~~current ~~and~~Advisory Agreement, an undetermined amount of these expenses may be ~~reimbursable~~reimbursed to the Advisor and its affiliates, ~~subject~~in toconnection with a subsequent offering of the ~~limitations~~Company’s ~~described~~common ~~herein~~stock.

2729

The amount of reimbursable organization and offering expenses that have been paid or recognized from November 12, 2013 (inception) through ~~March~~June 3130, 2017 is as follows (dollars in thousands):

	Amount
Gross offering proceeds:	$	56,~~527~~169
Organization and offering expenses reimbursement limitation		1.0	%
Total organization and offering expenses available to be paid/reimbursed	$	5562
Organization and offering expenses recorded:
Offering costs paid	$	7
Organization expenses reimbursement accrual		4855
Total organization and offering expenses recorded by the Company	$	5562

As of ~~March~~June 3130, 2017, wethe Company had recognized selling commissions, dealer manager fees, and organization and offering costs in the Continuous Offering in the amounts set forth below. The Dealer Manager reallowed all of the selling commissions and dealer manager fees to participating broker-dealers (dollars in thousands):

Type of Expense	Amount
Selling commissions and dealer manager fees	$	5
Other organization and offering costs		5562
Total expenses	$	6067
Total gross offering proceeds (excluding DRIP proceeds and interest acquired in contributed property)	$	5,~~243~~756
Percentage of gross offering proceeds used to pay for organization and offering costs, selling commissions and dealer manager fees		1.1416	%

From the commencement of the ~~Company’s~~Continuous ~~initial~~Offering ~~public offering~~ through ~~March~~June 3130, 2017, the net offering proceeds to the Company, after deducting the total expenses incurred as described above, were approximately $56.471 million (exclusive of 434,783 shares of Class A common stock issued to the Sponsor in exchange for its 95% interest in Estates), including net offering proceeds from the DRIP of approximately $~~283~~412,~~500~~700. From the commencement of the ~~Company’s~~Continuous ~~initial~~Offering ~~public offering~~ through ~~March~~June 3130, 2017, the ratio of the cost of raising equity capital to the gross amount of equity capital raised was approximately 1.1416%.

The amount of deferred organization and offering expenses that has not been reflected in the Company’s consolidated financial statements as of ~~March~~June 3130, 2017 is as follows (in thousands):

	March 31, 2017
	June 30, 2017
Offering costs deferred	$	2,~~438~~522
Organization expenses deferred		~~110~~103
Total organization and offering expenses deferred	$	2,~~548~~625

Investment-related Expenses

In addition, the Company will reimburse the Advisor or its affiliates for expenses actually incurred related to selecting, evaluating, acquiring and originating assets on its behalf, regardless of whether the Company actually acquires or originates the related assets. In addition, the Company will pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties, including legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finders’ fees, title insurance expenses, survey expenses, property inspection expenses and other closing costs regardless of whether the Company acquires or originates the related assets. The Company expects these expenses will be approximately 0.75% of the purchase price of each asset or real estate-related investment. For the three and six months ended ~~March~~June 3130, 2017 and 2016, the Advisor and its affiliates did not bill any investment-related expenses to the Company and any such expenses the Advisor or its affiliates incurred during the periods are considered to be permanently waived.

Operating Expenses

The Company will also reimburse the Advisor’s costs of providing administrative services and operating expenses incurred on behalf of the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses, as defined below, at the end of the four preceding fiscal quarters exceed the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period (the “2%/25% Guidelines”). For these purposes, “average invested assets” means, for any period, the average of the aggregate book value of the Company’s assets invested, directly or indirectly, in equity interests in and loans secured by real estate assets (including amounts invested in REITs and other real estate operating companies) before deducting reserves for depreciation, bad debts or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the period. Additionally, the Company will not make operating expense reimbursements for personnel costs to the Advisor in connection with services for which the Advisor already receives acquisition fees, acquisition or disposition expenses, real estate commissions or asset management fees. The Company will not reimburse the Advisor for salaries and benefits paid to the Company’s executive officers. “Total Operating Expenses” means all expenses paid or incurred by the Company that are in any way related to the Company’s operation, including the Company’s allocable share of Advisor overhead and investment management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of the Company’s assets; (f) acquisition fees and acquisition expenses (including expenses relating to potential acquisitions that the Company does not close); (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property). Notwithstanding the foregoing, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guidelines if a majority of the Company’s independent directors determines that such excess expenses (an “Excess Amount”) are justified based on unusual and non-recurring factors. The Advisor must reimburse the Company for the amount by which the Company’s Total Operating Expenses for the four preceding fiscal quarters then ended exceed the 2%/25% Guidelines, unless approved by the Company’s independent directors.

28For the three and six months ended June 30, 2017, the Company’s Total Operating Expenses were approximately $322,000 and $697,000, respectively. For the four fiscal quarters ended June 30, 2017, the Company’s Total Operating Expenses exceeded the 2%/25% Guidelines by approximately $446,000 (the “2017 Excess Amount”). On August 10, 2017, the Company’s independent directors determined that the 2017 Excess Amount was justified because (1) the amounts reflect legitimate operating expenses necessary for the operation of the Company’s business, (2) the Company is currently in its acquisition and development stage, (3) the expenses incurred as a result of being a public company are significant and disproportionate to the Company’s average invested assets and net income, and (4) the Company’s average invested assets was low due to the fact that the Company commenced material operations on March 24, 2016. As such, the Company will not seek reimbursement from the Advisor for the 2017 Excess Amount.

~~“average~~For ~~invested assets” means, for any period,~~ the ~~average~~three ~~of the aggregate book value of the Company’s assets invested, directly or indirectly, in equity interests in~~ and ~~loans~~six ~~secured~~months byended ~~real~~June ~~estate assets (including amounts invested in REITs and other real estate operating companies) before deducting reserves for depreciation~~30, ~~bad debts or other similar non-cash reserves~~2016, ~~computed by taking~~ the ~~average of these values at the end of each month during the period. Additionally, the~~ Company will not make operating expense reimbursements for personnel costs to the Advisor in connection with services for which the Advisor already receives acquisition fees, acquisition or disposition expenses, real estate commissions or asset management fees. The Company will not reimburse the Advisor for salaries and benefits paid to the Company’s ~~executive officers. “~~Total Operating Expenses” ~~means~~were ~~all~~approximately ~~expenses paid or incurred by the Company that are in any way related to the Company’s operation~~$458,000 ~~including the Company’s allocable share of Advisor overhead~~ and ~~investment~~$613,000, ~~management fees~~respectively, ~~but~~which ~~excluding~~exceeded ~~(a)~~ the ~~expenses~~2%/25% ofGuidelines. ~~raising~~For ~~capital~~the ~~such~~three ~~as organization~~ and ~~offering~~six ~~expenses,~~months ~~legal,~~ended ~~audit,~~June ~~accounting~~30, ~~underwriting~~2016, ~~brokerage,~~the ~~listing,~~Advisor ~~registration~~ and ~~other~~its ~~fees,~~affiliates ~~printing~~incurred ~~and~~approximately ~~other~~$376,000 ~~such expenses~~ and ~~taxes incurred in connection with the issuance~~$382, ~~distribution~~000, ~~transfer~~respectively, ~~listing and registration~~ of ~~shares of~~ the Company’s ~~common~~Total ~~stock;~~Operating ~~(b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation~~Expenses, ~~amortization~~all ~~and~~of ~~bad~~which ~~debt~~is ~~reserves;~~included ~~(e) reasonable incentive fees based~~ on the ~~gain~~accompanying inunaudited ~~the~~consolidated ~~sale~~statements of ~~the~~operations ~~Company’s~~and ~~assets;~~comprehensive ~~(f)~~loss. ~~acquisition~~The ~~fees~~Advisor ~~and~~made ~~acquisition~~a ~~expenses~~contribution ~~(including expenses relating~~ to ~~potential acquisitions that~~ the Company ~~does~~for ~~not~~$376,000 ~~close); (g) real estate commissions on the resale~~ of ~~investments;~~these ~~and~~operating ~~(h) other~~ expenses ~~connected with the acquisition~~, ~~disposition,~~which ~~management~~was ~~and~~recorded ~~ownership~~as ofa ~~investments~~reduction ~~(including~~to ~~the~~due ~~costs~~to ofaffiliates ~~foreclosure,~~and ~~insurance~~an ~~premiums,~~increase ~~legal~~to ~~services,~~additional ~~maintenance,~~paid-in ~~repair~~capital ~~and~~on ~~improvement~~the ofconsolidated ~~real~~balance ~~property)~~sheet. ~~Notwithstanding~~On ~~the~~May ~~foregoing~~11, ~~the~~2016, ~~Company may reimburse~~ the ~~Advisor for expenses in excess of the 2%/25% Guidelines if a majority of the~~ Company’s independent directors ~~determines~~determined ~~that~~the ~~such~~approximately ~~excess~~$6,000 ~~expenses~~of ~~(an~~operating ~~“Excess~~expenses ~~Amount”)~~the ~~are~~Advisor ~~justified based on unusual~~ and ~~non-recurring~~its ~~factors.~~affiliates ~~The~~incurred ~~Advisor~~for ~~must~~which ~~reimburse~~it ~~the~~did ~~Company~~not ~~for~~make ~~the~~a ~~amount~~contribution byto ~~which~~ the Company’s ~~Total Operating Expenses~~ for ~~the~~was ~~four~~justified; ~~preceding~~as ~~fiscal~~such, ~~quarters~~these ~~then~~costs ~~ended~~are ~~exceed~~reimbursable ~~the~~to ~~2%/25% Guidelines, unless approved by~~ the ~~Company’s independent directors~~Advisor.

For the three months ended March 31, 2017, the Company’s Total Operating Expenses were approximately $375,000. For the four fiscal quarters ended March 31, 2017, the Company’s Total Operating Expenses exceeded the 2%/25% Guidelines by approximately $580,000 (the “2017 Excess Amount”). On May 11, 2017, the Company’s independent directors determined that the 2017 Excess Amount was justified because (1) the amounts reflect legitimate operating expenses necessary for the operation of the Company’s business, (2) the Company is currently in its acquisition and development stage, (3) the expenses incurred as a result of being a public company are significant and disproportionate to the Company’s average invested assets and net income, and (4) the Company’s average invested assets was low due to the fact that the Company commenced material operations on March 24, 2016. As such, the Company will not seek reimbursement from the Advisor for the 2017 Excess Amount.

For the three months ended March 31, 2016, the Company’s Total Operating Expenses were approximately $155,000, which exceeded the 2%/25% Guidelines by such amount (the “2016 Excess Amount”). The Advisor and its affiliates incurred approximately $5,900 of the 2016 Excess Amount. On May 11, 2016, the Company’s independent directors determined that the 2016 Excess Amount was justified.

Disposition Fee

The Company will pay the Advisor or its affiliates a disposition fee on the sale of real property, real estate-related assets or the Company’s real estate portfolio, if the Advisor or its affiliates provides a substantial amount of services in connection with a sale, as determined by a majority of the Company’s independent directors. The disposition fee will be equal to 0.5% of the sales price of each real property, real estate-related asset sold, or for the sale of the Company’s real estate portfolio, excluding selling costs. In the event of the sale of the Company, the Company would pay the Advisor or its affiliates a fee of the lesser of 0.5% of the sales price or 50% of the amount of the investment banking fees related to such sale that otherwise would be incurred. For the three and six months ended ~~March~~June 3130, 2017 and 2016, the Company did not incur any disposition fees payable to the Advisor or its affiliates.

Subordinated Participation in Net Sales Proceeds

~~The~~In the event of the Company’s orderly liquidation, the Advisor (in its capacity as special limited partner of the OP) will receive 15.0% of remaining net sales proceeds after return of capital contributions plus payment to investors of a 6.0% annual cumulative, non-compounded return on the capital contributed by investors (the “Subordinated Participation in Net Sales Proceeds”).

Subordinated Incentive Listing Distribution

If the Company lists its shares on a national securities exchange, the Advisor (in its capacity as special limited partner of the OP) will receive 15.0% of the amount by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% annual cumulative, non-compounded return to investors (the “Subordinated Incentive Listing Distribution”). Neither the Advisor nor any of its affiliates can earn both the Subordinated Participation in Net Sales Proceeds and the Subordinated Incentive Listing Distribution.

Subordinated Distribution Upon Termination of the Advisory Agreement

Upon termination or non-renewal of the Advisory Agreement with or without cause, the Advisor (in its capacity as special limited partner of the OP), will be entitled to receive distributions from the OP equal to 15.0% of the amount, if any, by which (i) the sum of the appraised value of the Company’s assets, plus the total distributions paid to stockholders from the Company’s inception through the termination date of the Advisory Agreement, less any amounts distributable as of the termination date of the Advisory Agreement to the limited partners of the OP, who receive partnership units, exceeds (ii) the aggregate capital contributed by investors, less the portion of any distribution that is attributable to net sales proceeds and by any amounts paid by the Company to repurchase shares, plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded return to investors (the “Subordinated Distribution Upon Termination”). The Subordinated Distribution Upon Termination shall not be paid until after the Company’s stockholders have received distributions, in the aggregate, of a full return of capital raised from stockholders (less amounts paid to repurchase shares of the Company’s common stock pursuant to the Company’s share repurchase program) plus an annual 6.0% cumulative, non-compounded return on the gross proceeds from the shares of the Company’s common stock, as adjusted for distribution of net sale proceeds. The OP may satisfy the obligation to pay the Subordinated Distribution Upon Termination by either paying cash or issuing a non-interest bearing promissory note that will be repaid from the net sale proceeds of each sale after the date of the termination. If the promissory note is issued and not paid within five years of the termination date, then the Advisor, its successors or assigns, may elect to convert the balance of the fee into shares of the Company’s common stock.

Other Compensation Paid to the Advisor

Preferred Equity Placement Fee

The Advisor may receive a preferred equity placement fee, paid by the entity the preferred equity is placed with, equal to 1.0% of the preferred equity investment originated with the equity sponsor. During the three and six months ended ~~March~~June 3130, 2017 and 2016, the Advisor did not receive any preferred equity placement fees.

Preferred Equity Exit Fee

The Advisor may receive a preferred equity exit fee, paid by the entity the preferred equity is placed with, equal to 1.0% of the amount of preferred equity investment that is redeemed. During the three and six months ended ~~March~~June 3130, 2017 and 2016, the Advisor did not receive any preferred equity exit fees.

Dealer Manager Agreement

The Dealer Manager, an entity under common ownership with the Advisor, ~~serves~~served as the dealer manager of the Continuous Offering. The Dealer Manager and Advisor are related parties and ~~will receive fees, distributions and other compensation for services related to~~ the Offering and the investment and management of the Company’s assets. The Advisor will receive fees, distributions and other compensation during the offering, acquisition, operational and liquidation stages, as more fully described above. The Dealer Manager ~~will~~received ~~receive~~ fees ~~during~~for ~~the~~services ~~offering~~related ~~stage, and as it relates~~ to the ~~distribution~~Continuous ~~fee paid on outstanding Class T Shares, the Dealer Manager may continue to receive compensation after the offering stage~~Offering.

