12/312019FYFALSE000015806731110.08330.166700015806732019-01-012019-12-31xbrli:shares0001580673us-gaap:CommonClassAMember2020-03-230001580673pacificoak:CommonClassTMember2020-03-23iso4217:USD00015806732019-06-3000015806732019-12-3100015806732018-12-31iso4217:USDxbrli:shares0001580673us-gaap:CommonClassAMember2018-12-310001580673us-gaap:CommonClassAMember2019-12-310001580673pacificoak:CommonClassTMember2019-12-310001580673pacificoak:CommonClassTMember2018-12-310001580673srt:HotelMember2019-01-012019-12-310001580673srt:HotelMember2018-01-012018-12-310001580673srt:HotelMember2017-01-012017-12-3100015806732018-01-012018-12-3100015806732017-01-012017-12-310001580673us-gaap:RealEstateMember2019-01-012019-12-310001580673us-gaap:RealEstateMember2018-01-012018-12-310001580673us-gaap:RealEstateMember2017-01-012017-12-310001580673us-gaap:CommonClassAMember2019-01-012019-12-310001580673us-gaap:CommonClassAMember2018-01-012018-12-310001580673us-gaap:CommonClassAMember2017-01-012017-12-310001580673pacificoak:CommonClassTMember2019-01-012019-12-310001580673pacificoak:CommonClassTMember2018-01-012018-12-310001580673pacificoak:CommonClassTMember2017-01-012017-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2016-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2016-12-310001580673us-gaap:AdditionalPaidInCapitalMember2016-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2016-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2016-12-310001580673us-gaap:ParentMember2016-12-310001580673us-gaap:NoncontrollingInterestMember2016-12-3100015806732016-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2017-01-012017-12-310001580673us-gaap:ParentMember2017-01-012017-12-310001580673us-gaap:NoncontrollingInterestMember2017-01-012017-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-01-012017-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2017-01-012017-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2017-01-012017-12-310001580673us-gaap:AdditionalPaidInCapitalMember2017-01-012017-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2017-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2017-12-310001580673us-gaap:AdditionalPaidInCapitalMember2017-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2017-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-12-310001580673us-gaap:ParentMember2017-12-310001580673us-gaap:NoncontrollingInterestMember2017-12-3100015806732017-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2018-01-012018-12-310001580673us-gaap:ParentMember2018-01-012018-12-310001580673us-gaap:NoncontrollingInterestMember2018-01-012018-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-01-012018-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2018-01-012018-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2018-01-012018-12-310001580673us-gaap:AdditionalPaidInCapitalMember2018-01-012018-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2018-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2018-12-310001580673us-gaap:AdditionalPaidInCapitalMember2018-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2018-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001580673us-gaap:ParentMember2018-12-310001580673us-gaap:NoncontrollingInterestMember2018-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2019-01-012019-12-310001580673us-gaap:ParentMember2019-01-012019-12-310001580673us-gaap:NoncontrollingInterestMember2019-01-012019-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-01-012019-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2019-01-012019-12-310001580673us-gaap:AdditionalPaidInCapitalMember2019-01-012019-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2019-12-310001580673us-gaap:AdditionalPaidInCapitalMember2019-12-310001580673us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember2019-12-310001580673us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001580673us-gaap:ParentMember2019-12-310001580673us-gaap:NoncontrollingInterestMember2019-12-31xbrli:pure0001580673pacificoak:KBSStrategicOpportunityLimitedPartnershipIIMember2019-01-012019-12-31pacificoak:subsidiary00015806732019-11-012019-11-010001580673pacificoak:PacificOakCapitalAdvisorsLLCMember2019-11-012019-11-01pacificoak:property0001580673srt:HotelMember2019-12-310001580673srt:OfficeBuildingMember2019-12-310001580673srt:ApartmentBuildingMember2019-12-31pacificoak:instrument0001580673pacificoak:RetailPropertyMember2019-12-310001580673us-gaap:CommonStockMemberus-gaap:PrivatePlacementMember2013-07-032014-08-110001580673us-gaap:PrivatePlacementMember2013-07-032014-08-110001580673us-gaap:IPOMembersrt:MaximumMemberus-gaap:CommonStockMember2013-11-140001580673us-gaap:IPOMemberus-gaap:CommonStockMember2013-11-140001580673us-gaap:IPOMemberus-gaap:CommonClassAMemberus-gaap:CommonStockMember2015-01-072017-12-310001580673us-gaap:IPOMemberus-gaap:CommonStockMemberpacificoak:CommonClassTMember2015-01-072017-12-310001580673us-gaap:IPOMember2015-01-072017-12-310001580673us-gaap:IPOMemberus-gaap:CommonClassAMemberus-gaap:CommonStockMember2015-01-072019-12-310001580673us-gaap:IPOMemberus-gaap:CommonStockMemberpacificoak:CommonClassTMember2015-01-072019-12-310001580673us-gaap:IPOMember2015-01-072019-12-310001580673us-gaap:CommonClassAMemberus-gaap:CommonStockMember2015-01-072019-12-310001580673us-gaap:CommonStockMemberpacificoak:CommonClassTMember2015-01-072019-12-3100015806732015-01-072019-12-310001580673us-gaap:CommonStockMember2013-07-032013-07-030001580673us-gaap:CommonStockMember2013-07-030001580673pacificoak:WillowbrookCapitalGroupLLCMemberus-gaap:CommonClassAMemberus-gaap:CommonStockMemberus-gaap:PrivatePlacementMember2014-04-022014-04-020001580673pacificoak:WillowbrookCapitalGroupLLCMemberus-gaap:CommonClassAMemberus-gaap:CommonStockMemberus-gaap:PrivatePlacementMember2014-07-312014-07-310001580673pacificoak:WillowbrookCapitalGroupLLCMemberus-gaap:CommonClassAMemberus-gaap:CommonStockMemberus-gaap:PrivatePlacementMember2017-07-142017-07-140001580673pacificoak:WillowbrookCapitalGroupLLCMemberus-gaap:CommonClassAMemberus-gaap:CommonStockMemberus-gaap:PrivatePlacementMember2018-02-132018-02-13pacificoak:investment0001580673pacificoak:OfficeRevenueMemberus-gaap:AccountingStandardsUpdate201602Member2018-01-012018-12-310001580673pacificoak:RealEstateRevenueMemberus-gaap:AccountingStandardsUpdate201602Member2018-01-012018-12-310001580673pacificoak:OfficeRevenueMemberus-gaap:AccountingStandardsUpdate201602Member2017-01-012017-12-310001580673pacificoak:RealEstateRevenueMemberus-gaap:AccountingStandardsUpdate201602Member2017-01-012017-12-31pacificoak:lease0001580673srt:OfficeBuildingMemberus-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMember2019-01-012019-12-310001580673us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMember2018-01-012018-12-310001580673us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMember2017-01-012017-12-310001580673srt:MinimumMemberus-gaap:BuildingMember2019-01-012019-12-310001580673srt:MaximumMemberus-gaap:BuildingMember2019-01-012019-12-310001580673us-gaap:BuildingImprovementsMembersrt:MinimumMember2019-01-012019-12-310001580673us-gaap:BuildingImprovementsMembersrt:MaximumMember2019-01-012019-12-310001580673pacificoak:TenantImprovementsMember2019-01-012019-12-310001580673pacificoak:TenantOriginationAndAbsorptionCostsMember2019-01-012019-12-310001580673pacificoak:RealEstateSubsidiesAbatementsMember2019-01-012019-12-310001580673srt:MinimumMemberus-gaap:FurnitureAndFixturesMember2019-01-012019-12-310001580673srt:MaximumMemberus-gaap:FurnitureAndFixturesMember2019-01-012019-12-310001580673pacificoak:AmendmentofShareRedemptionProgramMember2016-02-162016-02-160001580673pacificoak:AmendmentofShareRedemptionProgramMember2019-12-310001580673pacificoak:HeldForOneYearMember2016-02-162016-02-160001580673pacificoak:HeldForOneYearMemberpacificoak:AmendmentofShareRedemptionProgramMember2016-02-162016-02-160001580673pacificoak:HeldForTwoYearsMember2016-02-162016-02-160001580673pacificoak:AmendmentofShareRedemptionProgramMemberpacificoak:HeldForTwoYearsMember2016-02-162016-02-160001580673pacificoak:HeldForThreeYearsMember2016-02-162016-02-160001580673pacificoak:HeldForThreeYearsMemberpacificoak:AmendmentofShareRedemptionProgramMember2016-02-162016-02-160001580673pacificoak:HeldForFourYearsMember2016-02-162016-02-160001580673pacificoak:HeldForFourYearsMemberpacificoak:AmendmentofShareRedemptionProgramMember2016-02-162016-02-160001580673pacificoak:AmendmentofShareRedemptionProgramMember2016-02-160001580673pacificoak:HeldForOneYearMember2017-06-302017-06-300001580673pacificoak:HeldForOneYearMemberpacificoak:AmendmentofShareRedemptionProgramMember2017-06-302017-06-300001580673pacificoak:HeldForTwoYearsMember2017-06-302017-06-300001580673pacificoak:AmendmentofShareRedemptionProgramMemberpacificoak:HeldForTwoYearsMember2017-06-302017-06-300001580673pacificoak:HeldForThreeYearsMember2017-06-302017-06-300001580673pacificoak:HeldForThreeYearsMemberpacificoak:AmendmentofShareRedemptionProgramMember2017-06-302017-06-300001580673pacificoak:HeldForFourYearsMember2017-06-302017-06-300001580673pacificoak:HeldForFourYearsMemberpacificoak:AmendmentofShareRedemptionProgramMember2017-06-302017-06-3000015806732017-06-0600015806732018-12-0600015806732019-12-170001580673us-gaap:CommonStockMember2019-01-012019-12-310001580673pacificoak:UnfulfilledRedemptionRequestMember2019-12-310001580673pacificoak:KbsCapitalAdvisorsLlcMember2019-12-310001580673pacificoak:KbsCapitalAdvisorsLlcOrAffiliatesMember2019-12-310001580673pacificoak:KbsCapitalAdvisorsLlcAffiliatesOrUnaffiliatedThirdPartiesMembersrt:MaximumMember2019-12-3100015806732015-01-012015-12-3100015806732016-01-012016-12-3100015806732019-03-072019-03-0700015806732018-12-062018-12-0600015806732017-01-012018-11-30pacificoak:loan0001580673pacificoak:KbsCapitalAdvisorsLlcMember2019-01-012019-12-310001580673us-gaap:LandMember2019-12-310001580673us-gaap:LandMember2018-12-310001580673us-gaap:BuildingAndBuildingImprovementsMember2019-12-310001580673us-gaap:BuildingAndBuildingImprovementsMember2018-12-310001580673pacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:TenantOriginationAndAbsorptionCostsMember2018-12-310001580673pacificoak:SpringmaidBeachResortMember2019-01-012019-12-310001580673us-gaap:LandMemberpacificoak:SpringmaidBeachResortMember2019-12-310001580673us-gaap:BuildingAndBuildingImprovementsMemberpacificoak:SpringmaidBeachResortMember2019-12-310001580673pacificoak:SpringmaidBeachResortMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:SpringmaidBeachResortMember2019-12-310001580673pacificoak:QandCHotelMember2019-01-012019-12-310001580673us-gaap:LandMemberpacificoak:QandCHotelMember2019-12-310001580673us-gaap:BuildingAndBuildingImprovementsMemberpacificoak:QandCHotelMember2019-12-310001580673pacificoak:QandCHotelMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:QandCHotelMember2019-12-310001580673pacificoak:LincolnCourtMember2019-01-012019-12-310001580673pacificoak:LincolnCourtMemberus-gaap:LandMember2019-12-310001580673pacificoak:LincolnCourtMemberus-gaap:BuildingAndBuildingImprovementsMember2019-12-310001580673pacificoak:LincolnCourtMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:LincolnCourtMember2019-12-310001580673pacificoak:LoftsatNoHoCommonsMember2019-01-012019-12-310001580673pacificoak:LoftsatNoHoCommonsMemberus-gaap:LandMember2019-12-310001580673pacificoak:LoftsatNoHoCommonsMemberus-gaap:BuildingAndBuildingImprovementsMember2019-12-310001580673pacificoak:LoftsatNoHoCommonsMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:LoftsatNoHoCommonsMember2019-12-310001580673pacificoak:A210West31stStreetMember2019-01-012019-12-310001580673pacificoak:A210West31stStreetMemberus-gaap:LandMember2019-12-310001580673pacificoak:A210West31stStreetMemberus-gaap:BuildingAndBuildingImprovementsMember2019-12-310001580673pacificoak:A210West31stStreetMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:A210West31stStreetMember2019-12-310001580673pacificoak:OaklandCityCenterMember2019-01-012019-12-310001580673us-gaap:LandMemberpacificoak:OaklandCityCenterMember2019-12-310001580673us-gaap:BuildingAndBuildingImprovementsMemberpacificoak:OaklandCityCenterMember2019-12-310001580673pacificoak:OaklandCityCenterMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:OaklandCityCenterMember2019-12-310001580673pacificoak:GraceCourtMember2019-01-012019-12-310001580673us-gaap:LandMemberpacificoak:GraceCourtMember2019-12-310001580673us-gaap:BuildingAndBuildingImprovementsMemberpacificoak:GraceCourtMember2019-12-310001580673pacificoak:GraceCourtMemberpacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673pacificoak:GraceCourtMember2019-12-310001580673pacificoak:MadisonSquareMember2019-12-310001580673us-gaap:OccupancyMembersrt:HotelMember2019-01-012019-12-310001580673us-gaap:OccupancyMembersrt:HotelMember2018-01-012018-12-310001580673us-gaap:OccupancyMembersrt:HotelMember2017-01-012017-12-310001580673us-gaap:FoodAndBeverageMembersrt:HotelMember2019-01-012019-12-310001580673us-gaap:FoodAndBeverageMembersrt:HotelMember2018-01-012018-12-310001580673us-gaap:FoodAndBeverageMembersrt:HotelMember2017-01-012017-12-310001580673pacificoak:CampgroundMembersrt:HotelMember2019-01-012019-12-310001580673pacificoak:CampgroundMembersrt:HotelMember2018-01-012018-12-310001580673pacificoak:CampgroundMembersrt:HotelMember2017-01-012017-12-310001580673us-gaap:HotelOtherMembersrt:HotelMember2019-01-012019-12-310001580673us-gaap:HotelOtherMembersrt:HotelMember2018-01-012018-12-310001580673us-gaap:HotelOtherMembersrt:HotelMember2017-01-012017-12-310001580673srt:HotelMember2019-01-012019-12-310001580673srt:HotelMember2018-01-012018-12-310001580673srt:HotelMember2017-01-012017-12-310001580673us-gaap:PublicUtilitiesMembersrt:HotelMember2019-01-012019-12-310001580673us-gaap:PublicUtilitiesMembersrt:HotelMember2018-01-012018-12-310001580673us-gaap:PublicUtilitiesMembersrt:HotelMember2017-01-012017-12-310001580673pacificoak:SpringmaidBeachResortMembersrt:HotelMember2017-01-012017-12-310001580673us-gaap:OtherLiabilitiesMember2019-12-310001580673us-gaap:OtherLiabilitiesMember2018-12-310001580673us-gaap:OtherLiabilitiesMember2019-01-012019-12-310001580673us-gaap:OtherLiabilitiesMember2018-01-012018-12-31utr:sqft0001580673srt:OfficeBuildingMember2019-01-012019-12-310001580673srt:OfficeBuildingMember2018-01-012018-12-310001580673srt:OfficeBuildingMember2017-01-012017-12-310001580673pacificoak:A210West31stStreetMembersrt:OfficeBuildingMember2019-01-012019-12-310001580673srt:MaximumMember2019-12-310001580673srt:WeightedAverageMember2019-12-31pacificoak:tenant0001580673pacificoak:IndustryLegalServicesMember2019-12-310001580673pacificoak:IndustryLegalServicesMember2019-01-012019-12-310001580673pacificoak:IndustryPublicAdministrationMember2019-12-310001580673pacificoak:IndustryPublicAdministrationMember2019-01-012019-12-310001580673pacificoak:IndustryProfessionalScientificAndTechnicalServicesMember2019-12-310001580673pacificoak:IndustryProfessionalScientificAndTechnicalServicesMember2019-01-012019-12-310001580673pacificoak:OfficeRevenueMember2019-01-012019-12-310001580673pacificoak:DirectCostsOfOfficeMember2019-01-012019-12-310001580673pacificoak:DirectCostsOfOfficeMember2018-01-012018-12-310001580673pacificoak:DirectCostsOfOfficeMember2017-01-012017-12-31pacificoak:unit0001580673srt:ApartmentBuildingMember2019-01-012019-12-310001580673srt:ApartmentBuildingMember2018-01-012018-12-310001580673srt:ApartmentBuildingMember2017-01-012017-12-310001580673stpr:CAus-gaap:AssetsTotalMember2019-01-012019-12-310001580673srt:OfficeBuildingMemberus-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMember2018-01-012018-12-310001580673srt:OfficeBuildingMemberus-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMemberpacificoak:A2200PaseoVerdeMember2019-11-040001580673srt:OfficeBuildingMemberus-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMemberpacificoak:A2200PaseoVerdeMember2019-01-012019-12-310001580673us-gaap:DisposalGroupHeldforsaleNotDiscontinuedOperationsMember2019-12-310001580673us-gaap:DisposalGroupHeldforsaleNotDiscontinuedOperationsMember2018-12-310001580673us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMember2019-01-012019-12-310001580673pacificoak:A210West31stStreetMember2018-01-012018-12-310001580673pacificoak:A210West31stStreetMember2018-12-3100015806732017-01-012019-12-310001580673pacificoak:TenantOriginationAndAbsorptionCostsMember2019-12-310001580673us-gaap:AboveMarketLeasesMember2019-12-310001580673pacificoak:TenantOriginationAndAbsorptionCostsMember2019-01-012019-12-310001580673us-gaap:AboveMarketLeasesMember2019-01-012019-12-310001580673pacificoak:BelowMarketLeaseLiabilitiesMember2019-01-012019-12-310001580673us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember2019-12-310001580673us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember2018-12-310001580673pacificoak:HousingSubsidyIntangibleAssetMember2019-01-012019-12-310001580673pacificoak:HousingSubsidyIntangibleAssetMember2018-01-012018-12-310001580673pacificoak:HousingSubsidyIntangibleAssetMember2017-01-012017-12-310001580673srt:MinimumMemberpacificoak:PropertyTaxAbatementIntangibleAssetMember2019-01-012019-12-310001580673pacificoak:PropertyTaxAbatementIntangibleAssetMember2019-01-012019-12-310001580673pacificoak:PropertyTaxAbatementIntangibleAssetMember2018-01-012018-12-310001580673pacificoak:PropertyTaxAbatementIntangibleAssetMember2017-01-012017-12-310001580673pacificoak:FranklinStreetPropertiesCorp.Memberus-gaap:AvailableforsaleSecuritiesMember2019-01-012019-12-31iso4217:EUR0001580673pacificoak:IndustrialMemberpacificoak:RealEstateJointVentureMember2016-06-280001580673pacificoak:IndustrialMemberpacificoak:RealEstateJointVentureMember2016-06-282016-06-280001580673pacificoak:IndustrialMemberpacificoak:RealEstateJointVentureMember2019-01-012019-12-310001580673pacificoak:IndustrialMemberpacificoak:RealEstateJointVentureMember2018-01-012018-12-310001580673pacificoak:IndustrialMemberpacificoak:RealEstateJointVentureMember2017-01-012017-12-310001580673pacificoak:IndustrialMemberpacificoak:RealEstateJointVentureMember2019-12-310001580673pacificoak:PacificOakOpportunityZoneFundIMember2019-12-31pacificoak:numberOfJointVentures0001580673us-gaap:MortgagesMemberpacificoak:SpringmaidBeachResortMortgageLoanMember2019-12-310001580673us-gaap:MortgagesMemberpacificoak:SpringmaidBeachResortMortgageLoanMember2018-12-310001580673us-gaap:MortgagesMemberpacificoak:SpringmaidBeachResortMortgageLoanMember2019-01-012019-12-310001580673pacificoak:QandCHotelMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:QandCHotelMortgageLoanMemberus-gaap:MortgagesMember2018-12-310001580673pacificoak:QandCHotelMortgageLoanMemberus-gaap:MortgagesMember2019-01-012019-12-310001580673pacificoak:A2200PaseoVerdeMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:A2200PaseoVerdeMortgageLoanMemberus-gaap:MortgagesMember2018-12-310001580673us-gaap:MortgagesMemberpacificoak:LincolnCourtMortgageLoanMember2019-12-310001580673us-gaap:MortgagesMemberpacificoak:LincolnCourtMortgageLoanMember2018-12-310001580673us-gaap:MortgagesMemberpacificoak:LincolnCourtMortgageLoanMember2019-01-012019-12-310001580673pacificoak:LoftsatNoHoCommonsMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:LoftsatNoHoCommonsMortgageLoanMemberus-gaap:MortgagesMember2018-12-310001580673pacificoak:LoftsatNoHoCommonsMortgageLoanMemberus-gaap:MortgagesMember2019-01-012019-12-310001580673us-gaap:MortgagesMemberpacificoak:A210West31stStreetMortgageLoanMember2019-12-310001580673us-gaap:MortgagesMemberpacificoak:A210West31stStreetMortgageLoanMember2018-12-310001580673us-gaap:MortgagesMemberpacificoak:A210West31stStreetMortgageLoanMember2019-01-012019-12-310001580673pacificoak:OaklandCityCenterMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:OaklandCityCenterMortgageLoanMemberus-gaap:MortgagesMember2018-12-310001580673pacificoak:OaklandCityCenterMortgageLoanMemberus-gaap:MortgagesMember2019-01-012019-12-310001580673pacificoak:MadisonSquareMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:MadisonSquareMortgageLoanMemberus-gaap:MortgagesMember2018-12-310001580673pacificoak:MadisonSquareMortgageLoanMemberus-gaap:MortgagesMember2019-01-012019-12-310001580673us-gaap:SecuredDebtMemberus-gaap:MortgagesMemberpacificoak:SpringmaidBeachResortMortgageLoanMember2019-12-310001580673pacificoak:QandCHotelMortgageLoanMemberus-gaap:MortgagesMemberus-gaap:LondonInterbankOfferedRateLIBORMember2019-12-232019-12-230001580673pacificoak:QandCHotelMortgageLoanMemberus-gaap:MortgagesMember2019-12-230001580673pacificoak:A2200PaseoVerdeMortgageLoanMemberus-gaap:MortgagesMember2019-11-042019-11-040001580673us-gaap:SecuredDebtMemberpacificoak:A2200PaseoVerdeMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673us-gaap:MortgagesMemberpacificoak:A210West31stStreetMortgageLoanMember2019-12-160001580673us-gaap:SecuredDebtMemberpacificoak:OaklandCityCenterMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673us-gaap:SecuredDebtMemberpacificoak:GraceCourtMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:MadisonSquareMortgageLoanMemberus-gaap:MortgagesMemberus-gaap:LondonInterbankOfferedRateLIBORMember2019-01-012019-12-310001580673srt:MaximumMemberpacificoak:GraceCourtMortgageLoanMemberus-gaap:MortgagesMember2019-12-310001580673pacificoak:A210West31stStreetMember2017-01-012017-12-310001580673us-gaap:InterestRateCapMember2019-01-012019-12-310001580673us-gaap:InterestRateCapMember2018-01-012018-12-310001580673us-gaap:InterestRateCapMember2017-01-012017-12-310001580673us-gaap:InterestRateCapMember2019-12-310001580673us-gaap:ForeignExchangeContractMember2019-05-090001580673us-gaap:ForeignExchangeContractMember2019-05-092019-05-090001580673us-gaap:ForeignExchangeContractMemberus-gaap:GeneralAndAdministrativeExpenseMember2019-01-012019-12-310001580673us-gaap:ForeignExchangeContractMemberus-gaap:GeneralAndAdministrativeExpenseMember2018-01-012018-12-310001580673us-gaap:OtherLiabilitiesMemberus-gaap:ForeignExchangeContractMember2019-12-310001580673us-gaap:OtherLiabilitiesMemberus-gaap:ForeignExchangeContractMember2018-12-310001580673us-gaap:CarryingReportedAmountFairValueDisclosureMember2019-12-310001580673us-gaap:EstimateOfFairValueFairValueDisclosureMember2019-12-310001580673us-gaap:CarryingReportedAmountFairValueDisclosureMember2018-12-310001580673us-gaap:EstimateOfFairValueFairValueDisclosureMember2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMember2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMember2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMemberus-gaap:FairValueInputsLevel1Member2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMemberus-gaap:FairValueInputsLevel2Member2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMemberus-gaap:FairValueInputsLevel3Member2019-12-310001580673us-gaap:FairValueMeasurementsRecurringMember2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMember2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMemberus-gaap:FairValueInputsLevel1Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMemberus-gaap:FairValueInputsLevel2Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:InterestRateCapMemberus-gaap:FairValueInputsLevel3Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:ForeignExchangeContractMember2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:ForeignExchangeContractMemberus-gaap:FairValueInputsLevel1Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:ForeignExchangeContractMemberus-gaap:FairValueInputsLevel2Member2018-12-310001580673us-gaap:FairValueMeasurementsRecurringMemberus-gaap:ForeignExchangeContractMemberus-gaap:FairValueInputsLevel3Member2018-12-310001580673us-gaap:FairValueMeasurementsNonrecurringMember2018-12-310001580673us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsNonrecurringMember2018-12-310001580673us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsNonrecurringMember2018-12-310001580673us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsNonrecurringMember2018-12-310001580673pacificoak:KbsCapitalAdvisorsLlcMember2019-11-012019-11-010001580673pacificoak:DealerManagerAgreementMembersrt:MaximumMemberus-gaap:CommonStockMember2017-02-160001580673pacificoak:DealerManagerAgreementMemberus-gaap:CommonClassAMembersrt:MaximumMemberus-gaap:CommonStockMember2016-02-170001580673pacificoak:DealerManagerAgreementMembersrt:MaximumMemberus-gaap:CommonStockMemberpacificoak:CommonClassTMember2016-02-170001580673pacificoak:DealerManagerAgreementMembersrt:MaximumMemberus-gaap:CommonStockMember2016-02-170001580673pacificoak:DealerManagerAgreementMemberus-gaap:CommonStockMember2016-02-170001580673pacificoak:DealerManagerAgreementMemberus-gaap:CommonStockMemberpacificoak:CommonClassTMember2016-02-170001580673pacificoak:DealerManagerAgreementMemberus-gaap:CommonStockMemberpacificoak:CommonClassTMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOperatingExpensesMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOperatingExpensesMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOperatingExpensesMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOperatingExpensesMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOperatingExpensesMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:RealEstateDispositionFeeMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:RealEstateDispositionFeeMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:RealEstateDispositionFeeMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:RealEstateDispositionFeeMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:RealEstateDispositionFeeMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AcquisitionFeeonDevelopmentProjectMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AcquisitionFeeonDevelopmentProjectMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AcquisitionFeeonDevelopmentProjectMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AcquisitionFeeonDevelopmentProjectMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AcquisitionFeeonDevelopmentProjectMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesonDevelopmentProjectMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesonDevelopmentProjectMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesonDevelopmentProjectMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesonDevelopmentProjectMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:AssetManagementFeesonDevelopmentProjectMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:SalesCommissionsMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:SalesCommissionsMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:SalesCommissionsMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:SalesCommissionsMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:SalesCommissionsMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:DealerManagerFeesMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:DealerManagerFeesMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:DealerManagerFeesMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:DealerManagerFeesMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:DealerManagerFeesMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:StockholderServicingFeesMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:StockholderServicingFeesMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:StockholderServicingFeesMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:StockholderServicingFeesMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:StockholderServicingFeesMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOtherOfferingCostsMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOtherOfferingCostsMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOtherOfferingCostsMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOtherOfferingCostsMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMemberpacificoak:ReimbursableOtherOfferingCostsMember2018-12-310001580673pacificoak:AdvisorAndDealerManagerMember2019-01-012019-12-310001580673pacificoak:AdvisorAndDealerManagerMember2018-01-012018-12-310001580673pacificoak:AdvisorAndDealerManagerMember2017-01-012017-12-310001580673pacificoak:AdvisorAndDealerManagerMember2019-12-310001580673pacificoak:AdvisorAndDealerManagerMember2018-12-310001580673pacificoak:KbsCapitalAdvisorsLlcMemberpacificoak:PropertyInsuranceRebateMember2018-01-012018-12-310001580673pacificoak:KbsCapitalAdvisorsLlcMemberpacificoak:LegalandProfessionalFeesReimbursementandPropertyInsuranceRebateMember2017-12-310001580673us-gaap:PrivatePlacementMember2019-12-310001580673us-gaap:PrivatePlacementMember2019-01-012019-12-310001580673us-gaap:IPOMemberpacificoak:KbsCapitalAdvisorsLlcMembersrt:MinimumMember2019-12-310001580673us-gaap:IPOMember2019-01-012019-12-310001580673us-gaap:IPOMember2019-12-310001580673pacificoak:KbsCapitalAdvisorsLlcMemberpacificoak:FollowonOfferingMember2019-01-012019-12-310001580673pacificoak:PacificOakOpportunityZoneFundILLCMember2019-12-310001580673pacificoak:PacificOakCapitalAdvisorsLLCMember2019-12-3100015806732019-01-012019-03-3100015806732019-04-012019-06-3000015806732019-07-012019-09-3000015806732019-10-012019-12-310001580673us-gaap:CommonClassAMember2019-01-012019-03-310001580673us-gaap:CommonClassAMember2019-04-012019-06-300001580673us-gaap:CommonClassAMember2019-07-012019-09-300001580673us-gaap:CommonClassAMember2019-10-012019-12-310001580673pacificoak:CommonClassTMember2019-01-012019-03-310001580673pacificoak:CommonClassTMember2019-04-012019-06-300001580673pacificoak:CommonClassTMember2019-07-012019-09-300001580673pacificoak:CommonClassTMember2019-10-012019-12-3100015806732018-01-012018-03-3100015806732018-04-012018-06-3000015806732018-07-012018-09-3000015806732018-10-012018-12-310001580673us-gaap:CommonClassAMember2018-01-012018-03-310001580673us-gaap:CommonClassAMember2018-04-012018-06-300001580673us-gaap:CommonClassAMember2018-07-012018-09-300001580673us-gaap:CommonClassAMember2018-10-012018-12-310001580673pacificoak:CommonClassTMember2018-01-012018-03-310001580673pacificoak:CommonClassTMember2018-04-012018-06-300001580673pacificoak:CommonClassTMember2018-07-012018-09-300001580673pacificoak:CommonClassTMember2018-10-012018-12-310001580673pacificoak:DoubletreeManagementLLCMemberpacificoak:SpringmaidBeachResortMember2019-01-012019-12-310001580673pacificoak:DoubletreeManagementLLCMemberpacificoak:SpringmaidBeachResortMember2018-01-012018-12-310001580673pacificoak:DoubletreeManagementLLCMemberpacificoak:SpringmaidBeachResortMember2017-01-012017-12-310001580673pacificoak:QandCHotelMemberpacificoak:EncoreHospitalityLLCMember2019-01-012019-12-310001580673pacificoak:DirectCostsofHotelsMemberpacificoak:QandCHotelMemberpacificoak:EncoreHospitalityLLCMember2019-01-012019-12-310001580673pacificoak:DirectCostsofHotelsMemberpacificoak:QandCHotelMemberpacificoak:EncoreHospitalityLLCMember2018-01-012018-12-310001580673pacificoak:DirectCostsofHotelsMemberpacificoak:QandCHotelMemberpacificoak:EncoreHospitalityLLCMember2017-01-012017-12-310001580673pacificoak:MarriottInternationalMemberpacificoak:QandCHotelMember2019-01-012019-12-310001580673pacificoak:MarriottInternationalMemberpacificoak:QandCHotelMember2018-01-012018-12-310001580673pacificoak:MarriottInternationalMemberpacificoak:QandCHotelMember2017-01-012017-12-310001580673us-gaap:DividendPaidMemberus-gaap:SubsequentEventMember2020-01-022020-01-020001580673us-gaap:SubsequentEventMemberpacificoak:PacificOakStrategicOpportunityREITIncMember2020-02-19