AsPursuant ~~of March 31, 2017, the Company had issued 1,034,099 shares of its Class A common stock in the Offering, including 29,843 shares issued pursuant~~ to the ~~DRIP,~~terms ~~which consisted~~ of the ~~issuance~~Dealer ofManager ~~434~~Agreement,~~783~~ ~~shares to acquire a 95% interest in Estates and gross offering proceeds of approximately $5.5 million, including approximately $283,500 of distributions reinvested through~~ the ~~DRIP. In connection with the~~ Company’s ~~incorporation~~paid ~~and prior to~~ the ~~effectiveness~~Dealer ofManager the Offering, the Company sold approximately 22,222 shares of its common stock to the Advisor for an aggregate purchase price of $200,000, at $9.00 per share, reflecting the fact that selling commissions and dealer manager fees indescribed ~~effect at the time of the purchase were not paid in connection with the sale. These shares were subsequently renamed as shares of Class A common stock.~~ below:

Pursuant to the terms of the Dealer Manager Agreement, the Company may pay the Dealer Manager the fees described below:

Selling Commissions

The Company ~~will~~paid ~~pay~~ the Dealer Manager selling commissions of up to 7.0% of gross offering proceeds from the sale of Class A Shares and up to 3.0% of gross offering proceeds from the sale of Class T Shares. The amount of selling commissions paid on the sale of Class A Shares and Class T Shares may be lower than the aforementioned percentages due to certain volume discounts. The Company ~~will~~did not pay selling commissions with respect to shares of any class sold pursuant to the DRIP. Additionally, the selling commissions ~~may~~were be waived in connection with certain categories of sales. The Dealer Manager isreallowed ~~expected to reallow~~ all selling commissions to participating broker-dealers. No Class T Shares were sold in the Continuous Offering.

Dealer Manager Fee

The Company ~~will~~paid ~~pay~~ a dealer manager fee of up to 1.0% of gross offering proceeds from the sale of Class A Shares and Class T Shares. The Dealer Manager ~~may~~reallowed ~~reallow~~ all ~~or a portion~~ of its dealer manager fees to participating broker-dealers and servicing broker-dealers. The Company will not pay dealer manager fees in connection with purchases of shares made pursuant to the DRIP. Additionally, the dealer manager fee may be waived in connection with certain categories of sales.

Company did not pay dealer manager fees in connection with purchases of shares made pursuant to the DRIP. Additionally, the dealer manager fee was waived in connection with certain categories of sales. No Class T Shares were sold in the Continuous Offering.

Distribution Fees

With respect to Class T Shares that ~~are~~were ~~sold~~offered in the Continuous Offering, the Company ~~will~~would pay the Dealer Manager a distribution fee that accrues daily in an amount equal to 1/365th of 0.8% of the amount of the purchase price per share or, once reported, the NAV for the Class T Shares on a continuous basis from year to year, but only on shares purchased through the Continuous Offering. The Company ~~will~~would continue paying distribution fees with respect to Class T Shares sold in the Continuous Offering until the earlier to occur of the following: (i) a listing of the Class T Shares on a national securities exchange, (ii) following the completion of the Continuous Offering, total underwriting compensation in the Continuous Offering equaling 10% of the gross proceeds from the Continuous Offering, or (iii) such Class T Shares no longer being outstanding. The Dealer Manager may reallow all or a portion of the distribution fee to participating broker-dealers and servicing broker-dealers. The distribution fee ~~will~~would be payable monthly in arrears. The Company ~~will~~would accrue for the entire 0.8% distribution fee at the time of sale. The distribution fee ~~will~~would not be payable with respect to Class T Shares issued under the DRIP. The Company ~~will~~would not pay a distribution fee with respect to Class A Shares.

Agreement Regarding Certain Volume Discount Sales

On September 14, 2016, the Company entered into an agreement with the Advisor and the Dealer Manager whereby the Advisor ~~will~~agreed to pay a portion of the selling commissions payable to the Dealer Manager in connection with the sale of Class A Shares subject to certain volume discounts. For purchases by an investor of $1,000,001 up to $2,000,000, the Advisor ~~will~~agreed to pay a 0.5% selling commission to the Dealer Manager. For purchases by an investor of $2,000,001 up to $5,000,000, the Advisor ~~will~~agreed to pay a 1.0% selling commission to the Dealer Manager. For purchases by an investor of $5,000,001 up to $10,000,000, the Advisor ~~will~~agreed to pay the full amount of the selling commissions payable to the Dealer Manager, or 2.0% of the purchase price. For purchases by an investor of $10,000,001 or more, the Advisor ~~will~~agreed to pay the full amount of the selling commissions payable to the Dealer Manager, after taking into account the volume discount, or 1.0% of the purchase price, and the Advisor ~~will~~agreed to pay an additional 1.0% of the total purchase price to the investor, which ~~will~~was to be used to purchase additional Class A Shares at a purchase price of $9.10 per share, which reflects that no selling commissions or dealer manager fees ~~are~~were charged on such additional Class A Shares. For the three and six months ended ~~March~~June 3130, 2017, the Advisor incurred approximately $912,000 and $21,000, respectively, of selling commissions payable to the Dealer Manager in connection with the sale of Class A Shares. For the three and six months ended ~~March~~June 3130, 2016, the Advisor did not incur any selling commissions payable to the Dealer Manager in connection with the sale of Class A Shares.

Fees and Reimbursements to BH and its Affiliates

The Company, through one of its subsidiaries, has entered into a management agreement with BH Management Services, LLC (“BH”), the Company’s property manager and an independently owned third party, who manages Estates and supervises the implementation of the Company’s value-add program. BH is an affiliate of the noncontrolling interest members of the Company’s joint venture in Estates by virtue of ownership in Estates through BH’s affiliates. BH and its affiliates do not have common ownership in any joint venture with the Advisor; there is also no common ownership between BH and its affiliates and the Advisor. The property management fee paid to BH is approximately 3% of the monthly gross income from the property. Additionally, the Company may pay BH certain other fees, including: (1) a fee of $25.00 per unit for the one-time setup and inspection of properties, (2) a construction supervision fee of 5-6% of total project costs, which is capitalized, (3) acquisition fees and due diligence costs reimbursements, and (4) other owner approved fees at $55 per hour. BH also acts as a paymaster for Estates and is reimbursed at cost for various operating expenses it pays on behalf of the property. The following is a summary of fees that Estates incurred to BH and its affiliates, as well as reimbursements paid to BH from the property for various operating expenses, for the three and six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Fees incurred
Property management fees (1)	$	3031	$	2830	$	61	$	58
Construction supervision fees (2)		—2		95		2		14
Reimbursements
Payroll and benefits (3)		~~108~~86		~~106~~93		194		199
Other reimbursements (4)		1117		913		28		22

(1)

Included in property management fees on the consolidated statements of operations and comprehensive loss.

(2)

Capitalized on the consolidated balance sheets and reflected in buildings and improvements.

(3)

Included in property operating expenses on the consolidated statements of operations and comprehensive loss.

(4)

Includes property operating expenses such as repairs and maintenance costs and property general and administrative expenses, which are included on the consolidated statements of operations and comprehensive loss.

Asset Management Fee to the Company

In accordance with the operating agreement of the entity that owns Estates, the Company earns an asset management fee for services provided in connection with monitoring the operations of the property. The asset management fee is equal to 0.5% per annum of the aggregate effective gross income of the property, as defined in the operating agreement. For the three months ended ~~March~~June 3130, 2017 and 2016, Estates incurred asset management fees to the Company of less than $0.1 million and less than $0.1 million, respectively. ~~Estates~~For ~~did~~the ~~not~~six ~~incur~~months ~~any~~ended June 30, 2017 and 2016, Estates incurred asset management fees to the Company ~~for~~of ~~the~~less ~~three~~than ~~months~~$0.1 ~~ended~~million ~~March~~and 31less than $0.1 million, ~~2016~~respectively. Since the fees are paid to the Company (and not the Advisor) by a consolidated joint venture, they have been eliminated in consolidation. However, because the Company’s joint venture partners own a portion of the entity that owns Estates, they absorb their pro rata share of the asset management fee. This amount is reflected on the consolidated ~~statement~~statements of operations and comprehensive loss in the net loss attributable to noncontrolling interests.

11. Restricted Share Plan

The Company ~~has~~ adopted a restricted share plan to:

•

furnish incentives to individuals and entities chosen to receive restricted shares of the Company’s Class A common stock because they are considered capable of improving the Company’s operations and increasing profits;

•

encourage selected persons to accept or continue employment with the Advisor and its affiliates; and

•

increase the interest of the Company’s employees, officers and directors in the Company’s welfare through their participation in the growth in the value of shares of the Company’s common stock.

The Underwritten Offering Registration Statement contemplates that the restricted share plan will be terminated. Awards granted under the restricted share plan would remain outstanding upon a termination of the plan. In conjunction with the contemplated termination of the restricted share plan, the Company intends to adopt a long-term incentive plan which will authorize the compensation committee of the Board to provide equity-based compensation in the form of stock options, appreciation rights, restricted shares, restricted stock units, performance shares, performance units and certain other awards denominated or payable in, or otherwise based on, the Company’s common stock or factors that may influence the value of the Company’s common stock, plus cash incentive awards, for the purpose of providing the Company’s directors, officers and other key employees (and those of the Advisor and the Company’s subsidiaries), the Company’s non-employee directors, and potentially certain non-employees who perform employee-type functions, incentives and rewards for performance.

The Company’s restricted share plan is administered by the Board. Upon the initial release from escrow of the Minimum Offering Requirement on March 24, 2016, each of the Company’s two independent directors received a grant of 3,000 restricted shares of the Company’s Class A common stock at a fair value of $10.00 per share. On May 16, 2016, upon unanimous approval by the stockholders to re-elect the Company’s directors to the Board for a one-year term expiring in 2017, the Company granted an additional 3,000 restricted shares of its Class A common stock at a fair value of $10.00 per share to each of its two independent directors. Restricted shares of Class A common stock issued to independent directors vest in equal amounts annually over a four-year period commencing on the first anniversary of the date of grant. An additional 3,000 restricted shares of the Company’s Class A common stock will be granted to each of the Company’s independent directors upon each re-election to the Board.

On March 16, 2017, the Board nominated each of the Company’s directors for re-election to the Board for a one-year term expiring in 2018. If the re-election of the directors to the Board is approved by the stockholders at the 2017 annual meeting of the stockholders, an additional 3,000 restricted shares of the Company’s Class A common stock will automatically be granted to each of the Company’s two independent directors under the Company’s restricted share plan.

Included in corporate general and administrative expenses on the accompanying unaudited consolidated statements of operations and comprehensive loss for the three months ended ~~March~~June 3130, 2017 and 2016 is approximately $7,500 and $5,600, respectively, of compensation expense recognized, which related to the vesting periods of ~~the 6,000~~ restricted shares of Class A common stock granted to each of the Company’s two independent directors. Included in corporate general and administrative expenses on the accompanying unaudited consolidated statements of operations and comprehensive loss for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016 is approximately $~~330~~15,000 and $6,000, respectively, of compensation expense recognized, which related to the vesting period of ~~the 3,000~~ restricted shares of Class A common stock granted to each of the Company’s two independent directors. The weighted average remaining term of the restricted Class A common stock is 31.0581 years as of ~~March~~June 3130, 2017.

3234

A summary of the Company’s restricted Class A common stock activities during the ~~three~~six months ended ~~March~~June 3130, 2017 is as follows:

	2017
	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding January 1,		12,000		$	10.00
Granted		—			—
Vested		1(3,~~500~~000	)		10.00
Forfeited		—			—
Outstanding March 31,		10,500		$	10.00
Outstanding June 30,		9,000		$	10.00

As of ~~March~~June 3130, 2017, the Company had issued 13,~~500~~000 shares of its Class A common stock under the restricted share plan.

12. Economic Dependency

The Company is dependent on the Advisor ~~and the Dealer Manager~~ for certain services that are essential to the Company, including ~~the sale of the Company’s shares of common stock,~~ asset acquisition and disposition decisions and other general and administrative responsibilities. In the event that the Advisor ~~and~~is ~~the Dealer Manager are~~ unable to provide such services, the Company would be required to find an alternative ~~service providers~~advisor.

13. Commitments and Contingencies

Commitments

The Company may enter into various rehabilitation construction-related purchase commitments with parties that provide these goods and services. In the event the Company were to terminate rehabilitation construction services prior to the completion of projects, the Company could potentially be committed to satisfy outstanding or uncompleted purchase orders with such parties. As of ~~March~~June 3130, 2017, the Company had not entered into any commitments with any parties.

Contingencies

In the normal course of business, the Company may become subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain the ultimate outcome of any such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the balance sheet of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company. Additionally, subject to the limitations on reimbursements to the Advisor and its affiliates of organization and offering expenses and operating and administrative expenses paid on the Company’s behalf, the Company may owe the Advisor or its affiliates payments in the future.

14. Subsequent Events

~~Status~~As of August 10, ~~Our~~2017, ~~Offering~~the Company had issued a total of 1,133,334 shares of Class A common stock and 0 shares of Class T common stock.

As of May 11, 2017, the Company had issued a total of 1,120,508 shares of Class A common stock and 0 shares of Class T common stock.

Distributions Paid

On ~~April~~July 3, 2017, the Company paid distributions of approximately $5355,400, which related to distributions declared for each day in the period from ~~March~~June 1, 2017 through ~~March~~June 3130, 2017 and consisted of cash distributions paid in the amount of approximately $159,~~000~~400 and approximately $3846,~~400~~000 in Class A Shares issued pursuant to the DRIP.

On ~~May~~August 13, 2017, the Company paid distributions of approximately $5457,~~300~~500, which related to distributions declared for each day in the period from ~~April~~July 1, 2017 through ~~April~~July 3031, 2017 and consisted of cash distributions paid in the amount of approximately $1057,~~700~~500 and ~~approximately~~ $~~43,600~~0 in Class A Shares issued pursuant to the DRIP.

Authorized Distributions

On ~~May~~August 1110, 2017, the Board approved and authorized the declaration of a daily distribution to the Company’s Class A stockholders of record as of the close of business on each day of the period commencing on ~~July~~October 1, 2017 and ending ~~September~~December 3031, 2017. The distributions will be calculated based on 365 days in the calendar year and will be equal to $0.00164 per share of Class A common stock per day. Distributions for all record dates of a given month will be paid approximately three days following month end. The distributions will be payable to stockholders from legally available funds therefor.

33Termination of the Continuous Offering

On July 21, 2017, the Company filed a post-effective amendment to the Registration Statement to terminate the Continuous Offering and deregister all of its unsold shares of Class A common stock ~~per~~and ~~day~~Class T common stock. ~~Distributions~~The ~~for~~post-effective ~~all~~amendment ~~record~~was ~~dates~~declared effective by the SEC on July 26, 2017. In connection with the termination of the Continuous Offering, the DRIP was also terminated. As a ~~given~~result ~~month~~of ~~will~~the betermination ~~paid~~of ~~approximately~~the ~~three~~DRIP, ~~days~~beginning ~~following~~with the distributions declared by the Board for the month ~~end.~~of ~~The~~July 2017, and continuing until such time as the Board may approve the resumption of the DRIP, if ever, all distributions declared by the Board will be ~~payable~~paid to the Company’s stockholders ~~from~~in ~~legally~~cash. ~~available~~Through ~~funds~~July ~~therefor~~26, 2017, the Company issued an aggregate of 1,108,112 Class A Shares and 0 Class T Shares in the Continuous Offering.

~~Extension~~On July 21, 2017, the Company filed the Underwritten Offering Registration Statement to register shares of ~~Credit~~its ~~Facility~~common stock to be sold in the Underwritten Offering. At the same time, the Company filed a post-effective amendment to terminate the Continuous Offering. For additional information regarding the Continuous Offering, see Note 1. There can be no assurance that the Company will be able to complete the Underwritten Offering. While the Underwritten Offering Registration Statement has been filed with the SEC, it has not yet been declared effective by the SEC. The common stock to be registered pursuant to the Underwritten Offering Registration Statement may not be sold nor may offers to buy be accepted prior to the time the Underwritten Offering Registration Statement becomes effective. Any disclosure concerning the Underwritten Offering is neither an offer nor a solicitation to purchase the Company’s securities.

OnRenewal ~~April 7, 2017, the OP and the Sponsor amended the Credit Facility (the “Second Amendment”) to extend the maturity date to June 30, 2017 and terminate the revolving feature~~ of ~~the~~Advisory ~~Credit Facility. The Company paid an amendment fee of $27,500 in connection with the Second Amendment.~~Agreement

34On August 10, 2017, the Board, including the independent directors, unanimously approved the renewal of the Advisory Agreement with the Advisor for a one-year term that expires on August 10, 2018.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our consolidated financial statements and accompanying notes. As used herein, the terms “we,” “our” and “us” refer to NexPoint Multifamily Capital Trust, Inc., a Maryland corporation, and, as required by context, NexPoint Multifamily Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the “OP,” and to its subsidiaries. Unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our consolidated financial statements and accompanying notes included in this quarterly report.

Forward-Looking Statements

Certain statements included in this quarterly report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” “predicts” or “potential,” or by the negative of these words and phrases, or by similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements contained herein reflect our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock.

For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2016 (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2017. We disclaim any obligation to publicly update or revise any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Overview

We are a Maryland corporation incorporated on November 12, 2013 that intends to elect to be taxed as a real estate investment trust (“REIT”) ~~unless~~beginning wewith doour ~~not~~2017 ~~meet~~tax ~~the qualifications to be taxed as a REIT~~year. We are primarily focused on directly or indirectly acquiring, owning, and operating well-located “core” and “core-plus” multifamily properties in large cities and suburban markets of large cities, primarily in the Southeastern and Southwestern United States. We are also focused on originating preferred equity investments with operators of well-located “core” and “core-plus” multifamily properties. Investing in both direct property investments and preferred equity investments is designed to minimize potential losses during market downturns and maximize risk adjusted total returns to our stockholders in all market cycles. To the extent practical, we implement a modest value-add component on “core-plus” properties that consists, on average, of investing $1,000 - $4,000 per unit in the first 24-36 months of ownership, in an effort to add value to the asset’s exterior and interior. Our modest value-add program is implemented at the direction and supervision of our advisor. We may also seek to invest in multifamily housing debt and mezzanine debt in situations where the risk/return correlation is more attractive than direct investments in common equity and originations of preferred equity investments. We may also invest in common and preferred stock of both publicly traded and private real estate companies.

On August 12, 2015, ~~the~~our ~~SEC~~registration ~~declared~~statement ~~effective~~on ~~our~~Form S-11 (File No. 333-200221) (the “Registration Statement”) tofor ~~offer~~ a ~~maximum~~continuous offering of upa tomaximum of $1.1 billion ~~in shares~~ of common stock, $0.01 par value per share (the “Continuous Offering”), which ~~consists~~consisted of ~~up to~~ $1.0 billion in shares of common stock in our primary offering and ~~up to~~ $100 million in shares of common stock pursuant to our distribution reinvestment plan (the “DRIP”)~~. We are publicly offering two classes of shares of common stock~~, ~~Class~~was Adeclared ~~shares~~effective ~~and~~by ~~Class T shares, in any combination up to~~ the ~~maximum~~SEC ~~offering~~under ~~amount. The share classes have different selling commissions, and there will be an ongoing distribution fee with respect to~~ the ~~primary~~Securities ~~offering of Class T shares~~Act. The initial offering price for the shares sold in the primary offering iswas $10.00 per Class A share of common stock and $9.58 per Class T share. ~~We reserve the right to reallocate the shares~~ of common stock. weThe ~~are~~initial offering ~~between~~price ~~our~~for ~~primary~~the ~~offering~~shares ~~and~~sold ~~our~~in the DRIP was $9.50 Weper ~~are~~Class ~~also~~A ~~offering~~share upof tocommon stock and $~~100~~9.10 ~~million~~per inClass ~~shares~~T share of common stock. ~~pursuant~~Highland toCapital ~~our~~Funds ~~DRIP~~Distributor, atInc. an(the ~~initial~~“Dealer ~~price~~Manager”), ofan ~~$9.50~~entity ~~per~~under ~~Class~~common Aownership ~~share~~with ~~and~~our ~~$9.10~~advisor, ~~per~~served ~~Class~~as Tthe ~~share,~~dealer ~~which~~manager ~~is 95%~~ of the ~~primary~~Continuous ~~offering price~~Offering.

3537

Through July 26, 2017, we sold shares of Class A common stock and Class T common stock pursuant to the Continuous Offering carried out in a manner consistent with offerings of non-listed REITs. On July 21, 2017, we filed a post-effective amendment to the Registration Statement to terminate the Continuous Offering and deregister all of our unsold shares of Class A common stock and Class T common stock. The post-effective amendment was declared effective by the SEC on July 26, 2017. On July 21, 2017, we filed a registration statement on Form S-11 (the "Underwritten Offering Registration Statement") to register shares of our common stock to be sold in an underwritten public offering (the "Underwritten Offering"). There can be no assurance that we will be able to complete the Underwritten Offering.

Upon a successful completion of the Underwritten Offering, we will change our strategy and primarily focus on originating and structuring preferred equity investments, alternative structured financing investments, mezzanine debt, bridge financing and first mortgage loans in properties benefiting from significant tenant diversification and short-term lease structures, including multifamily, storage and select-service and extended-stay hospitality properties. We will intend to target our structured financings in stabilized and well located properties, primarily located in large cities and suburban markets of large cities in the United States, which have been well-maintained, have few deferred maintenance issues and are owned by experienced and high quality operators. We expect the size of our investments will vary significantly, but generally expect them to range in value from $5 million to $20 million. The primary investment objectives will be to provide long-term, superior risk-adjusted total returns on our investments through all market cycles, provide attractive current income to stockholders through quarterly cash distributions and preserve and return capital contributions. We believe that these investment opportunities best meet our primary investment objectives as they contractually provide a high percentage of total return from current pay, are structured to mitigate impairments in the investments, and potentially provide equity-like, long-term total return opportunities, with lower risk than a typical direct equity investment in real estate.

NexPoint Real Estate Advisors II, L.P. (the “Advisor”) is our advisor. Subject to certain restrictions and limitations, the Advisor manages our day-to-day operations and our portfolio of properties and real estate-related assets. The Advisor and its personnel have no obligation to, but may present us with investment opportunities with a purchase price of less than $10.0 million. The Advisor’s investment committee may purchase on our account, without specific prior approval of our board of directors (the “Board”), assets with a purchase price of $15.0 million or less, so long as the investment in the asset would not, if consummated, violate our investment guidelines or any restrictions on indebtedness and the consideration to be paid for such assets does not exceed the fair market value of such assets. Any investment with a purchase price greater than $15.0 million or that, if consummated, would violate our investment guidelines or any restrictions on indebtedness, requires the approval of the Board, including approval by a majority of the independent directors.

Pursuant to the terms of our Continuous Offering, offering proceeds were held in an escrow account until we met the minimum offering amount of $2.0 million. On March 24, 2016, we raised the minimum offering amount and the Continuous Offering proceeds held in escrow were released to us. As of ~~March~~June 3130, 2017, we had issued 1,~~034~~103,~~099~~268 shares of Class A common stock in our Continuous Offering, which consisted of the issuance of 434,783 shares to acquire a 95% interest in Estates on Maryland (“Estates”) and the issuance of ~~599~~668,~~316~~485 shares, including 2943,~~843~~456 shares issued pursuant to the DRIP, resulting in gross offering proceeds of approximately $56.52 million plus the 95% ownership interest in Estates, including approximately $~~283~~412,~~500~~700 of distributions reinvested through the DRIP. In connection with our incorporation and prior to the effectiveness of the Continuous Offering, we sold approximately 22,222 shares of our common stock to the Advisor for an aggregate purchase price of $200,000, at $9.00 per share, reflecting the fact that selling commissions and dealer manager fees in effect at the time of the purchase were not paid in connection with the sale. These shares were subsequently renamed as shares of Class A common stock. The Advisor or any affiliate may not sell these shares while Highland Capital Management, L.P. (the “Sponsor”) remains our sponsor but it may transfer the shares to other affiliates. We will offer shares of our common stock in the Offering on a continuous basis until August 12, 2018. However, in certain states the Offering may continue for only one year unless we renew the offering period for an additional year. We reserve the right to terminate our Offering at any time.

On January 26, 2017, we sold 125 shares of 12.5% Series A Cumulative Non-Voting Preferred Stock, $0.01 par value per share (the “Series A Preferred Shares”), for $1,000 per Series A Preferred Share, pursuant to a private placement that was exempt from registration pursuant to Rule 506(b) of Regulation D under the Securities Act, to 125 “accredited investors,” as such term is defined in Rule 501(a) of Regulation D under the Securities Act for aggregate gross proceeds of $125,000 (the “Private Offering”). We paid approximately $6,250 in commissions in connection with the sale of the Series A Preferred Shares in the Private Offering. We did not use general solicitation or advertising to market the Series A Preferred Shares. The outstanding Series A Preferred Shares are subject to redemption, at our election. In addition, the Series A Preferred Shares have a distribution and liquidation preference senior to our shares of common stock.

Substantially all of our assets are held by the OP. We are the sole general partner and a limited partner of the OP. The special limited partner of the OP is the Advisor. If the OP requires additional funds at any time in excess of capital contributions made by us or from borrowing, we will borrow funds from a financial institution or other lender and lend such funds to the OP on the same terms and conditions as would be applicable to our borrowing of such funds. The limited partnership agreement of the OP provides that the OP be operated in a manner that will enable us to (1) satisfy the requirements for qualifying as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability (with the exception of federal income tax incurred on activities conducted through a taxable REIT subsidiary) and (3) ensure that the OP will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), which classification could result in the OP being taxed as a corporation.

As we accept subscriptions for shares, we will transfer substantially all of the proceeds of the Offering, net of offering costs, to the OP as a capital contribution, however, we will be deemed to have made capital contributions in the amount of the gross offering proceeds received from investors. The OP will be deemed to have simultaneously paid the costs associated with the Offering. If the OP requires additional funds at any time in excess of capital contributions made by us or from borrowing, we will borrow funds from a financial institution or other lender and lend such funds to the OP on the same terms and conditions as would be applicable to our borrowing of such funds. The limited partnership agreement of the OP provides that the OP be operated in a manner that will enable us to (1) satisfy the requirements for qualifying as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability (with the exception of federal income tax incurred on activities conducted through a taxable REIT subsidiary) and (3) ensure that the OP will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), which classification could result in the OP being taxed as a corporation. We will experience a relative increase in liquidity as additional subscriptions for shares of our common stock are received and a relative decrease in liquidity as offering proceeds are used to acquire and operate our assets.38

We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Code ~~and~~beginning ~~expect~~with toour ~~qualify~~2017 astax ~~a REIT~~year. To qualify as a REIT, we must meet a number of organizational and operational requirements, including requirements to pass the “closely-held test” (in order for us to qualify as a REIT, no more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year, beginning with the last half of 2018 assuming a valid 2017 REIT election, which we refer to as the “closely-held test”) and to distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. We believe we operate in such a manner so as to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.

that we will operate in a manner so as to qualify as a REIT. If we believe we will not meet the qualifications to be taxed as a REIT, we will not make the election to be taxed as a REIT.

Components of Our Revenues and Expenses

Revenues

Rental income. Rental income includes rental revenue from our multifamily properties. We anticipate that the leases we enter into for our multifamily properties will typically be for one year or less.

Other income. Other income includes ancillary income earned from tenants such as application fees, late fees, laundry fees, utility reimbursements, and other rental related fees charged to tenants.

Expenses

Property operating expenses. Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities and other property operating costs.

Acquisition costs. Acquisition costs include the costs to acquire additional properties. On January 1, 2017, we adopted Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business (“ASU 2017-01”), which requires an entity to capitalize acquisition costs associated with an acquisition that is determined to be an acquisition of an asset as opposed to an acquisition of a business. Prior to our adoption of ASU 2017-01, acquisition costs were expensed as incurred. We believe most future acquisition costs will be capitalized in accordance with ASU 2017-01 (see Note 2 to our consolidated financial statements).

Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property.

Property management fees. Property management fees include fees paid to our property manager, BH Management Services, LLC (“BH”), or other third party management companies for managing each property.

Asset management fees. Asset management fees include the fees paid to our Advisor for managing our assets pursuant to the Advisory Agreement.

Corporate general and administrative expenses. Corporate general and administrative expenses include, but are not limited to, audit, legal, filing and tax fees, directors’ and officers’ liability insurance and board of director fees. We will also reimburse the Advisor for its costs of providing administrative services and operating expenses incurred on our behalf, subject to the limitation that we will not reimburse the Advisor for any amount by which our operating expenses at the end of the four preceding fiscal quarters exceed the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period (the “2%/25% Guidelines”) (see Note 10 to our consolidated financial statements). We may reimburse the Advisor for expenses in excess of the 2%/25% Guidelines if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors.

Fees to affiliates. Fees to affiliates include, but are not limited to, acquisition and disposition fees paid to our Advisor on qualifying assets that are acquired or sold, subject to certain limitations. For more information regarding fees to affiliates, see Note 10 to our consolidated financial statements.

Organization expenses. We will reimburse the Advisor and its affiliates for organization expenses incurred on our behalf in connection with our formation and the Offering, but only to the extent the reimbursement would not exceed 1.0% of the gross offering proceeds at any point in time. The Advisor is responsible for the payment of organization expenses we incur in excess of 1.0% of the gross offering proceeds. Organization expenses include, but are not limited to legal, accounting, printing, mailing and filing fees.39

Organization expenses. We will reimburse the Advisor and its affiliates for organization expenses incurred on our behalf in connection with our formation and the Continuous Offering, but only to the extent the reimbursement does not exceed 1.0% of the gross offering proceeds received in the Continuous Offering. The Advisor is responsible for the payment of organization expenses we incur in excess of 1.0% of the gross offering proceeds. Organization expenses include, but are not limited to legal, accounting, printing, mailing and filing fees.

Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property.

Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases.

Other Income and Expense

Interest expense. Interest expense costs primarily includes the cost of interest expense on debt and the amortization of deferred financing costs.

Equity in income of preferred equity investments. Equity in income of preferred equity investments includes income earned on a stated investment return from preferred equity investments we originate. Equity in income on our preferred equity investments is recorded under the equity method of accounting.

Results of Operations for the Three and Six Months Ended ~~March~~June 3130, 2017 and 2016

On August 12, 2015, the SEC declared effective our ~~registration statement on Form S-11 (~~Registration ~~No. 333-200221) related to the Offering~~Statement, as described above. We had no operating activities before August 12, 2015. In accordance with U.S. generally accepted accounting principles (“GAAP”), our acquisition of Estates on April 7, 2016 was determined to be a combination of entities under common control. As such, the acquisition of Estates was deemed to be made on the date it was purchased by our Sponsor, which was August 5, 2015 (the “Original Acquisition Date”). In the accompanying unaudited consolidated financial statements, operations are shown from the Original Acquisition Date, although we did not commence material operations until March 24, 2016, the date we broke escrow in the Continuous Offering, enabling us to commence material operations. On August 19, 2016, we originated a preferred equity investment in Overlook at Stone Oak Park (fka Springs at Stone Oak Village), a multifamily property.

As of ~~March~~June 3130, 2017, we owned a majority interest in one multifamily property, Estates on Maryland, that encompasses 330 units of apartment space that was approximately 9593.23% leased with an average monthly effective rent per occupied unit of $~~954~~963; we also had one preferred equity investment in a multifamily property, Overlook at Stone Oak Park (fka Springs at Stone Oak Village), that was approximately 8691.97% leased with an average monthly effective rent per occupied unit of $1,~~094~~095. Our preferred equity investment has a minimum monthly preferred return of 8.0% annualized and an additional preferred return of 3.0% annualized, which accrues monthly on a compounding basis if not paid. Our preferred equity investment is accounted for under the equity method of accounting.