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________________________

FORM 10-K

__________________________________________________________________________________________

(Mark One)

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

For the fiscal year ended December 31, ~~2018~~2019

¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-55424

__________________________________________________________________________________________

~~KBS~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

(Exact Name of Registrant as Specified in Its Charter)

__________________________________________________________________________________________

Maryland	~~46-2822978~~	46-2822978
(State or Other Jurisdiction ofIncorporation or Organization)	~~(I.R.S. EmployerIdentification No.)~~	(I.R.S. EmployerIdentification No.)
800 Newport Center Drive, Suite 700Newport Beach, California	92660
11150 Santa Monica Blvd., Suite 400Los Angeles, California		90025
(Address of Principal Executive Offices)	~~(Zip Code)~~	(Zip Code)

(~~949~~424) ~~417~~208-~~6500~~8100

(Registrant’s Telephone Number, Including Area Code)

__________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of ~~Each~~each ~~Class~~class Trading Symbol(s) Name of ~~Each~~each ~~Exchange~~exchange on ~~Which~~which ~~Registered~~registered None ~~None~~N/A N/A

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $0.01 par value per share

Class T Common Stock, $0.01 par value per share

__________________________________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x☒ No ¨☐

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~is ~~filers~~a ~~pursuant~~large toaccelerated ~~Item~~filer, ~~405~~an ofaccelerated ~~Regulation~~filer, Sa non-Kaccelerated isfiler, ~~not~~a ~~contained~~smaller ~~herein,~~reporting ~~and~~company ~~will~~or ~~not~~an beemerging ~~contained,~~growth tocompany. See the ~~best~~definitions of ~~Registrant’s~~“large ~~knowledge~~accelerated filer,” in“accelerated ~~definitive~~filer,” ~~proxy~~“smaller orreporting ~~information~~company” ~~statements~~and ~~incorporated~~“emerging bygrowth ~~reference~~company” in ~~Part~~Rule 12b-2 ~~III~~ of the ~~Form~~Exchange ~~10-K~~Act. or(Check ~~any amendment of this Form 10-K. ¨~~one):

Large Accelerated Filer ¨☐ Accelerated Filer ¨☐ Non-Accelerated Filer x☒ Smaller reporting company x☒ Emerging growth company x☒

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. x☒

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

There is no established market for the Registrant’s shares of common stock. On December 617, ~~2018~~2019, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $910.6525 based on the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities divided by the number of shares outstanding, all as of September 30, ~~2018~~2019, with the exception of the following adjustments: (i) consolidated investments in real estate properties were valued as of October 31, 2019; (ii) an adjustment to reduce cash for the amount of capital expenditures incurred in October 2019; (iii) an adjustment for disposition costs and fees incurred in connection with the disposition of 2200 Paseo Verde. For a full description of the methodologies used to value the Registrant’s assets and liabilities in connection with the calculation the estimated value per share as of December 617, ~~2018~~2019, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” As of June 30, 2018, the Registrant was selling shares in its initial public offering at $10.00 per share of Class A common stock and $9.63 per share of Class T common stock, with discounts available for certain categories of purchasers. There were approximately 29,~~065~~829,~~490~~329 shares of common stock held by non-affiliates as of June 30, ~~2018~~2019, the last business day of the Registrant’s most recently completed second fiscal quarter.

As of March 4 23, ~~2019~~2020, there were 17,~~920~~842,~~460~~301 and 12,~~216~~222,~~244~~529 outstanding shares of Class A and Class T common stock of the Registrant, respectively.

Table of Contents

TABLE OF CONTENTS

PART I.

~~ITEM 1.~~

~~BUSINESS~~

3ITEM 1.

BUSINESS

~~ITEM 1A.~~

~~RISK FACTORS~~

6ITEM 1A.

RISK FACTORS

~~ITEM 1B.~~

~~UNRESOLVED STAFF COMMENTS~~

39ITEM 1B.

UNRESOLVED STAFF COMMENTS

~~ITEM 2.~~

~~PROPERTIES~~

39ITEM 2.

PROPERTIES

~~ITEM 3.~~

~~LEGAL PROCEEDINGS~~

42ITEM 3.

LEGAL PROCEEDINGS

~~ITEM 4.~~

~~MINE SAFETY DISCLOSURES~~

42ITEM 4.

MINE SAFETY DISCLOSURES

PART II.

~~ITEM 5.~~

~~MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~

43ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~ITEM 6.~~

~~SELECTED FINANCIAL DATA~~

53ITEM 6.

SELECTED FINANCIAL DATA

~~ITEM 7.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

53ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~ITEM 7A.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

70ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~ITEM 8.~~

~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~

71ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~ITEM 9.~~

~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~

71ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

~~ITEM 9A.~~

~~CONTROLS AND PROCEDURES~~

72ITEM 9A.

CONTROLS AND PROCEDURES

~~ITEM 9B.~~

~~OTHER INFORMATION~~

72ITEM 9B.

OTHER INFORMATION

PART III.

~~ITEM 10.~~

~~DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE~~

73ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

~~ITEM 11.~~

~~EXECUTIVE COMPENSATION~~

77ITEM 11.

EXECUTIVE COMPENSATION

~~ITEM 12.~~

~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS~~

78ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

~~ITEM 13.~~

~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE~~

78ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

~~ITEM14.~~

~~PRINCIPAL ACCOUNTING FEES AND SERVICES~~

84ITEM14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

PART IV.

~~ITEM 15.~~

~~EXHIBITS, FINANCIAL STATEMENT SCHEDULES~~

85ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

~~ITEM 16.~~

~~FORM 10-K SUMMARY~~

88ITEM 16.

FORM 10-K SUMMARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

~~F-1~~

F-1

Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of ~~KBS~~Pacific Oak Strategic Opportunity REIT II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

• We depend on our advisor to conduct our operations and eventually dispose of our investments.

•Because ~~All of~~ our ~~executive~~new ~~officers~~advisor, ~~our~~Pacific ~~affiliated~~Oak ~~directors~~Capital ~~and other key real estate and debt finance professionals are also officers~~Advisors, ~~directors~~LLC, ~~managers,~~was ~~key~~recently ~~professionals~~formed, ~~and/or~~it ~~holders~~could offace achallenges ~~direct~~with oremployee ~~indirect~~hiring ~~controlling~~and ~~interest in our advisor~~retention, ~~our~~information ~~dealer manager and other KBS-affiliated entities. As a result~~technology, ~~they~~vendor ~~face conflicts of interest~~relationships, ~~including significant conflicts created by our advisor’s compensation arrangements with us~~ and ~~other~~funding; ~~KBS-advised~~if ~~programs~~Pacific ~~and~~Oak ~~investors~~Capital ~~and~~Advisors ~~conflicts~~faces challenges in ~~allocating~~performing ~~time~~its ~~among~~obligations to us, ~~and~~it ~~these~~could ~~other~~negatively ~~programs~~impact ~~and~~our ~~investors.~~ability ~~These~~to ~~conflicts~~achieve ~~could~~our ~~result~~investment ~~in unanticipated actions~~objectives.

•All Weof ~~raised~~our ~~substantially~~executive ~~less~~officers, ~~than~~our ~~the~~affiliated ~~maximum~~directors ~~offering~~and ~~amount~~other inkey ~~our~~real ~~initial~~estate ~~public~~and ~~offering.~~debt ~~Therefore~~finance professionals are also officers, ~~our~~directors, ~~portfolio~~managers, ofkey ~~properties~~professionals ~~may~~and/or ~~not~~holders beof asa ~~diverse~~direct asor itindirect ~~otherwise~~controlling ~~would~~interest in our advisor, ~~which~~and ~~will~~other ~~cause~~Pacific ~~the~~Oak-affiliated ~~value~~entities. As a result, they face conflicts of interest, including significant conflicts created by our ~~stockholders~~advisor’s ~~investment~~compensation toarrangements ~~vary~~with ~~more~~us ~~widely~~and ~~with~~other ~~the~~Pacific ~~performance~~Oak-advised ofprograms ~~specific~~and ~~assets~~investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions.

•We ~~Our~~face ~~advisor~~potential ~~and~~business ~~its~~disruptions ~~affiliates~~due ~~receive~~to ~~fees~~the inrecent ~~connection~~global ~~with~~outbreak ~~transactions~~of ~~involving~~COVID-19 ~~the~~(Coronavirus). ~~management~~The ofvirus ~~our~~has ~~investments.~~significantly ~~These~~disrupted ~~fees~~economic ~~are~~markets ~~based~~and onimpacted ~~the~~commercial ~~cost~~activity ofworldwide, including the ~~investment~~US, and ~~not~~the ~~based~~prolonged oneconomic ~~the~~impact ~~quality~~is ofuncertain. ~~the~~Our ~~investment~~tenants orand ~~the~~potential ~~quality~~tenants of the ~~services~~properties ~~rendered~~we toown ~~us.~~could ~~This~~be ~~may~~adversely ~~influence~~affected ~~our~~by ~~advisor~~the todisruption ~~recommend riskier transactions~~ to usbusiness ~~and~~caused ~~increase~~by ~~our~~the ~~stockholders’ risk of loss~~virus.

•We ~~Our~~raised ~~distribution~~substantially ~~policy~~less isthan ~~generally~~the ~~not~~maximum tooffering ~~use~~amount ~~offering~~in ~~proceeds~~our toinitial ~~pay~~public ~~distributions~~offering. ~~However~~Therefore, weour ~~may~~portfolio ~~pay~~of ~~distributions~~properties ~~from~~may ~~any~~not ~~source,~~be ~~including,~~as ~~without~~diverse ~~limitation,~~as ~~from~~it ~~offering~~otherwise ~~proceeds~~would, ~~or borrowings (~~which ~~may~~will ~~constitute~~cause athe ~~return~~value of ~~capital). If we pay distributions from sources other than~~ our ~~cash~~stockholders’ ~~flow from operations, we will have less funds available for~~ investment into ~~properties~~vary ~~and~~more ~~other~~widely ~~assets~~with ~~and~~ the ~~overall~~performance ~~return~~of tospecific ~~our stockholders may be reduced~~assets.