The following table sets forth a summary of our operating results for the three and six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Total revenues	$	~~997~~1,027		$	~~930~~976		$	2,024		$	1,906
Total expenses		1,~~195~~135			1,~~064~~229			2,330			2,293
Operating loss		(~~198~~108	)		(~~134~~253	)		(306	)		(387	)
Interest expense		(~~368~~358	)		(~~282~~368	)		(726	)		(650	)
Equity in income of preferred equity investment		~~143~~145			—166			288			166
Net loss		(~~423~~321	)		(~~416~~455	)		(744	)		(871	)
Net loss attributable to noncontrolling interests		(1	)		(7	)
Net income (loss) attributable to noncontrolling interests		1			1			—			(6	)
Distributions declared to Series A preferred stockholders		(3	)		—
Net income attributable to Series A preferred stockholders		4			—			7			—
Net loss attributable to common stockholders	$	(~~425~~326	)	$	(~~409~~456	)	$	(751	)	$	(865	)

The change in our net loss for the three months ended ~~March~~June 3130, 2017 as compared to the net loss for the three months ended ~~March~~June 3130, 2016 primarily relates to ~~the realization of equity in income on our preferred equity investment and~~ a decrease in ~~depreciation~~corporate general and ~~amortization~~administrative expenses during the period in 2017,. ~~and~~The ~~was~~change ~~partially offset by increases~~ in ~~asset~~our ~~management~~net ~~fees,~~loss ~~corporate~~for ~~general~~the ~~and~~six ~~administrative~~months ~~expenses~~ended ~~and~~June ~~interest~~30, ~~expense.~~2017 Weas ~~did~~compared ~~not~~to ~~have~~the ~~any~~net ~~preferred~~loss ~~equity~~for ~~investments~~the orsix ~~incur~~months ~~any~~ended ~~asset~~June ~~management~~30, ~~fees~~2016 ~~during~~primarily ~~the~~relates ~~period~~to ~~in 2016.~~

Our results of operations for the three months ended March 31, 2017 and 2016 are not indicative of those expected in future periods. We expect to continue to raise additional capital, increase our borrowings and make future investments, which would have a significant impact on our future results of operations. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of anticipated future acquisitions of multifamily properties and originations of preferred equity investments.40

an increase in the realization of equity in income on our preferred equity investment during the period in 2017, and was partially offset by increases in asset management fees and interest expense.

Our results of operations for the three and six months ended June 30, 2017 and 2016 are not indicative of those expected in future periods. We expect to raise additional capital, increase our borrowings and make future investments, which would have a significant impact on our future results of operations. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of anticipated future investments.

Revenues

Rental income. Rental income ~~was~~remained flat at $0.9 million for the three months ended ~~March~~June 3130, 2017 compared to $0.89 million for the three months ended ~~March~~June 3130, 2016,. ~~which~~Rental income was an$1.8 ~~increase~~million offor ~~approximately~~the ~~$0.1~~six ~~million.~~months Weended ~~expect~~June ~~rental~~30, ~~income~~2017 compared to ~~increase~~$1.7 inmillion ~~future~~for ~~periods~~the assix amonths ~~result~~ended ofJune ~~future~~30, ~~acquisitions~~2016, which was an increase of ~~multifamily~~approximately ~~properties~~$0.1 million.

38Other income. Other income remained flat at $0.1 million for the three months ended June 30, 2017 compared to $0.1 million for the three months ended June 30, 2016. Other income remained flat at $0.2 million for the six months ended June 30, 2017 compared to $0.2 million for the six months ended June 30, 2016.

Other income. Other income was $0.1 million for the three months ended March 31, 2017 compared to $0.1 million for the three months ended March 31, 2016, which was an increase of less than $0.1 million. We expect other income to increase in future periods as a result of future acquisitions of multifamily properties.

Expenses

Property operating expenses. Property operating expenses ~~were~~remained flat at $0.2 million for the three months ended ~~March~~June 3130, 2017 compared to $0.2 million for the three months ended ~~March~~June 3130, 2016,. ~~which~~Property ~~was~~operating anexpenses ~~increase~~were ~~of less than~~ $0.15 million. Wefor ~~expect~~the ~~property~~six ~~operating~~months ~~expenses~~ended June 30, 2017 compared to ~~increase~~$0.4 inmillion ~~future~~for ~~periods~~the assix amonths ~~result~~ended ofJune ~~future~~30, ~~acquisitions~~2016, which was an increase of ~~multifamily~~less ~~properties~~than $0.1 million.

Real estate taxes and insurance. Real estate taxes and insurance costs ~~were~~remained flat at $0.1 million for the three months ended ~~March~~June 3130, 2017 compared to $0.1 million for the three months ended ~~March~~June 3130, 2016,. ~~which~~Real ~~was~~estate antaxes ~~increase~~and ofinsurance ~~less~~costs ~~than~~remained flat at $0.12 million for the six months ended June 30, 2017 compared to $0.2 million for the six months ended June 30, 2016. The costs for property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the costs of real estate taxes. ~~We expect real estate taxes and insurance costs to increase in future periods as a result of future acquisitions of multifamily properties.~~

Property management fees. Property management fees ~~were~~remained flat at less than $0.1 million for the three months ended ~~March~~June 3130, 2017 compared to less than $0.1 million for the three months ended ~~March~~June 3130, 2016,. ~~which~~Property ~~was~~management anfees ~~increase~~remained offlat ~~less~~at ~~than~~ $0.1 million. Wefor ~~expect~~the ~~property~~six ~~management~~months ~~fees~~ended toJune ~~increase~~30, in2017 ~~future~~compared ~~periods~~to as$0.1 ~~a result~~million offor ~~future~~the ~~acquisitions~~six ofmonths ~~multifamily~~ended ~~properties~~June ~~and increases in rental income and other income~~30, ~~which the fee is primarily based on~~2016.

Asset management fees. Asset management fees ~~were~~remained flat at $0.1 million for the three months ended ~~March~~June 3130, 2017 compared to $0.1 Wemillion ~~did~~for ~~not~~the ~~incur~~three ~~any~~months ~~asset~~ended June 30, 2016. Asset management fees ~~during~~were $0.2 million for the ~~three~~six months ended ~~March~~June 3130, ~~2016~~2017 ascompared weto ~~did~~$0.1 ~~not~~million ~~have~~for ~~any~~the ~~real~~six ~~estate~~months ~~assets~~ended ~~during~~June ~~the~~30, ~~period~~2016, which was an increase of approximately $0.1 million. We ~~expect~~did not incur any asset management fees toduring ~~increase~~the inthree ~~future~~months ~~periods~~ended asMarch a31, ~~result~~2016 ofas ~~future~~we ~~acquisitions~~did ofnot ~~multifamily~~have ~~properties~~any ~~and~~real ~~originations~~estate ofassets ~~preferred~~during ~~equity~~the ~~investments~~period.

Corporate general and administrative expenses. Corporate general and administrative expenses were $0.32 million for the three months ended ~~March~~June 3130, 2017 compared to $0.24 million for the three months ended ~~March~~June 3130, 2016, which was ana ~~increase~~decrease of approximately $0.12 million. WeThe ~~expect~~decrease ~~corporate~~between the periods primarily relates to one-time audit, legal and filing fees incurred in 2016 related to our acquisitions of Estates and the preferred equity investment in Bell Midtown in April 2016. Corporate general and administrative expenses ~~will~~remained ~~increase~~flat inat ~~future~~$0.5 ~~periods~~million asfor athe ~~result~~six ofmonths ~~future~~ended ~~acquisitions~~June of30, ~~multifamily~~2017 ~~properties~~compared ~~and~~to ~~originations~~$0.5 ofmillion ~~preferred~~for ~~equity~~the ~~investments~~six months ended June 30, 2016.

Organization expenses. Organization expenses ~~were~~remained flat at less than $0.1 million for the three months ended ~~March~~June 3130, 2017 compared to less than $0.1 million for the three months ended ~~March~~June 3130, 2016,. ~~which~~Organization ~~was~~expenses aremained ~~decrease~~flat ofat less than $0.1 million. Wefor ~~expect~~the ~~recognition~~six ofmonths ~~organization~~ended ~~expenses~~June 30, 2017 compared to ~~increase~~less inthan ~~future~~$0.1 ~~periods~~million asfor athe ~~result~~six ofmonths ~~receiving~~ended ~~gross~~June ~~offering~~30, ~~proceeds~~2016.

Property general and administrative expenses. Property general and administrative expenses were ~~less than~~ $0.1 million for the three months ended ~~March~~June 3130, 2017 compared to less than $0.1 million for the three months ended ~~March~~June 3130, 2016, which was an increase of less than $0.1 million. WeProperty ~~expect property~~ general and administrative expenses toremained ~~increase~~flat inat ~~future~~$0.1 ~~periods~~million asfor athe ~~result~~six ofmonths ~~future~~ended ~~acquisitions~~June of30, ~~multifamily~~2017 ~~properties~~compared to $0.1 million for the six months ended June 30, 2016.

Depreciation and amortization. Depreciation and amortization costs were $0.4 million for the three months ended ~~March~~June 3130, 2017 compared to $0.53 million for the three months ended ~~March~~June 3130, 2016, which was aan ~~decrease~~increase of ~~approximately~~less than $0.1 million. WeDepreciation ~~expect depreciation~~ and amortization costs were $0.8 million for the six months ended June 30, 2017 compared to ~~increase~~$0.9 inmillion ~~future~~for ~~periods~~the assix amonths ~~result~~ended ofJune ~~future~~30, ~~acquisitions~~2016, which was a decrease of ~~multifamily~~approximately ~~properties~~$0.1 million.

Other Income and Expense

Interest expense. Interest expense costs ~~were~~remained flat at $0.4 million for the three months ended ~~March~~June 3130, 2017 compared to $0.34 million for the three months ended ~~March~~June 3130, 2016,. ~~which~~Interest ~~was~~expense ancosts ~~increase~~remained offlat ~~approximately~~at $0.17 million. Wefor ~~expect~~the ~~interest~~six ~~expense~~months ~~costs~~ended toJune ~~increase~~30, in2017 ~~future~~compared ~~periods as a result of future increases in debt~~ to ~~fund~~$0.7 ~~acquisitions~~million offor ~~multifamily~~the ~~properties~~six ~~and~~months ~~originations~~ended ofJune ~~preferred~~30, ~~equity investments~~2016. The following is a table that details the various costs included in interest expense for the three and six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Interest on debt	$	~~309~~335	$	~~270~~316	$	644	$	586
Amortization of deferred financing costs		5922		1252		81		64
Total	$	368	$	282
Interest rate cap expense		1		—		1		—
Total	$	358	$	368	$	726	$	650

39Equity in income of preferred equity investment. Equity in income of preferred equity investment was $0.1 million for the three months ended June 30, 2017 compared to $0.2 million for the three months ended June 30, 2016, which was a decrease of less than $0.1 million. Equity in income of preferred equity investment was $0.3 million for the six months ended June 30, 2017 compared to $0.2 million for the six months ended June 30, 2016, which was an increase of approximately $0.1 million.

~~Equity~~Non-GAAP inand ~~income~~Key ofFinancial ~~preferred~~Measures ~~equity~~and investment. Equity in income of preferred equity investment was $0.1 million for the three months ended March 31, 2017. We did not have any preferred equity investments during the three months ended March 31, 2016. We expect equity in income of preferred equity investments to increase in future periods as a result of future originations of preferred equity investments.Indicators

~~Non-GAAP~~In ~~Measures~~connection with our contemplated new strategy, we believe the key financial measures and indicators for our business will be net operating income for real estate owned (“NOI”), funds from operations (“FFO”), Core Earnings, cash available for distributions (“CAD”), adjusted cash available for distributions (“ACAD”) and adjusted book value per share.

~~Net~~We ~~Operating~~believe ~~Income~~providing NOI, FFO, Core Earnings, CAD and ACAD, which are non-GAAP measures of performance, on a supplemental basis to our net income (loss) as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business. We believe that adjusted book value per share, which is a non-GAAP measure, is helpful to stockholders in evaluating the growth of our company as we grow our equity capital base and make future investments. The key financial measures and indicators should not be considered as a substitute for GAAP measures. We caution that our methodology for calculating these key financial measures and indicators may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported key financial measures and indicators may not be comparable to similar measures presented by other REITs.

Net Operating Income (“NOI”) is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties to other comparable properties, to determine trends in earnings and to compute the fair value of our properties as NOI is not affected by (1) the cost of funds, (2) acquisition costs, (3) non-operating fees to affiliates, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (5) corporate general and administrative expenses, (6) other gains and losses that are specific to us, (7) equity in income recognized on unconsolidated joint ventures, and (8) expenses that are not reflective of the ongoing operations of the properties or are incurred on our behalf at the property for ~~expenses~~Real ~~such~~Estate ~~as legal, professional and franchise tax fees.~~Owned

~~The~~NOI ~~cost of funds~~ is ~~eliminated~~a ~~from~~non-GAAP ~~net~~financial ~~income~~measure ~~(loss)~~used ~~because~~to itmeasure isperformance ~~specific~~for to our ~~particular~~direct ~~financing~~property ~~capabilities~~interests. ~~and~~We ~~constraints.~~believe ~~The~~that ~~cost~~NOI ofprovides ~~funds~~meaningful isinformation ~~also~~that ~~eliminated~~is ~~because~~used itby isinvestors, ~~dependent~~analysts onand ~~historical~~our ~~interest~~management ~~rates~~to evaluate and ~~other~~compare ~~costs~~the performance of ~~capital~~our asproperties ~~well~~to asother ~~past~~comparable ~~decisions~~properties, ~~made~~to bydetermine ustrends ~~regarding~~in earnings and to compute the ~~appropriate~~fair ~~mix~~value of ~~capital,~~our ~~which~~properties ~~may~~as ~~have~~NOI ~~changed~~is ornot ~~may~~affected ~~change~~by in(1) the ~~future.~~cost ~~Acquisition~~of funds, (2) acquisition costs, ~~and~~(3) non-operating fees to affiliates, ~~are~~(4) ~~eliminated~~the ~~because~~impact ~~they do not reflect continuing operating costs~~ of ~~the~~depreciation ~~property owner. Depreciation~~ and amortization expenses as well as gains or losses from the sale of operating real estate assets ~~are eliminated because they may not accurately represent the actual change in value in our multifamily properties~~ that ~~result~~are ~~from~~included ~~use of the properties or changes~~ in ~~market~~net ~~conditions.~~income ~~While~~computed ~~certain aspects of real property do decline~~ in ~~value~~accordance ~~over~~with ~~time~~GAAP, in(5) acorporate ~~manner~~general ~~that is reasonably captured by depreciation~~ and ~~amortization~~administrative expenses, ~~the~~(6) ~~value~~other ofgains ~~the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains~~ and losses ~~from~~that ~~the sale of real property vary from property to property and~~ are ~~affected~~specific ~~by market conditions at the time of sale, which will usually change from period~~ to period. Equity in income from unconsolidated joint ventures is eliminated because the income recognized may not accurately reflect the change in value of our investments in unconsolidated joint ventures from changes in the underlying investments’ results of operations or changes in market conditions; furthermoreus, we(7) ~~evaluate~~ equity in income recognized ~~from~~on unconsolidated joint ventures, asand ~~its own reportable segment~~ (~~see Note 3 to our consolidated financial statements~~8). ~~Entity level general and administrative~~ expenses ~~are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our joint venture ownership structuring. Also, expenses~~ that are ~~incurred upon acquisition of a property do~~ not ~~reflect~~reflective ~~continuing operating costs~~ of the ~~property~~ongoing ~~owner.~~operations ~~These~~of ~~gains and losses can create distortions when comparing one period to another or when comparing our operating results to~~ the ~~operating~~properties ~~results of other real estate companies that have not made similarly timed purchases~~ or ~~sales.~~are Weincurred ~~believe~~on ~~that~~our ~~eliminating~~behalf ~~these~~at ~~items from net income (loss) is useful because~~ the ~~resulting~~property ~~measure~~for ~~captures the actual ongoing revenue generated and actual~~ expenses ~~incurred~~such ~~in operating our properties~~ as ~~well as trends in occupancy rates~~legal, ~~rental~~professional ~~rates~~ and ~~operating~~franchise ~~costs~~tax fees.