• Our ~~policies~~advisor doand ~~not~~its ~~limit~~affiliates usreceive ~~from~~fees ~~incurring~~in ~~debt~~connection ~~until~~with ~~our~~transactions ~~total~~involving ~~liabilities would exceed 75% of~~ the ~~cost~~management of our ~~tangible~~investments. ~~assets~~These ~~(before~~fees ~~deducting~~are ~~depreciation~~based ~~and~~on ~~other~~the ~~non-cash~~cost ~~reserves)~~of the investment, and wenot ~~may~~based ~~exceed~~on ~~this limit with~~ the ~~approval~~quality of the ~~conflicts~~investment ~~committee~~or ofthe ~~our~~quality ~~board~~ of ~~directors. To~~ the ~~extent~~services ~~financing~~rendered into ~~excess~~us. ofThis ~~this limit is available on attractive terms, our conflicts committee~~ may ~~approve~~influence ~~debt such that~~ our ~~total~~advisor ~~liabilities~~to ~~would~~recommend ~~exceed~~riskier ~~this~~transactions ~~limit. High debt levels could limit the amount of cash we have available~~ to ~~distribute~~us and ~~could~~increase ~~result~~our instockholders’ arisk ~~decline in the value~~ of ~~an investment in us~~loss.

•Our ~~Disruptions~~distribution inpolicy ~~the~~is ~~financial~~generally ~~markets~~not ~~and~~to ~~uncertain~~use ~~economic~~offering ~~conditions~~proceeds ~~could~~to ~~adversely~~pay ~~affect~~distributions. ~~our~~However, ~~ability~~we tomay ~~implement~~pay distributions from any source, including, without limitation, from offering proceeds or borrowings (which may constitute a return of capital). If we pay distributions from sources other than our ~~business~~cash ~~strategy~~flow from operations, we will have less funds available for investment in properties and ~~generate~~other ~~returns~~assets and the overall return to our stockholders may be reduced.

• Our ~~opportunistic~~policies ~~property~~do not limit us from incurring debt until our total liabilities would exceed 75% of the cost of our tangible assets (before deducting depreciation and other non-~~acquisition~~cash ~~strategy~~reserves), ~~involves~~and awe ~~higher~~may ~~risk~~exceed this limit with the approval of ~~loss~~the ~~than~~conflicts committee of our board of directors. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt such that our total liabilities would aexceed ~~strategy~~this limit. High debt levels could limit the amount of ~~investing~~cash we have available to distribute and could result in ~~stabilized~~a ~~properties~~decline in the value of an investment in us.

•Disruptions ~~Our~~in ~~estimated~~the ~~net~~financial ~~asset~~markets ~~value per share does not currently represent our enterprise value~~ and ~~may~~uncertain ~~not~~economic ~~accurately~~conditions ~~reflect the actual prices at which our assets~~ could beadversely ~~liquidated~~affect ~~on any given day, the value a third party would pay for all or substantially all of~~ our ~~shares,~~ability orto ~~the~~implement ~~price that~~ our ~~shares~~business ~~would~~strategy ~~trade~~and atgenerate onreturns ato ~~national stock exchange~~stockholders.

•Our ~~Certain~~opportunistic ofproperty-acquisition ~~our~~strategy ~~debt~~involves ~~obligations~~a ~~have~~higher ~~variable~~risk ~~interest~~of ~~rates~~loss ~~and~~than ~~related~~would ~~payments~~a ~~that~~strategy ~~vary with the movement~~ of ~~LIBOR~~investing ~~or other indexes. Increases~~ in ~~these~~stabilized ~~indexes could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders~~properties.

•Our estimated net asset value per share does not currently represent our enterprise value and may not accurately reflect the actual prices at which our assets could be liquidated on any given day, the value a third party would pay for all or substantially all of our shares, or the price that our shares would trade at on a national stock exchange.

•Certain of our debt obligations have variable interest rates and related payments that vary with the movement of LIBOR or other indexes. Increases in these indexes could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this Annual Report on Form 10-K.

Table of Contents

PART I

ITEM 1. BUSINESS

Overview

~~KBS~~Pacific Oak Strategic Opportunity REIT II, Inc. (formerly known as KBS Strategic Opportunity REIT II, Inc) was formed on February 6, 2013 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ~~ending~~ended December 31, 2014 and it intends to continue to operate in such a manner. As used herein, the terms “we,” “our” and “us” refer to ~~KBS~~Pacific Oak Strategic Opportunity REIT II, Inc. and as required by context, ~~KBS~~Pacific Oak Strategic Opportunity Limited Partnership II, a Delaware limited partnership formed on May 21, 2013 (the “Operating Partnership”), and its subsidiaries. KBS Capital Advisors LLC was previously our external advisor and on October 31, 2019 ceased to be our advisor or have any advisory responsibility to us immediately following the filing of our Quarter Report on Form 10-Q for the period ending September 30, 2019. On November 1, 2019, Pacific Oak Capital Advisors, LLC (“Pacific Oak Capital Advisors”) became our advisor. As our advisor, Pacific Oak Capital Advisors manages our day-to-day operations and our portfolio of investments. Pacific Oak Capital Advisors also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors. Pacific Oak Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. We have sought to invest in and manage a diverse portfolio of real estate related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments. We conduct our business primarily through our Operating Partnership, of which we are the sole general partner. ~~We have no paid employees.~~

KBS Capital Advisors ~~LLC~~entered ~~(“KBS~~a ~~Capital~~sub-advisory ~~Advisors”)~~agreement ~~serves~~with asSTAM ~~our~~Europe ~~external~~(“STAM”), ~~advisor~~a ~~pursuant~~real toestate anoperating ~~advisory~~company ~~agreement~~based ~~initially~~in ~~entered into on July 3~~Paris, ~~2013. As our advisor~~France, ~~KBS~~pursuant ~~Capital Advisors manages our day-~~to~~-day~~ ~~operations~~which ~~and~~STAM ~~manages~~would ~~our~~provide ~~portfolio of~~ real estate ~~properties~~acquisition and ~~real~~portfolio ~~estate-related~~management ~~investments.~~services ~~KBS~~to ~~Capital~~our ~~Advisors~~advisor ~~also~~in ~~provides~~connection ~~marketing,~~with ~~investor-relations~~investments ~~and~~in ~~other administrative services on our behalf~~Europe. OnEffective ~~July~~April 317, ~~2013~~2019, weSTAM ~~issued~~terminated ~~21,739~~the ~~shares~~sub-advisory ofagreement ~~our~~with ~~common~~KBS ~~stock~~Capital ~~to our advisor at a purchase price of $9~~Advisors.~~20 per share.~~

On July 3, 2013, we commenced a private placement offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to offer a maximum of $105,000,000 of shares of common stock for sale to certain accredited investors, of which $5,000,000 of shares were offered pursuant to our dividend reinvestment plan. We ceased offering shares in our private offering on August 11, 2014. KBS Capital Markets Group LLC, an affiliate of ~~our~~KBS ~~advisor~~Capital Advisors, served as the dealer manager of the offering pursuant to a dealer manager agreement and was responsible for marketing our shares in the offering.

On November 14, 2013, we filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to register for sale to the public a maximum of 180,000,000 shares of common stock, of which 80,000,000 shares were to be offered pursuant to our dividend reinvestment plan. The SEC declared our registration statement effective on August 12, 2014 and we retained KBS Capital Markets Group LLC to serve as the dealer manager of the initial public offering pursuant to a dealer manager agreement. On February 11, 2016, we filed an amended registration statement on Form S-11 with the SEC to offer a second class of common stock designated as Class T shares and to designate our initially offered and outstanding common stock as Class A shares. Pursuant to the amended registration statement, we were offering to sell any combination of Class A and Class T shares in our primary offering and dividend reinvestment plan offering but in no event could we sell more than 180,000,000 of shares of our common stock pursuant to the offering. We commenced offering our Class T shares of our common stock for sale to the public on February 17, 2016. The dealer manager was responsible for marketing our shares in the initial public offering.

We ceased offering shares of common stock in our initial public offering on July 31, 2018 and terminated our initial public offering on September 28, 2018. We continue to offer shares of common stock under our dividend reinvestment plan. In some states, we will need to renew the registration statement annually or file a new registration statement to continue our dividend reinvestment plan offering. We may terminate our dividend reinvestment plan offering at any time.

We have used substantially all of the net proceeds from our offerings to invest in and manage a portfolio of opportunistic real estate, real estate-related loans, real estate equity securities and other real estate-related investments located in the United States and Europe. As of December 31, ~~2018~~2019, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, anand ~~investment~~owned intwo aninvestments in unconsolidated ~~entity~~joint ventures and an investment in real estate equity securities. Additionally, as of December 31, ~~2018~~2019, we had entered into a consolidated joint venture to develop one office/retail property.

We sold 11,977,758 and 11,537,701 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of $228.6 million in our initial public offering. As of December 31, ~~2018~~2019, we had sold ~~602~~723,~~462~~641 and ~~225~~333,~~137~~841 shares of Class A and Class T common stock, respectively, under our dividend reinvestment plan for aggregate gross offering proceeds of $79.68 million. Also as of December 31, ~~2018~~2019, we had redeemed ~~443~~718,~~543~~962 and 63107,~~926~~945 shares of Class A and Class T common stock, respectively, for $47.4 million.

We sold 3,619,851 shares of Class A common stock for gross offering proceeds of $32.2 million in our private offering. Additionally, on each of April 2, 2014 and July 31, 2014, we issued 120,106 shares of Class A common stock to an entity affiliated with two of our officers and affiliated directors for $1.0 million in separate private transactions exempt from the registration requirements of the Securities Act. On July 14, 2017 and February 13, 2018, we issued 214,175 shares and 10,935 shares, respectively, of Class A common stock to a business associate of two of our officers and affiliated directors for $2.0 million and $0.1 million, respectively, in a separate private transaction exempt from the registration requirements of the Securities Act.

Table of Contents

On February 19, 2020, we, Pacific Oak Strategic Opportunity REIT, Inc. (“POSOR I”), and Pacific Oak SOR II, LLC, an indirect subsidiary of POSOR I (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Subject to the terms and conditions of the Merger Agreement, we will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger (the “Surviving Entity”), such that following the Merger, the Surviving Entity will continue as an indirect subsidiary of POSOR I. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of our company shall cease. At the effective time of the Merger and subject to the terms and conditions of the Merger Agreement, each issued and outstanding share of our common stock will be converted into the right to receive 0.9643 shares of POSOR I common stock. The combined company after the Merger will retain the name “Pacific Oak Strategic Opportunity REIT, Inc.” The Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended. See “Proposed Merger” below for more information.

Objectives and Strategies

Our primary investment objectives are:

• to preserve and return our stockholders’ capital contributions;

• to realize growth in the value of our investments; and

• to provide increasing cash distributions to our investors through increased cash flow from operations or targeted asset sales.