However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, interest income and other expense, acquisition costs, certain fees to affiliates, depreciation and amortization expense, gains or losses from the sale of properties, equity in income from unconsolidated joint ventures, other gains and losses as stipulated by GAAP, and the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs or factors. NOI may fail to capture significant trends in these components of net income (loss) which further limits its usefulness.

NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

40However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, interest income and other expense, acquisition costs, certain fees to affiliates, depreciation and amortization expense, gains or losses from the sale of properties, equity in income from unconsolidated joint ventures, other gains and losses as stipulated by GAAP, and the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs or factors. NOI may fail to capture significant trends in these components of net income (loss) which further limits its usefulness.

NOI for the Three Months Ended March 31, 2017 and 2016

The following table, which has not been adjusted for the effects of any noncontrolling interests, reconciles our NOI for the three months ended March 31, 2017 and 2016 to net loss, the most directly comparable GAAP financial measure (in thousands):

	For the Three Months Ended March 31,
	2017			2016
Net loss	$	(423	)	$	(416	)
Adjustments to reconcile net loss to NOI:
Asset management fees		86			—
Corporate general and administrative expenses		289			155
Organization expenses		7			15
Property general and administrative expenses (1)		1			1
Depreciation and amortization		389			523
Interest expense		368			282
Equity in income of preferred equity investment		(143	)		—
NOI	$	574		$	560

(1) Adjustment to net loss excludes expenses that are not reflective of the ongoing operations of the property or were incurred on our behalf at the property for expenses such as legal and other professional fees.

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under GAAP.

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

The historical accounting convention used for real estate assets requires depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably overtime, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at an individual asset or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from an asset, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that, because impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

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

calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate and real estate-related investments under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Our management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition and investment activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition and investment activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition and investment activity ceases. The Board, in consultation with our management, may determine that it is in our best interests to begin the process of considering alternatives with respect to a liquidity event (i.e., listing of its common stock on a national exchange, a merger or sale of us or another similar transaction) at such time during our offering stage as the Board can reasonably determine that all of the securities in the Offering will be sold within a reasonable time period (i.e. three to six months). Thus, we will not continuously purchase assets and will have a limited life.

Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired and preferred equity investments are originated, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and originating our preferred equity investments and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after the Offering has been completed, our properties have been acquired, and our preferred equity investments have been originated. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after the Offering and acquisitions and originations are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition and origination activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after the Offering has been completed and properties have been acquired and preferred equity investments have been originated, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired and preferred equity investments are originated.

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

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition

~~fees~~We ~~and~~calculate ~~expenses~~NOI ~~are~~by ~~characterized~~adjusting ~~as operating expenses in determining operating~~ net income. ~~These~~(loss) ~~expenses are paid in cash~~ by ~~us,~~adding ~~and~~back ~~therefore~~asset ~~such~~management ~~funds will not be available to distribute to investors. All paid and accrued acquisition~~ fees ~~and expenses negatively impact our operating performance during the period in which assets are acquired and will have negative effects on returns to investors~~, ~~the~~corporate ~~potential~~general ~~for future distributions,~~ and ~~cash~~administrative ~~flows generated by us~~expenses, ~~unless earnings from operations or net sales proceeds from the disposition of other assets are generated to cover the purchase price of the asset, these~~ fees ~~and~~paid ~~expenses and other costs related~~ to ~~such asset. Therefore~~affiliates, ~~MFFO~~organization ~~may not be an accurate indicator of our operating performance, especially during periods in which assets are being acquired. MFFO that excludes such costs and~~ expenses ~~would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further~~, ~~under GAAP,~~ certain ~~contemplated~~property ~~non-cash~~general ~~fair value~~ and ~~other~~administrative ~~non-cash~~expenses ~~adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items~~ that are ~~unrealized and may~~ not ~~ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items that are not~~ reflective of the ongoing operations and are therefore typically adjusted for when assessing operating performance and calculating MFFO. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all of ~~our~~the ~~hedging~~properties ~~agreements.~~or ~~Inasmuch as interest rate hedges~~ are ~~not~~incurred aon ~~fundamental part of~~ our ~~operations,~~behalf weat ~~believe~~the itproperty isfor ~~appropriate~~expenses ~~to exclude~~ such ~~gains and losses in calculating MFFO~~ as ~~such~~legal, ~~gains~~professional and ~~losses~~franchise ~~are~~tax ~~not~~fees, ~~reflective~~depreciation ofand ~~ongoing operations. As disclosed elsewhere in this quarterly report~~amortization, ~~the~~interest ~~purchase~~expense ~~of properties~~ and origination ~~of preferred equity investments,~~ and ~~the~~disposition ~~corresponding~~fee ~~expenses associated with those processes, are key operational features of our business plan to generate operational~~ income and ~~cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed~~ by ~~the~~removing ~~Advisor~~equity ~~if there are no further proceeds from the sale of shares~~ in ~~the~~income ~~Offering, and therefore such fees and expenses may need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale~~ of ~~properties~~preferred orequity ~~from ancillary cash flows~~investments.

~~Our~~The ~~management~~following uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs that have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted abovetable, ~~MFFO~~which ~~may~~has not bebeen aadjusted ~~useful~~for ~~measure of~~ the ~~impact~~effects of ~~long-term~~any ~~operating~~noncontrolling ~~performance~~interests, onreconciles ~~value if we do not continue to operate in this manner. We believe that~~ our ~~use~~NOI offor ~~MFFO and~~ the ~~adjustments~~three ~~used~~and tosix ~~calculate~~months itended ~~allow~~June ~~us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs~~30, ~~such~~2017 ~~as their limited life, limited~~ and ~~defined~~2016 ~~acquisition period and targeted exit strategy, and hence that the use of such measures is useful~~ to ~~investors.~~net ~~For example~~loss, ~~acquisition costs are funded from~~ the ~~proceeds~~most of the Offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties and preferred equity investments. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly ~~related~~comparable orGAAP ~~attributable~~financial tomeasure ~~our~~(in ~~current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.~~thousands):

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as the Offering (unless and until we calculate NAV prior to the close of the Offering) where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods and, in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Net loss	$	(321	)	$	(455	)	$	(744	)	$	(871	)
Adjustments to reconcile net loss to NOI:
Asset management fees		87			82			173			82
Corporate general and administrative expenses		235			376			524			531
Organization expenses		7			—			14			15
Property general and administrative expenses (1)		8			3			9			4
Depreciation and amortization		392			345			781			868
Interest expense		358			368			726			650
Equity in income of preferred equity investment		(145	)		(166	)		(288	)		(166	)
NOI	$	621		$	553		$	1,195		$	1,113

~~Neither~~(1) ~~the~~Adjustment ~~SEC,~~to ~~NAREIT~~net ~~nor~~loss ~~any~~excludes ~~other~~expenses ~~regulatory~~that ~~body~~are ~~has~~not ~~passed~~reflective ~~judgment on the acceptability~~ of the ~~adjustments~~ongoing ~~that~~operations weof ~~use to calculate FFO or MFFO. In~~ the ~~future,~~property ~~the SEC, NAREIT~~ or ~~another~~were ~~regulatory~~incurred ~~body~~on ~~may~~our ~~decide~~behalf toat ~~standardize~~ the ~~allowable~~property ~~adjustments~~for ~~across~~expenses ~~the~~such ~~non-listed~~as ~~REIT~~legal ~~industry~~ and weother ~~would~~professional ~~have to adjust our calculation and characterization of FFO or MFFO~~fees.

Funds from Operations

We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations, or FFO, as defined by the National Association of Real Estate Investment Trusts, or NAREIT, is an important non-GAAP supplemental measure of operating performance for a REIT.

Since the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. We compute FFO attributable to common stockholders in accordance with NAREIT’s definition.

We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. While FFO is a relevant and widely used measure of operating performance of REITs, it does not represent cash flows from operations or net income (loss) as defined by GAAP and should not be considered as an alternative or substitute to those measures in evaluating our liquidity or operating performance. FFO does not purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO may not be comparable to FFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.

The following table reconciles our ~~calculations~~calculation of FFO ~~and MFFO~~ attributable to common stockholders to net loss attributable to common stockholders, the most directly comparable GAAP financial measure, for the three and six months ended ~~March~~June 3130, 2017 and 2016 (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Net loss	$	(423	)	$	(416	)
Net loss attributable to common stockholders	$	(326	)	$	(456	)	$	(751	)	$	(865	)
Depreciation and amortization		~~389~~392			~~523~~345			781			868
Adjustment for noncontrolling interests		(1820	)		(1917	)		(39	)		(43	)
FFO attributable to common stockholders, basic		(52	)		88
FFO attributable to common stockholders		46			(128	)		(9	)		(40	)
Distributions declared to Series A preferred stockholders		(3	)		—
FFO per common share - basic	$	0.04		$	(0.19	)	$	(0.01	)	$	(0.07	)
FFO attributable to common stockholders, diluted		(55	)		88
FFO per common share - diluted	$	0.04		$	(0.19	)	$	(0.01	)	$	(0.07	)
FFO per common share - basic	$	(0.05	)	$	0.18
Weighted average Class A common shares outstanding - basic		1,119			674			1,071			575
FFO per common share - diluted	$	(0.05	)	$	0.18
Weighted average Class A common shares outstanding - diluted		1,128			683			1,082			580
MFFO attributable to common stockholders, diluted		(55	)		88
MFFO per common share - diluted	$	(0.05	)	$	0.18

Our FFO ~~and MFFO~~ for the three and six months ended ~~March~~June 3130, 2017 and 2016 ~~are~~is not indicative of FFO ~~and MFFO~~ expected in future periods. ~~We expect to continue to raise additional capital, increase our borrowings and make future investments, which would have a significant impact on our future FFO and MFFO.~~

~~Liquidity~~Core ~~and Capital Resources~~Earnings

~~Our~~Core ~~principal~~Earnings ~~demands~~is ~~for~~a ~~funds~~non-GAAP ~~are~~financial ~~for~~measure ~~property~~of ~~acquisitions~~performance ~~and~~primarily used to measure the performance of preferred equity, ~~originations~~structured finance, ~~either~~mezzanine, ~~directly~~bridge orfinancing, ~~through~~and ~~investment~~mortgage ~~interests~~investments. We believe that Core Earnings provides meaningful information that is used by investors, ~~for~~analysts and our management to evaluate and compare the ~~payment~~performance of ~~operating~~our ~~expenses~~investments ~~and~~to ~~distributions~~other comparable investments, to determine trends in earnings and ~~for~~to compute the ~~payment~~fair value of ~~principal~~our ~~and~~investments ~~interest~~as onCore ~~any~~Earnings ~~outstanding~~is ~~indebtedness.~~not ~~Generally,~~affected ~~cash~~by ~~needs~~certain ~~for~~transactions ~~items~~and ~~other~~GAAP ~~than~~adjustments ~~acquisitions~~that ~~and~~we ~~originations~~believe are ~~met~~not ~~from~~necessarily indicative of our current portfolio and operations. Additionally, ~~and~~Core ~~cash~~Earnings ~~needs~~will ~~for~~be ~~acquisitions~~used ~~and~~in ~~originations~~the ~~are~~calculation ~~funded~~of byasset ~~our~~management ~~Offering~~fees ~~and~~payable ~~debt~~to our Advisor. IfCore Earnings does not represent GAAP net income (loss) or cash flows from ~~operations~~operating ~~are~~activities ~~insufficient~~and should not be considered as an alternative to ~~cover~~GAAP net income (loss), an indication of our GAAP cash flows from operating ~~expenses~~activities, a measure of our ~~Advisor~~liquidity ~~will~~or ~~cover~~an ~~these~~indication ~~costs~~of onfunds available for our ~~behalf~~cash needs. ToIn ~~the~~addition, ~~extent~~our methodology for calculating Core Earnings may differ from the ~~costs~~methodologies ~~covered~~employed onby ~~our~~other ~~behalf~~companies ~~exceed~~to calculate the ~~2%/25%~~same ~~Guidelines,~~or similar supplemental performance measures and, accordingly, our ~~Advisor~~reported ~~does~~Core Earnings may not ~~seek~~be ~~approval~~comparable ~~from~~to ~~our~~the ~~independent~~Core ~~directors~~Earnings toreported beby ~~reimbursed,~~other ~~these~~companies. ~~support~~We ~~payments~~calculate ~~will~~Core beEarnings ~~treated~~by asadjusting anet ~~non-equity~~income ~~contribution~~(loss) attributable to common stockholders by ~~our~~adding ~~Advisor~~back stock-based compensation expense, ~~meaning~~depreciation ~~our~~and ~~Advisor~~amortization ~~receives~~expense nocalculated ~~shares~~on inreal ~~exchange~~estate owned and adjustments for ~~the~~noncontrolling ~~contribution~~interests.

Cash needs for principal payments due in the next twelve months related to the Credit Facility will generally be funded from excess cash from operations and proceeds from our Offering. However, to the extent we are unable to generate sufficient excess cash from operations, raise sufficient proceeds through our Offering to make principal payments as they come due, or to extend the maturity date of the Credit Facility, it may be necessary to sell assets at less than their fair value or before we feel the full value has been recognized. However, pursuant to the terms of the pledge agreement entered into between KeyBank and an affiliate of our Sponsor on the Credit Facility, the affiliate of our Sponsor pledged registered equity securities (the “Collateral”) that had a fair market value of approximately $22.7 million as of March 31, 2017, as compared to a balance on the Credit Facility of $11.0 million as of the same date. Therefore, we believe it is unlikely we will be required to liquidate assets to repay the Credit Facility as the most likely course of action by KeyBank would be to seize the Collateral to the extent necessary to repay the Credit Facility. If this occurred, we would issue shares of Class A common stock to the affiliate of our Sponsor in an equal amount, at $9.20 per share, to reflect the fact that no selling commissions and dealer manager fees would be charged. If we were required to sell assets, this may cause a disruption in our operations and inhibit our ability to meet our objectives. We do not believe there is a scenario whereby repayment of the Credit Facility would create a going concern issue for us whereby we would not be able to fund our operations for the next 12 months.

There may be a delay between the sale of our shares and our acquisitions and originations, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. As a result, we may increase leverage above our targeted level on a temporary basis in order to make current investments and then use proceeds from our Offering to lower the leverage. Over time, as we become established and the fundraising effort begins to scale, we do not expect our target leverage ratio to exceed 60% to 65% of the cost of our properties and 25% to 30% of our preferred equity investments. Over the long term, and on an aggregate basis, we do not expect our target leverage ratio to exceed 50% to 60% of the estimated value of our assets.