We have completed our acquisition stage and we plan to lease-up and stabilize existing assets, as well as explore value-add opportunities for existing assets. We will seek to realize growth in the value of our investments by timing asset sales to maximize their value.

Investment Strategies

We have sought to achieve our objectives by using substantially all of the net proceeds from our offerings and debt financing to invest in and manage a portfolio of opportunistic real estate, real estate-related loans, real estate equity securities and other real estate-related investments located in the United States and Europe. We believe that we are most likely to meet our investment objectives through the careful selection and underwriting of assets. When making an investment, we emphasized the performance and risk characteristics of that investment, how that investment fits with our portfolio-level performance objectives, the other assets in our portfolio and how the returns and risks of that investment compare to the returns and risks of available investment alternatives.

Real Estate Investments

As of December 31, ~~2018~~2019, we owned two hotel properties with an aggregate of ~~648~~649 rooms, ~~four~~three office properties encompassing in the aggregate ~~864~~806,~~940~~115 rentable square feet which were 7068% occupied and one apartment property with 292 units which was 9593% occupied. Additionally, as of December 31, ~~2018~~2019, we had entered into a consolidated joint venture to develop one office/retail property. For more information about our real estate investments, see Part I, Item 2 of this Annual Report on Form 10-K.

Real Estate-Related Investments

As of December 31, ~~2018~~2019, we owned an investment in real estate equity securities with a total book value of $79.29 million.

Other Investment

As of December 31, ~~2018~~2019, we owned antwo ~~investment~~investments in an unconsolidated ~~entity~~entities. On June 28, 2016, we originated a participating loan facility to STAM in an amount up to €2.6 million ($2.9 million at closing). We funded approximately €2.1 million ($2.3 million at closing). In addition to the amount funded at closing, we also capitalized an additional $0.2 million of acquisition costs and fees. ~~During~~ ~~the year ended December 31, 2018, we recognized $0.3 million of income with respect to this investment.~~ STAM used the proceeds to fund a general partner interest in a STAM-sponsored institutional real estate fund with an unrelated third party joint venture partner. The real estate fund invested in European real estate which STAM manages on behalf of the joint venture. As part of the terms of this investment with STAM, we receive a portion of the fees STAM receives from the fund. During the year ended December 31, 2019, STAM completed the liquidation of the portfolio and we recognized $2.8 million of equity in income of unconsolidated entity with respect to this investment.

Financing Objectives

We have focused our investment activities on obtaining a portfolio of opportunistic real estate, real estate-related loans, real estate equity securities and other real estate investments. Careful use of debt has helped us to achieve our diversification goals because we have more funds available for investment. We expect our debt financing to be 60% or less of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). This is our target leverage as established by our board of directors. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets (before deducting depreciation or other non-cash reserves); however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of December 31, 2018, our borrowings and other liabilities were approximately 60% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

Table of Contents

On December 31, 2019, the Company acquired 13 Class A Units for $2.9 million in Pacific Oak Opportunity Zone Fund I, LLC. As of December 31, 2019, Pacific Oak Opportunity Zone Fund I consolidated two joint ventures with real estate under development.

Financing Objectives

We have financed a portion of our investments with debt. We have used debt financing in various forms in an effort to increase the size of our portfolio and potential returns to our stockholders. Access to capital is crucial to our business, since we earn income based on the spread between the yield on our investments and the cost of our borrowings. The following table shows the current and fully extended maturities, including principal amortization payments, of our debt as of December 31, 2019 (in thousands):


	Current Maturity		Extended Maturity
2020	$	79,931	$	21,922
2021	76,575		37,129
2022	173,089		96,165
2023	—		25,419
2024	—		148,960

	$	329,595	$	329,595

We have focused our investment activities on obtaining a portfolio of opportunistic real estate, real estate-related loans, real estate equity securities and other real estate investments. Careful use of debt has helped us to achieve our diversification goals because we have more funds available for investment. We expect our debt financing to be 60% or less of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). This is our target leverage as established by our board of directors. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets (before deducting depreciation or other non-cash reserves); however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of December 31, 2019, our borrowings and other liabilities were approximately 60% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

We do not intend to exceed the leverage limit in our charter. Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. However, high levels of debt could cause us to incur higher interest charges and higher debt service payments, which would decrease the amount of cash available for distribution to our investors, and could also be accompanied by restrictive covenants. High levels of debt could also increase the risk of being unable to refinance when loans become due, or of being unable to refinance on favorable terms, and the risk of loss with respect to assets pledged as collateral for loans.

Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our debt policy in the future without a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: economic conditions, the relative cost and availability of debt and equity capital, any investment opportunities, the ability of our investments to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to book value in connection with any change of our borrowing policies.

Disposition Policies

The period that we will hold our investments will vary depending on the type of asset, interest rates and other factors. Our advisor has developed a well-defined exit strategy for each investment we have made. Pacific Oak Capital Advisors will continually perform a hold-sell analysis on each asset in order to determine the optimal time to hold the asset and generate a strong return for our stockholders. Economic and market conditions may influence us to hold our investments for different periods of time. We may sell an asset before the end of the expected holding period if we believe that market conditions have maximized its value to us or the sale of the asset would otherwise be in the best interests of our stockholders. During the year ended December 31, 2019, we sold one office building and there were no properties classified as held for sale as of December 31, 2019. The disposition strategy is consistent with our objectives of acquiring opportunistic investments, improving the investments and timing asset sales to realize the growth in the value that was created during our hold period.

Table of Contents

Proposed Merger

If the Merger were to occur today, the combined company’s portfolio would consist of nine office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, in the aggregate, approximately, 3.8 million rentable square feet and 77.7% leased occupancy (based on data as of March 24, 2020), two hotel properties, two apartment properties, one residential home portfolio consisting of 993 single-family rental homes, three investments in undeveloped land with approximately 1,000 developable acres, an investment in an office/retail property redevelopment, six investments in unconsolidated entities and four investments in real estate equity securities.

The Merger is conditioned upon receipt of the approval of the holders of a majority of our outstanding shares with respect to the Merger. In addition, the Merger Agreement provides certain termination rights for POSOR I and us. In connection with the termination of the Merger Agreement, under certain specified circumstances, we may be required to pay POSOR I a termination fee of $9.3 million.

Under the terms of the Merger Agreement, in exchange for each share of our common stock owned, our stockholders will receive 0.9643 shares of our common stock. Following the closing of the Merger, POSOR I and our stockholders are expected to own approximately 69.4% and 30.6% of the combined company, respectively. We expect the transaction to close in the second half of 2020, subject to certain closing conditions, including the approval of the merger by our stockholders.

Concurrently with the entry into the Merger Agreement, POSOR I and Pacific Oak Capital Advisors (which is also the external advisor to us) entered into the Amended and Restated Advisory Agreement (the “Amended Advisory Agreement”). The Amended Advisory Agreement amended POSOR I’s existing advisory agreement to provide that no acquisition fees will be paid in connection with the Merger and to set the “issue price” ($10.63 per share) of the shares issued in the Merger for purposes of calculating the Pacific Oak Capital Advisors’ incentive fee. The Merger itself will not trigger an incentive fee to Pacific Oak Capital Advisors by POSOR I or us.

Concurrently with the entry into the Merger Agreement, we and Pacific Oak Capital Advisors entered into a termination letter agreement (the “Termination Agreement”), effective as of February 19, 2020. Pursuant to the Termination Agreement, the advisory agreement between us and Pacific Oak Capital Advisors (the “POSOR II Advisory Agreement”) will be terminated at the effective time of the Merger. Also pursuant to the Termination Agreement, Pacific Oak Capital Advisors waived any disposition fee it otherwise would be entitled to receive from us with respect to the Merger. If, however, we are ultimately sold to another bidder, then Pacific Oak Capital Advisors may be entitled to a disposition fee from us in an amount as set forth in the POSOR II Advisory Agreement.

The foregoing descriptions of the Merger Agreement, the Termination Agreement and the Merger are not complete and are subject to and qualified in their entirety by reference to the Merger Agreement and the Termination Agreement, copies of which were filed as exhibits to our Current Report on Form 8-K filed with the SEC on February 20, 2020. There is no guarantee that the Merger will be consummated.

Economic Dependency

We are dependent on our advisor for certain services that are essential to us, including the disposition of investments; management of the daily operations of our investment portfolio; and other general and administrative responsibilities. In the event that our advisor is unable to provide these services, we will be required to obtain such services from other sources.

Competitive Market Factors

We face competition from various entities for prospective tenants and to retain our current tenants, including other REITs, pension funds, insurance companies, investment funds and companies, partnerships and developers. Many of these entities have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a tenant. As a result of their greater resources, those entities may have more flexibility than we do in their ability to offer rental concessions to attract and retain tenants. This could put pressure on our ability to maintain or raise rents and could adversely affect our ability to attract or retain tenants. As a result, our financial condition, results of operations, cash flow, ability to satisfy our debt service obligations and ability to pay distributions to our stockholders may be adversely affected.

Although we believe that we are well-positioned to compete effectively in each facet of our business, there is enormous competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter increased competition in the future that could limit our ability to conduct our business effectively.

Table of Contents

Compliance with Federal, State and Local Environmental Law

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.

All of our real estate properties, other than properties acquired through foreclosure, will be subject to Phase I environmental assessments at the time they are acquired.

Table of Contents

Segments

We have invested in opportunistic real estate investments and originated a loan secured by a non-stabilized real estate asset. In general, we intend to hold our investments in opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, our management views opportunistic real estate and other real estate-related assets as similar investments. Substantially all of our revenue and net income (loss) is from opportunistic real estate and other real estate-related assets, and therefore, we currently aggregate our operating segments into one reportable business segment. In addition, we have invested in a participating loan facility secured by a portfolio of light industrial properties located in Europe. However, based on our investment portfolio and future investment focus, we do not believe that our investment in the European asset is a reportable segment.

Employees

We have no paid employees. The employees of our advisor or its affiliates provide management, acquisition, disposition, advisory and certain administrative services for us.

Principal Executive Office

Our principal executive offices are located at ~~800~~11150 ~~Newport~~Santa ~~Center~~Monica ~~Drive~~Blvd., Suite ~~700~~400, ~~Newport~~Los ~~Beach~~Angeles, California ~~92660~~90025. Our telephone number, ~~general facsimile number~~ and web address are (~~949~~424) ~~417~~208-~~6500,~~8100 ~~(949) 417-6501~~ and http://www.~~kbssorii~~pacificoakcmg.com~~, respectively~~/offering/reit-ii.