~~Our~~The ~~Advisor~~following ~~evaluates~~table ~~potential~~reconciles ~~investments~~our ~~and~~calculation ~~engages~~of inCore ~~negotiations~~Earnings ~~with~~attributable ~~sellers~~to ~~and~~common ~~lenders~~stockholders onto ~~our~~net ~~behalf.~~loss ~~After~~attributable ato ~~purchase~~common ~~contract is executed that contains specific terms~~stockholders, the ~~investment~~most ~~will~~directly ~~not~~comparable beGAAP ~~made~~financial ~~until the successful completion of due diligence~~measure, ~~which~~for ~~includes review of~~ the ~~title~~three ~~insurance commitment, an appraisal~~ and ansix ~~environmental~~months ~~analysis.~~ended June ~~In some instances~~30, ~~the~~2017 ~~proposed~~and ~~investment~~2016 ~~will~~(in ~~require the negotiation of final binding agreements~~thousands, ~~which~~except ~~may~~per ~~include~~share financing documents. During this period, we may decide to temporarily invest any unused proceeds from the Offering in certain investments that could yield lower returns than investments we intend to make. These lower returns may affect our ability to make distributions.amounts):

Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and redemption of preferred equity investments and undistributed MFFO. If necessary, we may use financings or other sources of capital in cases of unforeseen significant capital expenditures. We have not identified any sources of such financing.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Net loss attributable to common stockholders	$	(326	)	$	(456	)	$	(751	)	$	(865	)
Adjustments:
Amortization of stock-based compensation		8			6			15			6
Depreciation and amortization		392			345			781			868
Adjustment for noncontrolling interests		(20	)		(17	)		(39	)		(43	)
Core earnings attributable to common stockholders	$	54		$	(122	)	$	6		$	(34	)

Weighted average Class A common shares outstanding - basic		1,119			674			1,071			575
Weighted average Class A common shares outstanding - diluted		1,128			683			1,082			580

Core earnings per common share - basic	$	0.05		$	(0.18	)	$	0.01		$	(0.06	)
Core earnings per common share - diluted	$	0.05		$	(0.18	)	$	0.01		$	(0.06	)

Our Core Earnings for the three and six months ended June 30, 2017 and 2016 is not indicative of Core Earnings expected in future periods.

Cash Available for Distributions and Adjusted Cash Available for Distributions

CAD is a non-GAAP financial measure. We believe that CAD provides meaningful information that is used by investors, analysts and our management to evaluate and determine trends in cash flow as CAD is not affected by non-cash items. CAD is also a useful measure used by our Board to determine our dividend and the long-term viability of the current dividend. CAD does not represent GAAP net income (loss) or cash flows from operating activities and should not be considered as an alternative to GAAP net income (loss), an indication of our GAAP cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. In addition, our methodology for calculating CAD may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures and, accordingly, our reported CAD may not be comparable to the CAD reported by other companies.

We calculate CAD by adjusting net income (loss) attributable to common stockholders by adding back depreciation and amortization expense on real estate owned, acquisition fees and costs, fees paid to affiliates, amortization of deferred financing costs, stock-based compensation expense and changes in the fair value of derivative financial instruments included in interest expense, and by removing non-cash equity in income of preferred equity investments and adjustments for noncontrolling interests.

ACAD is a non-GAAP financial measure that further adjusts CAD. We believe that ACAD provides meaningful information that is used by investors, analysts and our management to evaluate and determine longer term trends in cash flow as ACAD adds back the non-cash equity in income of preferred equity investments and origination and disposition fee income to CAD. ACAD is also a useful measure used by our Board to determine longer-term viability of the current dividend. ACAD does not represent GAAP net income (loss) or cash flows from operating activities and should not be considered as an alternative to GAAP net income (loss), an indication of our GAAP cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. In addition, our methodology for calculating ACAD may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures and, accordingly, our reported ACAD may not be comparable to the ACAD reported by other companies.

We calculate ACAD by modifying CAD by adding back non-cash equity in income of preferred equity investments.

The following table reconciles our calculations of CAD and ACAD attributable to common stockholders to net loss attributable to common stockholders, the most directly comparable GAAP financial measure, for the three and six months ended June 30, 2017 and 2016 (in thousands, except per share amounts):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Net loss attributable to common stockholders	$	(326	)	$	(456	)	$	(751	)	$	(865	)
Depreciation and amortization		392			345			781			868
Amortization of deferred financing costs		22			52			81			64
Noncash equity in income of preferred equity investment		(40	)		—			(79	)		—
Amortization of stock-based compensation		8			6			15			6
Changes in fair value on derivative instruments included in interest expense		1			—			1			—
Adjustment for noncontrolling interests		(22	)		(18	)		(41	)		(44	)
CAD attributable to common stockholders		35			(71	)		7			29

Noncash equity in income of preferred equity investment		40			—			79			—
ACAD attributable to common stockholders		75			(71	)		86			29

Weighted average Class A common shares outstanding - basic		1,119			674			1,071			575
Weighted average Class A common shares outstanding - diluted		1,128			683			1,082			580

CAD per common share - basic	$	0.03		$	(0.11	)	$	0.01		$	0.05
CAD per common share - diluted	$	0.03		$	(0.11	)	$	0.01		$	0.05

ACAD per common share - basic	$	0.07		$	(0.11	)	$	0.08		$	0.05
ACAD per common share - diluted	$	0.07		$	(0.11	)	$	0.08		$	0.05

Our CAD and ACAD for the three and six months ended June 30, 2017 and 2016 are not indicative of CAD and ACAD expected in future periods.

Adjusted Book Value per Share

We believe that adjusted book value per share, which is a non-GAAP measure, is helpful to stockholders in evaluating the growth of our company as we grow our equity capital base and make future investments. We calculate adjusted book value per share by adding accumulated depreciation on real estate owned back to stockholders’ equity and adjusting for Series A preferred stockholders and noncontrolling interests.

The following table calculates our adjusted book value per share of Class A common stock as of June 30, 2017 and December 31, 2016 (in thousands, except per share amounts):

	June 30, 2017			December 31, 2016
	(Unaudited)
Stockholders' equity	$	6,445		$	5,997
Accumulated depreciation		2,708			1,927
Adjustment for Series A preferred stockholders		(125	)		—
Adjustment for noncontrolling interests		(135	)		(96	)
Adjusted book value	$	8,893		$	7,828
Shares:
Class A common stock		1,128			976
Restricted Class A common stock		9			12
Total Class A common stock, diluted		1,137			988

Adjusted book value per share, diluted	$	7.82		$	7.92

Liquidity and Capital Resources

Our principal demands for funds are for property acquisitions and preferred equity originations, either directly or through investment interests, for the payment of operating expenses and distributions, and for the payment of principal and interest on any outstanding indebtedness. Generally, cash needs for items other than acquisitions and originations are met from operations, and cash needs for acquisitions and originations will be funded by one or more offerings of our common stock and/or additional borrowings. If cash flows from operations are insufficient to cover our operating expenses, our Advisor will cover these costs on our behalf. To the extent the costs covered on our behalf exceed the 2%/25% Guidelines, and our Advisor does not seek approval from our independent directors to be reimbursed, these support payments will be treated as a non-equity contribution by our Advisor, meaning our Advisor receives no shares in exchange for the contribution.

On July 21, 2017, we filed a post-effective amendment to the Registration Statement to terminate the Continuous Offering and deregister all of our unsold shares of Class A common stock and Class T common stock. The post-effective amendment was declared effective by the SEC on July 26, 2017.

Cash needs for principal payments due in the next twelve months related to the Credit Facility will generally be funded from excess cash from operations. However, to the extent we are unable to generate sufficient excess cash from operations, raise sufficient proceeds through one or more offerings of our common stock and/or additional borrowings to make principal payments as they come due, or to extend the maturity date of the Credit Facility, it may be necessary to sell assets at less than their fair value or before we feel the full value has been recognized. However, pursuant to the terms of the pledge agreement entered into between KeyBank and an affiliate of our Sponsor on the Credit Facility, the affiliate of our Sponsor pledged registered equity securities (the “Collateral”) that had a fair market value of approximately $23.4 million as of June 30, 2017, as compared to a balance on the Credit Facility of $11.0 million as of the same date. Therefore, we believe it is unlikely we will be required to liquidate assets to repay the Credit Facility as the most likely course of action by KeyBank would be to seize the Collateral to the extent necessary to repay the Credit Facility. If this occurred, we may issue shares of Class A common stock to the affiliate of our Sponsor. If we were required to sell assets, this may cause a disruption in our operations and inhibit our ability to meet our objectives. We do not believe there is a scenario where repayment of the Credit Facility would create a going concern issue for us whereby we would not be able to fund our operations for the next 12 months.

Over time, as we become established, we do not expect our target leverage ratio to exceed 60% to 65% of the cost of our properties and 25% to 30% of our preferred equity investments. Over the long term, and on an aggregate basis, we do not expect our target leverage ratio to exceed 50% to 60% of the estimated value of our assets.

Our Advisor evaluates potential investments and engages in negotiations with sellers and lenders on our behalf. After a purchase contract is executed that contains specific terms, the investment will not be made until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed investment will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from the Continuous Offering in certain investments that could yield lower returns than investments we intend to make. These lower returns may affect our ability to make distributions.

Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, the sale of properties and redemption of preferred equity investments and one or more offerings of our common stock. If necessary, we may

use financings or other sources of capital in cases of unforeseen significant capital expenditures. We have not identified any sources of such financing.

Cash Flows

The following table presents selected data from our consolidated statements of cash flows for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016 (in thousands):

	For the Three Months Ended March 31,
	For the Six Months Ended June 30,
	2017			2016
Net cash provided by operating activities	$	98139		$	~~183~~314
Net cash used in investing activities		(5193	)		(~~216~~6,383	)
Net cash provided by financing activities		~~733~~1,122			15,~~986~~999
Net increase in cash and restricted cash		780			1,953
Net increase (decrease) in cash and restricted cash		1,168			(70	)
Cash and restricted cash, beginning of period		683			969
Cash and restricted cash, end of period	$	1,~~463~~851		$	~~2,922~~899

On August 12, 2015, the SEC declared effective our Registration Statement related to the Offering, as described above. We had no operating activities before August 12, 2015. In accordance with GAAP, our acquisition of Estates on April 7, 2016 was determined to be a combination of entities under common control. As such, the acquisition of Estates was deemed to be made on the Original Acquisition Date by our Sponsor. In the accompanying unaudited consolidated financial statements, operations are shown from the Original Acquisition Date, although we did not commence material operations until March 24, 2016, the date we broke escrow in the Offering, enabling us to commence material operations. On August 19, 2016, we originated a preferred equity investment in Springs at Stone Oak Village, a multifamily property. Our overall cash flows from operating, investing, and financing activities for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016 are not indicative of those expected in future periods. We expect to continue to raise additional capital, increase our borrowings and make future investments, which would have a significant impact on our future results of operations and overall cash flows.

Cash Flows from Operating Activities

During the ~~three~~six months ended ~~March~~June 3130, 2017, net cash provided by operating activities was approximately $0.1 million compared to net cash provided by operating activities of $0.23 million for the ~~three~~six months ended ~~March~~June 3130, 2016. The change in cash flows from operating activities was mainly due to changes in working capital.

Cash Flows from Investing Activities

During the ~~three~~six months ended ~~March~~June 3130, 2017, net cash used in investing activities was approximately $0.1 million compared to net cash used in investing activities of $06.24 million for the ~~three~~six months ended ~~March~~June 3130, 2016. The change in cash flows from investing activities was mainly due to athe ~~reduction~~origination inof ~~capitalized~~a ~~expenditures~~preferred ~~between~~equity ~~periods.~~investment ~~Our~~of ~~cash~~$6.0 ~~used~~million induring ~~investing~~the ~~activities~~period ~~will vary based on how quickly we raise funds~~ in ~~the~~2016, ~~Offering~~compared ~~and~~to ~~how~~no ~~quickly we invest those funds towards acquisitions of properties and~~ originations of preferred equity investments during the period in 2017.

Cash Flows from Financing Activities

During the ~~three~~six months ended ~~March~~June 3130, 2017, net cash provided by financing activities was $01.71 million compared to net cash provided by financing activities of $26.0 million for the ~~three~~six months ended ~~March~~June 3130, 2016. The change in cash flows from financing activities was mainly due to an increase in net debt proceeds of approximately $04.61 million during the period in 2016, compared to no debt activity during the period in 2017. The change in cash flows from financing activities was also due to $1.1 million of proceeds received in the Continuous Offering during the period in 2017 compared to $2.0 million during the period in 2016.

Mortgage Indebtedness

As of ~~March~~June 3130, 2017, our subsidiary had mortgage indebtedness to a third party of approximately $26.9 million at an interest rate of 23.8812%. For additional information regarding our mortgage indebtedness, see Note 7 to our consolidated financial statements.

We entered into and expect to continue to enter into interest rate cap agreements with various third parties to cap the variable interest rates on a majority of floating rate mortgage indebtedness we may incur. These agreements generally have a term of three to four years and cover the outstanding principal amount of the underlying indebtedness. Under these agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. At ~~March~~June 3130, 2017, we had one interest rate cap agreement that covered our $26.9 million of outstanding floating rate mortgage indebtedness. This interest rate cap agreement caps the related variable interest rate of our mortgage indebtedness at 6.0%.

Our subsidiary has a separate non-recourse mortgage, which is secured only by Estates. This non-recourse mortgage has standard scope non-recourse carve outs required by the agency lender and calls for protection by the borrower and the guarantor against losses by the lender for so-called “bad acts,” such as misrepresentations, and may include full recourse liability for more significant events such as bankruptcy. An affiliate of BH provided a non-recourse carve out guarantee for this mortgage.

~~As we continue to raise capital, we will make acquisitions of multifamily properties, originate preferred equity investments and increase our borrowings.~~ We expect that future investments ~~in properties~~, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and proceeds from ~~the~~one Offering. In addition, we may seek financing from U.S. government agencies, including through the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with the acquisition or ~~refinancing~~more ofofferings ~~existing mortgage loans.~~

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing debt or other equity securities, on terms that are acceptable to us or at all.48

of our common stock. In addition, we may seek financing from U.S. government agencies, including through the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with the acquisition or refinancing of existing mortgage loans.

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for future investments or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing debt or other equity securities, on terms that are acceptable to us or at all.

Furthermore, following the completion of any modest value-add and capital expenditures programs we may implement and depending on the interest rate environment at the applicable time, we may seek to refinance any floating rate mortgage debt into longer-term fixed rate debt at lower leverage levels.

Credit Facility

As of ~~March~~June 3130, 2017, we, through ~~the~~our OP, had $11.0 million outstanding under the Credit Facility at an interest rate of 45.9822%. On April 7, 2017, weour ~~extended~~OP and the Sponsor amended the Credit Facility (the “Second Amendment”) to extend the maturity date to June 30, 2017 and terminate the revolving feature of the Credit Facility. toWe paid an amendment fee of $27,500 in connection with the Second Amendment. On June 30, 2017, our OP and the Sponsor amended the Credit Facility (~~see~~the ~~Note~~“Third 14Amendment”) to ~~our~~extend ~~consolidated~~the ~~financial~~maturity ~~statements)~~date to October 2, 2017. In conjunction with the Third Amendment, the affiliate of BH Equity was released and discharged of the guarantee it had previously provided on the Credit Facility. We ~~are~~continue to be in discussions with KeyBank to further extend the maturity date, alleviating the need to repay the Credit Facility in full on ~~June~~October 302, 2017. Additionally, a stated use of proceeds in the Underwritten Offering Registration Statement is to repay the Credit Facility in full. If we are unable to extend the maturity date of the Credit Facility, ~~and~~are unable to complete the Underwritten Offering prior to October 2, 2017, or we do not have sufficient cash on hand to repay the outstanding principal balance on the maturity date, there is sufficient liquid collateral, in the form of registered equity securities (the “Collateral”), pledged from an affiliate of our Sponsor, to satisfy our obligations. The Collateral had a fair market value of approximately $2223.74 million as of ~~March~~June 3130, 2017. If the Collateral were used to satisfy our obligations on the Credit Facility, we ~~would~~may ~~likely~~ issue shares of our Class A common stock in an amount equal to the obligations that are relieved from the application of the Collateral. We do not believe there is a scenario ~~whereby~~where repayment of the Credit Facility would create a going concern issue for us whereby we would not be able to fund our operations for the next 12 months.

The Credit Facility agreement, as amended, contains customary provisions with respect to events of default, covenants and borrowing conditions. Certain prepayments may be required upon a breach of covenants or borrowing conditions. As of ~~March~~June 3130, 2017, we believe we are in compliance with all covenant provisions.

Leverage Limit

Pursuant to our charter, our borrowings may not exceed 300% of our total “net assets” (as defined in our charter in accordance with the North American Securities Administrators Association Statement of Policy regarding Real Estate Investment Trusts) (the “Leverage Limit”). However, over time, we intend to target a leverage ratio of 50%-60% loan-to-value. We may exceed the Leverage Limit if such excess is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing, along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments and there is no limitation on the amount we may borrow against any single improved property. We ~~expect~~have ~~that~~sought ~~during~~and will continue to seek such independent director approval of borrowings in excess of the ~~period~~Leverage Limit until such point as our borrowings do not exceed the Leverage Limit. As a result of the ~~Offering~~debt incurred on the acquisition of Estates and the additional debt incurred from the investment in Overlook at Stone Oak Park (fka Springs at Stone Oak Village), weour ~~will~~borrowings ~~seek~~exceeded ~~such~~the ~~independent~~Leverage ~~director~~Limit. ~~approval~~A majority of our independent directors approved borrowings in excess of the Leverage Limit. ~~since~~Our independent directors determined that exceeding the Leverage Limit was justified because we ~~are~~were in the process of raising our equity capital in the Continuous Offering to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have raised additional equity capital and repaid a portion of our initial leverage. If necessary, we expect to repay the ~~debt~~Credit ~~incurred~~Facility onby exchanging the Collateral, or with proceeds from a successful completion of the Underwritten Offering or from sales of our assets.

4649

~~the~~Contractual ~~acquisition~~Obligations ~~of Estates~~ and the additional debt incurred from the investment in Springs at Stone Oak Village, our borrowings exceeded the Leverage Limit. A majority of our independent directors approved borrowings in excess of the Leverage Limit. Our independent directors determined that exceeding the Leverage Limit was justified because we are in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have raised equity capital and repaid a portion of our initial leverage.Commitments

~~Obligations~~The following table summarizes our contractual obligations and ~~Commitments~~commitments for the next five calendar years subsequent to June 30, 2017. Interest expense due by period on our floating rate debt is based on one-month LIBOR, which was 1.2239% as of June 30, 2017.

The following table summarizes our contractual obligations and commitments for the next five calendar years subsequent to March 31, 2017. Interest expense due by period on our floating rate debt is based on one-month LIBOR, which was 0.9828% as of March 31, 2017.

	Payments Due by Period (in thousands)
	Total		2017		2018		2019		2020		2021		Thereafter
Mortgage Debt
Principal payments	$	26,919	$	—	$	—	$	—	$	26,919	$	—	$	—
Interest expense		2,706		430		853		853		570		—		—
Total	$	29,625	$	430	$	853	$	853	$	27,489	$	—	$	—

Credit Facility
Principal payments	$	11,000	$	11,000	$	—	$	—	$	—	$	—	$	—
Interest expense		150		150		—		—		—		—		—
Total	$	11,150	$	11,150	$	—	$	—	$	—	$	—	$	—

Total contractual obligations and commitments	$	40,775	$	11,580	$	853	$	853	$	27,489	$	—	$	—

	Payments Due by Period (in thousands)
	Total		2017		2018		2019		2020		2021		Thereafter
Mortgage Debt
Principal payments	$	26,919	$	—	$	—	$	—	$	26,919	$	—	$	—
Interest expense		2,633		593		787		787		466		—		—
Total	$	29,552	$	593	$	787	$	787	$	27,385	$	—	$	—
Credit Facility
Principal payments	$	11,000	$	11,000	$	—	$	—	$	—	$	—	$	—
Interest expense		11		11		—		—		—		—		—
Total	$	11,011	$	11,011	$	—	$	—	$	—	$	—	$	—
Total contractual obligations and commitments	$	40,563	$	11,604	$	787	$	787	$	27,385	$	—	$	—

Income Taxes

We anticipate that we will elect to be taxed as a REIT for U.S. federal income tax purposes beginning with our 2017 tax year, and we intend to continue to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including requirements to pass the “closely-held test” and to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT. ~~If we believe we will not meet the qualifications to be taxed as a REIT, we will not make an election to be taxed as a REIT.~~

We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. We have no examinations in progress and none are expected at this time.

If we do not meet the qualifications to be taxed as a REIT, we will be taxed as a corporation for U.S. federal income tax purposes. We ~~believe~~did ~~there~~not ismeet the qualifications to be taxed as a ~~possibility~~REIT wefor ~~will~~the ~~not~~2016 ~~qualify~~tax toyear and will be taxed as a ~~REIT~~corporation for U.S. federal income tax purposes for the 2016 tax year. As such, we provide for income taxes using the asset and liability method under ASC 740. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize our tax positions and evaluate them by determining whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. We will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

47We had no material unrecognized tax benefit or expense, accrued interest or penalties as of June 30, 2017. Our subsidiaries and us may be subject to federal income tax as well as income tax of various state and local jurisdictions. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive loss.

benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.50

We had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2017. Our subsidiaries and us may be subject to federal income tax as well as income tax of various state and local jurisdictions. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive loss.

Deferred Tax Assets

Deferred income taxes arise principally from temporary differences between book and tax recognition of income, expenses, and losses relating to financing and other transactions. As of ~~March~~June 3130, 2017 and December 31, 2016, we recognized total deferred tax assets, net of valuation allowances, based on the fact that we ~~may~~did ~~choose to~~ not ~~elect~~qualify ~~to be taxed~~ as a REIT for the 2016 tax year. The deferred income taxes on the accompanying consolidated balances sheet at ~~March~~June 3130, 2017 (unaudited) and December 31, 2016 are comprised of the following (in thousands):

	March 31, 2017			December 31, 2016
	June 30, 2017			December 31, 2016
Net operating loss	$	~~421~~497		$	309
Partnership temporary differences		~~112~~148			75
Unreimbursed expenses		32			32
Total deferred tax assets		~~565~~677			416
Valuation allowance		(~~565~~677	)		(416	)
Net deferred tax assets	$	—		$	—

The valuation allowances at ~~March~~June 3130, 2017 and December 31, 2016 were primarily related to incurring cumulative net operating losses without generating sufficient future taxable income to recover the deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable losses and projections for future taxable income over the periods in which the deferred tax assets are deductible; management believes it is more likely than not that we will not realize the benefits of these deductible differences at ~~March~~June 3130, 2017.

Distributions

Our Board previously declared daily distributions on our Class A common stock for the period from January 1, 2017 through February 28, 2017. On March 16, 2017, our Board authorized the declaration of a special distribution to our Class A stockholders of record as of the close of business on March 16, 2017 of $0.0246 per Class A share, which is an amount equal to a daily distribution of $0.00164 per Class A share of common stock, for the period of March 1, 2017 to March 15, 2017. Our Board has also approved and authorized the declaration of a daily distribution to our Class A stockholders of record as of the close of business on each day of the period commencing on March 16, 2017 and ending ~~September~~December 3031, 2017. Distributions for all record dates of a given month are paid approximately three days following month end. We expect to continue paying monthly distributions unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. We may declare distributions in excess of our cash flows from operations ~~and funds from operations~~. As a result, our distribution rate and payment frequency may vary from time to time. After the completion of the Underwritten Offering, we plan to make quarterly distributions.

Distributions declared (1) accrue daily to our Class A stockholders of record as of the close of business on each day, (2) are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month and (3) are calculated at a rate of $0.00164 per share per day during the period ended ~~September~~December 3031, 2017, which if paid each day over a 365-day period is equivalent to a 6.0% annualized distribution rate based on a purchase price of $10.00 per share of Class A common stock.

48During the three and six months ended June 30, 2017, we declared distributions on our Series A cumulative preferred stock of approximately $4,000 and $6,700, respectively.

~~During~~The Class A common stock distributions declared and paid during each of the ~~three~~last ~~months~~four fiscal quarters ended ~~March~~June 3130, 2017, wealong ~~declared~~with ~~distributions~~the onamount ~~our~~of ~~Series~~distributions Areinvested ~~cumulative~~pursuant ~~preferred~~to ~~stock~~the ofDRIP, ~~approximately~~were ~~$2,700.~~as follows:

The Class A common stock distributions declared and paid during the three months ended March 31, 2017, along with the amount of distributions reinvested pursuant to the DRIP were as follows:

					Distributions Paid (3)
Period	Distributions Declared (1)		Distributions Declared Per Share (2)		Cash		Reinvested		Total
Third Quarter 2016	$	69,700	$	0.100	$	10,800	$	22,700	$	33,500
Fourth Quarter 2016		134,300		0.151		1,200		117,000		118,200
First Quarter 2017		153,000		0.148		3,300		143,700		147,000
Second Quarter 2017		168,400		0.149		35,300		129,300		164,600
Total	$	525,400	$	0.548	$	50,600	$	412,700	$	463,300

					Distributions Paid (3)
Period (Quarter ended March 31, 2017)	Distributions Declared (1)		Distributions Declared Per Share (2)		Cash		Reinvested		Total
January	$	51,400	$	0.051	$	600	$	48,700	$	49,300
February		47,600		0.046		1,200		49,600		50,800
March		54,000		0.051		1,600		45,400		47,000
Total	$	153,000	$	0.148	$	3,400	$	143,700	$	147,100

(1)

Includes distributions due, which are payable in cash upon vesting, on the 12,000 restricted shares of Class A common stock we have granted pursuant to our restricted share plan, 9,000 of which remain unvested as of June 30, 2017.

~~(1) Includes distributions due, which are payable in cash upon vesting, on the 12,000 restricted shares of Class A common stock we have granted pursuant to our restricted share plan.~~51

(2)

Based on number of days each Class A share was issued and outstanding during the period presented.

(3)

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

For the three ~~months ended March 31, 2017, we paid aggregate distributions on our shares of Class A common stock of approximately $147,100, including approximately $3,400 of distributions paid in cash~~ and ~~15,133~~six ~~shares of our Class A common stock issued pursuant to our DRIP for approximately $143,700. For the three~~ months ended ~~March~~June 3130, 2017, we ~~did~~paid ~~not~~aggregate ~~pay any~~ distributions on our shares of Series A ~~cumulative~~ preferred stock. ~~For the three months ended March 31, 2017, our net loss was approximately $0.4 million and we had net cash provided by operating activities~~ of approximately $~~0.1 million. For the three months ended March 31~~6, 2017, we funded approximately $98,000, or 67%, of total distributions paid, including shares issued pursuant to our DRIP, from net cash provided by operating activities and approximately $49,100, or 33%, from net public offering proceeds700.

WeFor ~~expect~~the tothree ~~continue~~months ~~paying~~ended ~~monthly~~June ~~distributions~~30, ~~to our stockholders. Because all of our operations are performed indirectly through the OP~~2017, ~~our~~we ~~ability~~paid toaggregate ~~pay~~ distributions ~~depends~~ on ~~the~~our ~~OP’s~~shares ~~ability~~of toClass ~~pay~~A ~~distributions~~common tostock ~~its~~of ~~partners~~approximately $164,600, including toapproximately ~~us.~~$35,300 Ifof wedistributions dopaid ~~not~~in ~~have enough~~ cash ~~from~~and ~~operations~~13,614 toshares ~~fund~~of ~~the~~our ~~distributions,~~Class weA ~~may~~common ~~borrow,~~stock ~~issue~~issued ~~additional~~pursuant ~~securities~~to orour ~~sell~~DRIP ~~assets~~for inapproximately ~~order~~$129,300. toFor ~~fund~~ the ~~distributions~~three ormonths ~~make~~ended ~~the~~June ~~distributions~~30, ~~out~~2017, ofour net ~~proceeds~~loss ~~from~~was ~~the~~approximately ~~Offering~~$0.3 Wemillion ~~have~~and ~~not~~we ~~established~~had ~~any~~net ~~limit~~cash onprovided ~~the~~by ~~amount~~operating activities of ~~proceeds~~less ~~from~~than ~~the~~$0.1 ~~Offering~~million; ~~that~~we ~~may~~funded beapproximately ~~used to fund distributions~~$41, ~~except that~~000, inor ~~accordance with our organizational documents and Maryland law~~24%, weof ~~may~~total ~~not make~~ distributions ~~that~~paid, ~~would:~~including ~~(1) cause~~shares usissued topursuant ~~be unable~~ to ~~pay~~ our ~~debts~~DRIP, asfrom ~~they~~net ~~become~~cash ~~due~~provided inby ~~the~~operating ~~usual~~activities ~~course~~and ofapproximately ~~business;~~$130,300, or ~~(2) cause our total assets to be less than the sum of our total liabilities plus~~76%, ~~unless~~from ~~our~~net ~~charter~~public ~~provides~~offering ~~otherwise, senior liquidation preferences, if any~~proceeds.

For the six months ended June 30, 2017, we paid aggregate distributions on our shares of Class A common stock of approximately $311,600, including approximately $38,600 of distributions paid in cash and 28,747 shares of our Class A common stock issued pursuant to our DRIP for approximately $273,000. For the six months ended June 30, 2017, our net loss was approximately $0.7 million and we had net cash provided by operating activities of approximately $0.1 million; we funded approximately $139,000, or 44%, of total distributions paid, including shares issued pursuant to our DRIP, from net cash provided by operating activities and approximately $179,300, or 56%, from net public offering proceeds.

On July 26, 2017, in connection with the termination of the Continuous Offering, the DRIP was terminated. As a result of the termination of the DRIP, beginning with the distributions declared by the Board for the month of July 2017, and continuing until such time as the Board may approve the resumption of the DRIP, if ever, all distributions declared by the Board will be paid to our stockholders in cash.

We expect to continue paying monthly distributions to our stockholders. Because all of our operations are performed indirectly through the OP, our ability to pay distributions depends on the OP’s ability to pay distributions to its partners, including to us. If we do not have enough cash from operations to fund the distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions. We have not established any limit on the amount of proceeds from the issuance of securities that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; or (2) cause our total assets to be less than the sum of our total liabilities plus, unless our charter provides otherwise, senior liquidation preferences, if any.

In addition, the fees, distributions and reimbursements payable to the Advisor or its affiliates depend on various factors, including the assets we acquire, indebtedness incurred, and sales prices of assets sold, and therefore cannot be quantified or reserved for until such fees have been earned. We are required to pay these amounts to the Advisor or its affiliates regardless of the amount of cash we distribute to our stockholders and therefore our ability to make distributions from cash flow, as well as cash flow available for investment, to our stockholders may be negatively impacted.

Distributions are paid to our stockholders when and if authorized by the Board and declared by us out of legally available funds. Distributions are authorized at the discretion of the Board, which is influenced in part by its intention to comply with the REIT requirements of the Code. We intend to make distributions sufficient to meet the annual distribution requirement and to avoid U.S. federal income and excise taxes on our earnings; however, it may not always be possible to do so. Each distribution will be accompanied by a notice which sets forth: (a) the record date; (b) the amount per share that will be distributed; (c) the equivalent annualized yield; (d) the amount and percentage of the distributions paid from operations, offering proceeds and other sources; and (e) for those investors participating in the DRIP, a statement that a distribution statement will be provided in lieu of a check. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:

• the amount of time required for us to invest the funds received in the Continuous Offering;

•

our operating and interest expenses;

•

operating results of our properties;

•

the amount of distributions or dividends received by us from our indirect real estate investments;

•

our ability to keep our properties occupied;

•

our ability to maintain or increase rental rates when renewing or replacing current leases;

•

capital expenditures and reserves for such expenditures;

•

the issuance of additional shares; and

•

financings and refinancings.