Available Information

Access to copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other filings with the SEC, including amendments to such filings, may be obtained free of charge from the following website, http://www.~~kbssorii~~pacificoakcmg.com/offering/reit-ii., through a link to the SEC’s website~~, http://www~~.~~sec.gov.~~ These filings are available promptly after we file them with, or furnish them to, the SEC.

Table of Contents

ITEM 1A. RISK FACTORS

The following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

Risks Related to an Investment in Us

In January ~~2019~~2020 we exhausted funds available for redemptions under our share redemption program, other than those submitted in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” for which we had $0.5 million available as of March 1, ~~2019~~2020. Therefore, except in limited circumstances, our stockholders will be unable to sell their shares under our share redemption program.

During any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our distribution reinvestment plan during the prior calendar year provided that $500,000 of this amount is reserved for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence.” In ~~2018~~2019, our net proceeds from the distribution reinvestment plan were $32.02 million. As of the January 1, ~~2019~~2020 redemption date, we had exhausted the amount available for ordinary redemptions, and as of March 1, ~~2019~~2020, we had $18.92 million outstanding and unfulfilled redemption requests representing ~~205~~808,~~038~~172 shares. We have $0.5 million available to fund special redemptions during the remainder of ~~2019~~2020. We can provide no assurances as to whether our board of directors will make additional funds available for our share redemption program.

Table of Contents

We raised substantially less than the maximum offering amount in our initial public offering. Therefore, our portfolio of assets may not be as diverse as it otherwise would, which will cause the value of our stockholders’ investment to vary more widely with the performance of specific assets.

Our initial public offering was made on a “best efforts” basis, whereby the broker-dealers who participated in the offering had no firm commitment or obligation to purchase any of the shares. In the public offering, we raised fewer proceeds than our sponsor and dealer manager originally expected. As a result, we raised substantially less than the maximum offering amount in the public offering. Therefore, we made fewer investments than originally intended, resulting in less diversification in terms of the number of investments owned and the geographic regions in which our investments or the collateral securing our investments are located. Adverse developments with respect to a single asset, or a geographic region, will have a greater adverse impact on our operations than they otherwise would.

Our board of directors has begun to explore strategic alternatives for us. If we consummate a merger or pursue another exit strategy in the near term, stockholders may not receive an amount per share equal to our estimated NAV per share.

Our estimated NAV per share of $910.6525, as established by our board of directors on December 617, ~~2018~~2019, did not take into account estimated disposition costs and fees for real estate properties, entity liquidation costs, and debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations. These fees may be substantial. Thus, to the extent we consummate a merger or pursue another exit strategy in the near term, stockholders may not recover the estimated NAV per share due to the impact of these fees and costs.

Because no public trading market for our shares currently exists, it will be difficult for our investors to sell their shares and, if they are able to sell their shares, it will likely be at a substantial discount to the offering price.

No public market currently exists for our shares, and at this time we have no plans to list our shares on a national securities exchange. Our charter does not require our directors to provide our stockholders with a liquidity event by a specified date or at all. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. Any sale must comply with applicable state and federal securities laws. In addition, our charter prohibits the ownership of more than 9.8% of our stock by any person, unless exempted by our board of directors, which may inhibit large investors from purchasing our stockholders’ shares. Moreover, our share redemption program includes numerous restrictions that limit our stockholders’ ability to sell a stockholders’ shares to us, and our board of directors may amend, suspend or terminate our share redemption program upon 10 business days’ notice to stockholders. In addition, in January ~~2019~~2020 we exhausted funds available for redemptions under our share redemption program, other than those submitted in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence.” Therefore, it will be difficult for stockholders to sell their shares promptly or at all. If stockholders are able to sell their shares, they would likely have to sell them at a substantial discount to their public offering price. It is also likely that our shares would not be accepted as the primary collateral for a loan.

Table of Contents

Because of the concentration of a significant portion of our assets in California, any adverse economic, real estate or business conditions in this area could affect our operating results and our ability to make distributions to our stockholders.

As of December 31, ~~2018~~2019, our real estate investments in California represented 5556.2% of our total assets. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse economic developments in the California real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect our operating results and our ability to make distributions to stockholders.

Disruptions in the financial markets and uncertain economic conditions could adversely affect market rental rates, commercial real estate values and our ability to secure debt financing, service future debt obligations, or pay distributions to our stockholders.

We have relied on debt financing to finance our real estate properties and we may have difficulty refinancing some of our debt obligations prior to or at maturity or we may not be able to refinance these obligations at terms as favorable as the terms of our existing indebtedness and we also may be unable to obtain additional debt financing on attractive terms or at all. If we are not able to refinance our existing indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. Market conditions can change quickly, which could negatively impact the value of our assets.

Table of Contents

Disruptions in the financial markets and uncertain economic conditions could adversely affect the values of our investments. Any disruption to the debt and capital markets could result in fewer buyers seeking to acquire commercial properties and possible increases in capitalization rates and lower property values. Furthermore, declining economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio and in the collateral securing our loan investments, which could have the following negative effects on us:

• the values of our investments in commercial properties could decrease below the amounts paid for such investments;

• the value of collateral securing our loan investments could decrease below the outstanding principal amounts of such loans;

• revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to pay distributions or meet our debt service obligations on debt financing; and/or

• revenues generated by the properties and other assets securing our loan investments could decrease, making it more difficult for the borrowers to meet their payment obligations to us, which could in turn make it more difficult for us to pay distributions or meet our debt service obligations on debt financing.

All of these factors could reduce our stockholders’ return and decrease the value of an investment in us.

Subsequent to December 31, 2019, there was a global outbreak of a new strain of coronavirus, COVID-19 which has been designated as a pandemic by the World Health Organization, continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have continued to be identified in additional countries, many countries have reacted by instituting quarantines, restrictions on travel, and limiting hours of operations of non-essential offices and retail centers. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the novel coronavirus. Nevertheless, the novel coronavirus presents material uncertainty and risk with respect to the Company’s performance and financial results, such as the potential negative impact to occupancy at its properties, financing arrangements, increased costs of operations, decrease in values of its investments, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. The Company is unable to estimate the impact the novel coronavirus will have on its financial results at this time.

Table of Contents

Uncertainty and volatility in the credit markets could affect our ability to obtain debt financing on reasonable terms, or at all, which could reduce the number of properties we may be able to acquire and the amount of cash distributions we can make to our stockholders.

The U.S. and global credit markets have in the past experienced severe dislocations and liquidity disruptions, which caused volatility in the credit spreads on prospective debt financings and constrained the availability of debt financing due to the reluctance of lenders to offer financing at high leverage ratios. Similar conditions in the future could adversely impact our ability to access additional debt financing on reasonable terms or at all, which may adversely affect investment returns on future acquisitions or our ability to make acquisitions.

If mortgage debt or unsecured debt is unavailable on reasonable terms as a result of increased interest rates, increased credit spreads, decreased liquidity or other factors, we may not be able to finance the initial purchase of properties. In addition, when we incur mortgage debt or unsecured debt, we run the risk of being unable to refinance such debt upon maturity, or of being unable to refinance on favorable terms.

If interest rates are higher or other financing terms, such as principal amortization, the need for a corporate guaranty, or other terms are not as favorable when we refinance debt or issue new debt, our income could be reduced. To the extent we are unable to refinance debt on reasonable terms, at appropriate times or at all, we may be required to sell properties on terms that are not advantageous to us, or that could result in the foreclosure of such properties. If any of these events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing securities or borrowing more money.

Because we depend upon our advisor and its affiliates to conduct our operations, adverse changes in the financial health of our advisor or its affiliates could cause our operations to suffer.

We depend on ~~KBS~~Pacific Oak Capital Advisors, its affiliates and the key real estate and debt finance professionals at ~~KBS~~Pacific Oak Capital Advisors to manage our operations and our portfolio of real estate-related loans, opportunistic real estate, real estate equity securities and other real estate-related investments. Our advisor depends upon the fees and other compensation that it receives from us and other ~~KBS~~Pacific Oak-sponsored public programs in connection with the origination, purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of ~~KBS~~Pacific Oak Capital Advisors or its affiliates or our relationship with ~~KBS~~Pacific Oak Capital Advisors or its affiliates could hinder their ability to successfully manage our operations and our portfolio of investments.

We have paid distributions in part from financings and expect that in the future we may not pay distributions solely from our cash flow from operating activities. To the extent that we pay distributions from sources other than our cash flow from operating activities, the overall return to our stockholders may be reduced.

Our organizational documents permit us to pay distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We have paid distributions in part from financings and expect that in the future we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from debt financing. We may also fund such distributions with proceeds from the sale of assets. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operating activities available for distribution in future periods. If we fund distributions from the sale of assets, this will affect our ability to generate cash flow from operating activities in future periods. To the extent that we pay distributions from sources other than our cash flow from operating activities, the overall return to our stockholders may be reduced. In addition, to the extent distributions exceed cash flow from operating activities, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain. There is no limit on the amount of distributions we may fund from sources other than from cash flow from operating activities.

For the year ended December 31, 2017, we paid aggregate distributions of $3.8 million, including $1.4 million of distributions paid in cash and $2.4 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the year ended December 31, 2017 was $3.3 million and cash flow provided by operations was $8.8 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $2.8 million of cash flow from operating activities and $1.0 million of debt financing.

For the year ended December 31, 2018, we paid aggregate distributions of $4.9 million, including $1.9 million of distributions paid in cash and $3.0 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the year ended December 31, 2018 was $23.5 million and cash flow provided by operations was $4.6 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $3.8 million of cash flow from operating activities and $1.1 million of prior period cash flow from operating activities in excess of distributions paid. For purposes of determining the source of distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.10

Table of Contents

For the year ended December 31, 2019, we paid aggregate distributions of $3.6 million, including $1.4 million of distributions paid in cash and $2.2 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the year ended December 31, 2019 was $7.5 million and cash flow used in operations was $0.1 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders with $5.7 million of prior period cash flow from operating activities in excess of distributions paid. For purposes of determining the source of distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

The loss of or the inability to retain or obtain key real estate and debt finance professionals at our advisor could delay or hinder implementation of our investment strategies, which could limit our ability to pay distributions and decrease the value of an investment in us.