We must annually distribute at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, in order to meet the requirements for qualification as a REIT under the Code. The Board may authorize distributions in excess of this percentage as it deems appropriate. Because we may receive income or rents at various times during our fiscal year, distributions may not reflect our income earned in that particular distribution period, but may be made in anticipation of cash flow that we expect to receive during a later period and may be made in advance of actual receipt of funds in an attempt to make distributions relatively uniform. To allow for such differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, among other things, we could be required to borrow funds from third parties on a short-term basis, issue new securities, or sell assets to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of capital.

Distributions in kind will not be permitted, except for:

•

distributions of readily marketable securities;

•

distributions of beneficial interests in a liquidating trust established for our dissolution and the liquidation of our assets in accordance with the terms of our charter; or

• distributions of in-kind property, so long as, with respect to such in-kind property, the Board advises each stockholder of the risks associated with direct ownership of the property, offers each stockholder the election of receiving in-kind property distributions, and distributes in- kind property only to those stockholders who accept the directors’ offer.

Off-Balance Sheet Arrangements

As of ~~March~~June 3130, 2017, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As of ~~March~~June 3130, 2017, we own an interest in one joint venture that is accounted for under the equity method of accounting as we exercise significant influence over, but do not control, the investee.

Related-Party Transactions and Agreements

We have entered into agreements with the Advisor and its affiliates ~~and the Dealer Manager~~, whereby we pay certain fees to, or reimburse certain expenses of, the Advisor or its affiliates for acquisition and asset management fees and expenses, organization and offering expenses, ~~selling commissions, dealer manager fees, distribution fees,~~ reimbursement of certain operating costs, and possibly disposition fees. Refer to Note 10 to our consolidated financial statements for a discussion of the various related-party transactions, agreements and fees.

From the commencement of the Continuous Offering through July 26, 2017, the date which the Continuous Offering was terminated, we paid the Dealer Manager selling commissions and dealer manager fees totaling $5,000.

Inflation

Consistent with the multifamily property focus, the majority of the leases we enter into for multifamily apartment homes are for terms of typically one year or less. These terms provide us with maximum flexibility to implement rental increases when the market will bear such increases and may provide us with a hedge against inflation.

Valuation Guidelines; Calculation of NAV

Pursuant to rules recently promulgated by FINRA effective as of April 11, 2016, since we have not yet disclosed an estimated NAV per share, our stockholders’ customer account statements will include a value per share that is equal to the public offering price less all up-front underwriting compensation and certain organization and offering expenses. If we provide an estimated NAV prior to the conclusion of the Offering, the Board may determine to modify the public offering price, including the price at which shares are offered through our DRIP, to reflect the estimated per share NAV. We are not required to provide an estimated NAV based on the value of our assets until August 21, 2018, which is 150 days following the second anniversary of the date we broke escrow in the Continuous Offering (the “NAV Pricing Date”). Prior to providing an estimated NAV based on a valuation of our assets, the per share values that we report will not reflect the proceeds our stockholders would receive upon liquidation or upon the sale of their shares. Furthermore, in the event of any voluntary or involuntary liquidation, dissolution or winding up of us, or any liquidating distribution of our assets, then such assets, or the proceeds therefrom, will be distributed between the holders of Class A shares and Class T shares ratably in proportion to the respective NAV for each class until the NAV for each class has been paid. The NAV will be calculated on a company-wide basis, with any adjustments to Class A or Class T shares made subsequent to such

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we report will not reflect the proceeds our stockholders would receive upon liquidation or upon the sale of their shares. Furthermore, in the event of any voluntary or involuntary liquidation, dissolution or winding up of us, or any liquidating distribution of our assets, then such assets, or the proceeds therefrom, will be distributed between the holders of Class A shares and Class T shares ratably in proportion to the respective NAV for each class until the NAV for each class has been paid. The NAV will be calculated on a company-wide ~~basis, with any adjustments to Class A or Class T shares made subsequent to such company-wide~~ calculation. For purposes of calculating NAV, we intend to use the most recent price paid to acquire the applicable class of shares in the primary offering (ignoring purchase price discounts for certain categories of purchasers) as the estimated per share value of our shares until the Board determines our NAV. Each holder of shares of a particular class of common stock will be entitled to receive, ratably with each other holder of shares of such class, that portion of such aggregate assets available for distribution as the number of outstanding shares of such class held by such holder bears to the total number of outstanding shares of such class then outstanding. ~~If we provide an estimated NAV prior to the conclusion of the Offering, the Board may determine to modify the public offering price to reflect the estimated per share NAV.~~

Prior to August 21, 2018, which is 150 days following the second anniversary of the date we broke escrow in the Continuous Offering (or earlier if the Board so directs or applicable regulations require), we are required to provide an initial estimated NAV per share of each class of our common stock based on the value of our assets. We will provide an update of the initial estimated NAV as of the end of each completed fiscal quarter (or fiscal year, in the case of a quarter ending at a fiscal year-end) thereafter. Once we are required to provide an estimated NAV per share, our NAV will be determined by the Board based on the input of the Advisor, our audit committee and, if engaged by the Board, one or more independent valuation firms. We intend to base our calculation of estimated NAV on the values of our assets and liabilities, without ascribing additional value to our enterprise or the going concern of our business. We expect that the values of our assets and liabilities will reflect the specific terms of our investments and our indebtedness, as well as conditions prevailing in the real estate, credit and broader financial markets. In addition, on a quarterly basis, management will update our NAV to reflect changes in the fair value of our indebtedness, estimated asset disposition costs (including estimates of fees payable to the Advisor and its affiliates), and our other net assets and liabilities. In general, after the NAV Pricing Date, we expect to report our quarterly estimated NAV in filings with the SEC and on our website.

Significant Accounting Policies and Critical Accounting Estimates

Our significant accounting policies are those having the most impact on the reporting of our financial condition and ~~critical~~results ~~accounting~~and those requiring significant judgments and estimates. ~~are~~These ~~disclosed~~policies ininclude ~~Note~~those 2related ~~“Summary~~to: (1) principles of ~~Significant~~consolidation ~~Accounting~~and ~~Policies”~~basis toof ~~our~~presentation, ~~consolidated~~(2) ~~financial~~real ~~statements~~estate investments, (3) impairment, (4) noncontrolling interests, (5) equity in income, (6) organization and offering expenses, (7) reportable segments and (8) fair value measurements.

Our significant accounting policies are disclosed in Note 2 “Summary of Significant Accounting Policies” to the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the adverse effect on the value of assets and liabilities that results from a change in market conditions. Our primary market risk exposure is interest rate risk with respect to our indebtedness. As of ~~March~~June 3130, 2017, we had total indebtedness of $37.9 million, which is floating rate debt with a variable interest rate.

An increase in interest rates could make the financing of any acquisition by us costlier. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of derivative financial instruments, such as interest rate swaps, interest rate caps and rate lock arrangements. As of ~~March~~June 3130, 2017, an interest rate cap agreement covered $26.9 million of the $37.9 million of our total outstanding indebtedness. This interest rate cap agreement caps the related floating rate debt at 6.00% for the term of the agreement, which is 3 years. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable rates for our indebtedness. Increasing rates may make fundraising more difficult if potential investors perceive a rise in rates as a negative for multifamily fundamentals.

As of ~~March~~June 3130, 2017, the weighted average interest rate of our total indebtedness was 3.4973%. Until the interest rate on our $26.9 million of floating rate mortgage debt reaches the cap provided by its interest rate cap agreement, each increase of 25 basis points to the interest rate would result in an approximate increase to our total annual interest expense of the amounts illustrated in the table below for our indebtedness as of ~~March~~June 3130, 2017 (in thousands):

Change in Interest Rates	Annual Increase to Interest Expense
0.25%	$	95
0.50%		190
0.75%		285
1.00%		380

There is no assurance that we would realize such expense as such changes in interest rates could alter our liability positions or strategies in response to such changes.

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We may also be exposed to credit risk in such derivative financial instruments we use. Credit risk is the failure of the counterparty to perform under the terms of the derivative financial instrument. We seek to minimize the credit risk in derivative financial instruments by entering into transactions with high-quality counterparties.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of the end of the period covered by this quarterly report was conducted under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures, as of ~~March~~June 3130, 2017, were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended ~~March~~June 3130, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.

Item 1A. Risk Factors

We have disclosed under Part I, Item 1A, “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”), filed with the U.S. Securities and Exchange Commission on March 28, 2017, risk factors which materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the Annual Report and the other information set forth elsewhere in this quarterly report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Unregistered Sales of Equity Securities

On January 26, 2017, we sold 125 shares of 12.5% Series A Cumulative Non-Voting Preferred Stock, $0.01 par value per share (the “Series A Preferred Shares”), for $1,000 per Series A Preferred Share, pursuant to a private placement that was exempt from registration pursuant to Rule 506(b) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), to 125 “accredited investors,” as such term is defined in Rule 501(a) of Regulation D under the Securities Act, for aggregate gross proceeds of $125,000 (the “Private Offering”). We paid approximately $6,250 in commissions in connection with the sale of the Series A Preferred Shares in the Private Offering. We did not use general solicitation or advertising to market the Series A Preferred Shares. The outstanding Series A Preferred Shares are subject to redemption, at our election. In addition, the Series A Preferred Shares have a distribution and liquidation preference senior to our shares of common stock.

Use of Proceeds

On August 12, 2015, our Registration Statement, registering a public offering of up to $1.1 billion in shares of our common stock, was declared effective under the Securities Act. We ~~are~~offered ~~offering~~ up to $1.0 billion in shares of our common stock to the public in our primary offering and up to $100 million in shares of our common stock pursuant to our DRIP. Highland Capital Funds Distributor, Inc., an affiliate of the Advisor, isserved ~~serving~~ as the dealer manager for our Continuous Offering.

As of ~~March~~June 3130, 2017, we had issued 1,~~034~~103,~~099~~268 shares of Class A common stock in the Continuous Offering, which consisted of the issuance of 434,783 shares to acquire a 95% interest in Estates and the issuance of ~~599~~668,~~316~~485 shares, including 2943,~~843~~456 shares issued pursuant to the DRIP, resulting in gross proceeds of approximately $56.52 million, including approximately $~~283~~412,~~500~~700 of distributions reinvested through the DRIP. In connection with raising the minimum offering amount and breaking escrow, we have recorded approximately $0.1 million of organization and offering expenses through ~~March~~June 3130, 2017 for reimbursements to the Advisor and its affiliates for organization and offering expenses incurred on our behalf.

As of ~~March~~June 3130, 2017, we had recognized selling commissions, dealer manager fees, and organization and other offering costs in the Continuous Offering in the amounts set forth below (dollars in thousands). The dealer manager for the Continuous Offering reallowed all of the selling commissions and dealer manager fees to participating broker-dealers.

Type of Expense	Amount
Selling commissions and dealer manager fees	$	5
Other organization and offering costs		5562
Total expenses	$	6067
Total gross offering proceeds (excluding DRIP proceeds and interest acquired in contributed property)	$	5,~~243~~756
Percentage of gross offering proceeds used to pay for organization and offering costs, selling commissions and dealer manager fees		1.1416	%

From the commencement of the Continuous Offering through ~~March~~June 3130, 2017, the net offering proceeds to us, after deducting the total expenses incurred as described above, were approximately $56.471 million (exclusive of 434,783 shares of Class A common stock issued to our Sponsor in exchange for its 95% interest in Estates), including offering proceeds from the DRIP of approximately $412,700. From the commencement of the Continuous Offering through June 30, 2017, the ratio of the cost of raising equity capital to the gross amount of equity capital raised was approximately 1.16%.

53On July 21, 2017, we filed a post-effective amendment to the Registration Statement to terminate the Continuous Offering and deregister all of our unsold shares of Class A common stock and Class T common stock. The post-effective amendment was declared effective by the SEC on July 26, 2017.

issued to our Sponsor in exchange for its 95% interest in Estates), including offering proceeds from the DRIP of approximately $283,500. From the commencement of the Offering through March 31, 2017, the ratio of the cost of raising equity capital to the gross amount of equity capital raised was approximately 1.14%.56

We intend to use substantially all of the net proceeds from the Offering to directly or indirectly acquire, own, operate and selectively develop well-located “core” and “core-plus” multifamily properties in large cities and suburban markets of large cities, primarily in the Southeastern and Southwestern United States. We intend to also originate preferred equity investments with operators of well-located “core” and “core-plus” multifamily properties. We may also seek to invest in multifamily housing debt and mezzanine debt, and common and preferred stock of both publicly traded and private real estate companies. As of March 31, 2017, we owned a 95% interest in one multifamily property, which we acquired for approximately $39.6 million, and had one preferred equity investment of $5.25 million in a multifamily property. These investments were acquired through the issuance of $4.0 million of our Class A common stock, $2.2 million in proceeds from the Offering, and $38.6 million in secured financings.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number		Exhibit Description
3.1		Articles of Amendment and Restatement of NexPoint Multifamily Capital Trust, Inc. (included as Exhibit 3.1 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (File No. 333-200221) filed on July 10, 2015 and incorporated herein by reference)
10.1*		Third Amendment to Revolving Credit Agreement, by and among Highland Capital Management, L.P. and NexPoint Multifamily Operating Partnership, L.P. as Borrowers and KeyBank, National Association as Lender and Administrative Agent, dated June 30, 2017
3.2		Bylaws of NexPoint Multifamily Capital Trust, Inc. (included as Exhibit 3.2 to the initial public filing of the Registration Statement on Form S-11 (File No. 333-200221) filed on November 14, 2014 and incorporated herein by reference)
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
3.3		Articles of Amendment of NexPoint Multifamily Realty Trust, Inc., filed April 12, 2016 (included as Exhibit 3.3 to the Current Report on Form 8-K (File No. 333-200221) filed on April 13, 2016 and incorporated herein by reference)
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
4.1		Distribution Reinvestment Plan (included in the prospectus dated April 27, 2016 as Appendix A and incorporated herein by reference)
32.1**		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
4.2		First Amendment to Distribution Reinvestment Plan (included as Appendix A to Supplement No. 2 to the Company’s prospectus dated April 27, 2016, as filed on September 9, 2016 and incorporated herein by reference)
101.INS*		XBRL Instance Document
4.3		Form of Subscription Agreement (included in the prospectus dated April 27, 2016 as Appendix B and incorporated herein by reference)
101.SCH*		XBRL Taxonomy Extension Schema Document
4.4		Form of Multiproduct Subscription Agreement (included in the prospectus dated April 27, 2016 as Appendix C and incorporated herein by reference)
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
4.5		Form of Additional Subscription Agreement (included as Appendix D to Supplement No. 6 to the Company’s prospectus dated April 27, 2016, as filed on January 17, 2017 and incorporated herein by reference)
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

10.1		Second Amendment to Revolving Credit Agreement, by and among Highland Capital Management, L.P. and NexPoint Multifamily Operating Partnership, L.P. as Borrowers and KeyBank, National Association as Lender and Administrative Agent, dated April 7, 2017 (included as Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-200221) filed on April 13, 2017 and incorporated herein by reference)
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.

5557

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NEXPOINT MULTIFAMILY CAPITAL TRUST, INC.
Dated: May 11, 2017		/s/ James Dondero
Dated: August 10, 2017		/s/ James Dondero
		James Dondero President (Principal Executive Officer)
Dated: May 11, 2017		/s/ Brian Mitts
Dated: August 10, 2017		/s/ Brian Mitts
		Brian Mitts Chief Financial Officer (Principal Financial and Accounting Officer)

5658

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