Our success depends to a significant degree upon the contributions of ~~Peter M. Bren,~~ Keith D. Hall, and Peter McMillan III, ~~and Charles J. Schreiber, Jr.,~~ each of whom would be difficult to replace. Neither we nor our affiliates have employment agreements with Messrs. ~~Bren,~~ Hall, ~~McMillan~~ or ~~Schreiber~~McMillan. Messrs. ~~Bren,~~ Hall, ~~McMillan~~ and ~~Schreiber~~McMillan may not remain associated with us, our advisor or its affiliates. If any of these persons were to cease their association with us, our advisor or its affiliates, we may be unable to find suitable replacements and our operating results could suffer as a result. We do not intend to maintain key person life insurance on any person. We believe that our future success depends, in large part, upon our advisor’s and its affiliates’ ability to attract and retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense, and our advisor and its affiliates may be unsuccessful in attracting and retaining such skilled individuals. If we lose or are unable to retain or obtain the services of highly skilled professionals our ability to implement our investment strategies could be delayed or hindered, and the value of an investment in us may decline. Furthermore, if some or all of ~~the~~these ~~key~~individuals ~~real~~may ~~estate~~become ~~and~~employees ~~debt~~of ~~finance~~another ~~professionals~~Pacific atOak-sponsored ~~KBS~~program ~~Capital~~in ~~Advisors~~an ~~are~~internalization ~~internalized~~transaction ~~by KBS REIT II, KBS REIT III, KBS Strategic Opportunity REIT~~ or ~~KBS Growth & Income REIT~~, ~~KBS~~if ~~Capital~~we ~~Advisors~~internalize ~~may~~our ~~need to replace such professionals~~advisor, ~~or we~~ may ~~need~~not tobecome ~~find~~our employees oras ana ~~advisor~~result toof ~~replace~~their ~~the~~relationship ~~management~~with ~~services~~other ~~KBS~~Pacific ~~Capital~~Oak-sponsored ~~Advisors~~programs. ~~provides~~If tothese ~~us. In~~events ~~such~~occur, ~~event~~ our operating performance and the return on an investment in us could suffer.

Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce our stockholders’ and their recovery against our independent directors if they negligently cause us to incur losses.

Maryland law provides that a director has no liability in that capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interest and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that no independent director shall be liable to us or our stockholders for monetary damages and that we will generally indemnify them for losses unless they are grossly negligent or engage in willful misconduct. As a result, our stockholders and us may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce our stockholders and our recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees (if we ever have employees) and agents) in some cases, which would decrease the cash otherwise available for distribution.

We have no target investment allocation and we may change our targeted investments without stockholder consent.

Except with respect to unimproved or non-income producing property, we are not limited in the percentage of net proceeds of our initial public offering that we may allocate to a specific real estate asset type. Thus, we may make all of our investments in investments which present an increased risk of loss. In addition, we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, our targeted investments described our prospectus. A change in our targeted investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common stock and our ability to pay distributions.

Table of Contents

We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (“IT”) networks and related systems.

We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.

Table of Contents

A security breach or other significant disruption involving our IT networks and related systems could:

• disrupt the proper functioning of our networks and systems and therefore our operations;

• result in misstated financial reports, violations of loan covenants and/or missed reporting deadlines;

• result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;

• result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;

• require significant management attention and resources to remedy any damages that result;

• subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or

• damage our reputation among our stockholders.

In addition, we rely on the security systems of our third-party managers and franchisors to protect proprietary and customer information from these threats.

Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

Risks Related to Conflicts of Interest

~~KBS~~Pacific Oak Capital Advisors and its affiliates, including all of our executive officers and our affiliated directors and other key real estate and debt finance professionals, face conflicts of interest caused by their compensation arrangements with us and with other ~~KBS~~Pacific Oak-sponsored programs and ~~KBS~~Pacific Oak-advised investors, which could result in actions that are not in the long-term best interests of our stockholders.

All of our executive officers and our affiliated directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and/or other ~~KBS~~Pacific Oak-affiliated entities. ~~KBS~~ Pacific Oak Capital Advisors and its affiliates receive substantial fees from us. These fees could influence our advisor’s advice to us as well as the judgment of its affiliates. Among other matters, these compensation arrangements could affect their judgment with respect to:

• the continuation, renewal or enforcement of our agreements with ~~KBS~~Pacific Oak Capital Advisors and its affiliates, including the advisory agreement and the dealer manager agreement;

• offerings of equity by us, which entitle ~~KBS~~Pacific Oak Capital Markets Group to dealer-manager fees and will likely entitle ~~KBS~~Pacific Oak Capital Advisors to increased acquisition and origination fees and asset management fees;

• sales of investments, which entitle ~~KBS~~Pacific Oak Capital Advisors to disposition fees and possible subordinated incentive fees;

• acquisitions of investments and originations of loans, which entitle ~~KBS~~Pacific Oak Capital Advisors to acquisition and origination fees based on the cost of the investment and asset management fees and, in the case of acquisitions of investments from other ~~KBS~~Pacific Oak-sponsored programs, might entitle affiliates of ~~KBS~~Pacific Oak Capital Advisors to disposition fees and possible subordinated incentive fees in connection with its services for the seller;

~~• borrowings to acquire investments and to originate loans, which borrowings increase the acquisition and origination fees payable to KBS Capital Advisors;~~12

•Table ~~whether~~of ~~and when we seek to list our common stock on a national securities exchange, which listing could entitle KBS Capital Advisors to a subordinated incentive fee; and~~Contents

•borrowings ~~whether~~to ~~and~~acquire ~~when~~investments weand ~~seek~~ to ~~sell~~originate ~~the company or its assets~~loans, which ~~sale~~borrowings ~~could~~increase ~~entitle~~the ~~KBS~~acquisition ~~Capital~~and ~~Advisors~~origination tofees apayable ~~disposition~~to ~~fee~~Pacific ~~and/or~~Oak aCapital ~~subordinated incentive fee.~~Advisors;

•whether and when we seek to list our common stock on a national securities exchange, which listing could entitle Pacific Oak Capital Advisors to a subordinated incentive fee; and

•whether and when we seek to sell the company or its assets, which sale could entitle Pacific Oak Capital Advisors to a disposition fee and/or a subordinated incentive fee.

The fees our advisor receives in connection with transactions involving the acquisition or origination of an asset are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us and increase our stockholders’ risk of loss.

Further, existing and future ~~KBS~~Pacific Oak-sponsored programs and ~~KBS~~Pacific Oak-advised investors and Messrs. ~~Bren,~~ Hall, ~~McMillan~~ and ~~Schreiber~~McMillan generally are not and will not be prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, origination, development, ownership, leasing or sale of real estate-related investments.

Pacific 10Oak Capital Advisors and the key real estate professionals associated with Pacific Oak Capital Advisors face conflicts of interest relating to the leasing and disposition of properties due to their relationship with other real estate programs and such conflicts may not be resolved in our favor, which could limit our ability to pay distributions to our stockholders and reduce our stockholders’ overall investment return.

We rely on our sponsor, Pacific Oak Holding Group, LLC, and other key real estate professionals at our advisor, including Messrs. Hall and McMillan, to identify suitable investment opportunities for us and to supervise the property management and leasing and eventual disposition of properties. POSOR I is also advised by Pacific Oak Capital Advisors. Keppel Pacific Oak US REIT is externally managed by a joint venture between (i) an entity in which Messrs. Hall and McMillan have an indirect ownership interest and (ii) Keppel Capital Holding Pte. Ltd., which is not affiliated with us, and has also engaged Pacific Oak Capital Advisors to act as its asset manager in the United States. Through Pacific Oak Capital Advisors these programs rely on many of the same real estate and debt finance professionals as will future programs advised by our advisor or professionals associated with our advisor. As such, we and other programs that currently have funds available for investment rely on many of the same real estate and debt finance professionals employed by Pacific Oak Capital Advisors, as will future Pacific Oak-sponsored programs, Pacific Oak-advised investors and other programs sponsored by Messrs. Hall and McMillan. Many investment opportunities that are suitable for us may also be suitable for other programs and investors. When these real estate and debt finance professionals direct an investment opportunity to any program or investor they, in their sole discretion, will offer the opportunity to the program or investor for which the investment opportunity is most suitable based on the investment objectives, portfolio and criteria of each program or investor.

In addition, we and other programs advised by Pacific Oak Capital Advisors and its affiliates or key real estate professionals, rely on our sponsor and other key real estate professionals at our advisor to sell our properties. These programs and Pacific Oak-advised investors may possess properties in similar locations and/or of the same property types as ours and may be attempting to sell these properties at the same time we are attempting to sell some of our properties. If our advisor directs potential purchasers to properties owned by other programs they advise when it could direct such purchasers to our properties, we may be unable to sell some or all of our properties at the time or at the price we otherwise would, which could limit our ability to pay distributions and reduce our stockholders’ overall investment return.

Pacific Oak Capital Advisors will face conflicts of interest relating to joint ventures that we may form with affiliates of Pacific Oak Capital Advisors, which conflicts could result in a disproportionate benefit to the other venture partners at our expense.

If approved by a majority of our independent directors, we may enter into joint venture agreements with other Pacific Oak-sponsored programs or affiliated entities for the acquisition, development or improvement of properties or other investments. Pacific Oak Capital Advisors and its affiliates, the advisors to the other Pacific Oak-sponsored programs and the investment advisers to Pacific Oak-advised investors, have some of the same executive officers, directors and other key real estate and debt finance professionals; and these persons will face conflicts of interest in determining which Pacific Oak program or investor should enter into any particular joint venture agreement. These persons may also face a conflict in structuring the terms of the relationship between our interests and the interests of the Pacific Oak-affiliated co-venturer and in managing the joint venture. Any joint venture agreement or transaction between us and a Pacific Oak-affiliated co-venturer will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers. The Pacific Oak-affiliated co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. These co-venturers may thus benefit to our and our investors’ detriment.

Table of Contents

~~KBS~~Pacific Oak Capital Advisors, ~~and~~ the ~~key~~ real estate ~~professionals~~and ~~associated~~debt ~~with~~finance ~~KBS~~professionals ~~Capital~~assembled ~~Advisors~~by ~~face~~our ~~conflicts~~advisor, oftheir ~~interest~~affiliates ~~relating to the leasing~~ and ~~disposition~~our ofofficers ~~properties~~face ~~due~~competing todemands on their ~~relationship~~time ~~with other real estate programs~~ and ~~such~~this ~~conflicts~~ may ~~not~~cause ~~be resolved in~~ our ~~favor,~~operations ~~which could limit our ability to pay distributions to our stockholders~~ and ~~reduce~~ our stockholders’ ~~overall~~ investment ~~return~~to suffer.

We rely on ~~our~~Pacific ~~sponsor,~~Oak ~~KBS~~Capital ~~Holdings~~Advisors ~~LLC,~~ and ~~other~~the ~~key~~ real estate, ~~professionals~~management, ataccounting and debt finance professionals our advisor has assembled, including Messrs. ~~Bren,~~ Hall, McMillan and ~~Schreiber,~~Michael toA. ~~supervise~~Bender for the ~~property~~day-to-day ~~management~~operation ~~and leasing and eventual disposition~~ of ~~properties~~our business. Messrs. ~~KBS REIT II~~Hall, ~~KBS REIT III~~McMillan, ~~KBS Strategic Opportunity REIT~~ and ~~KBS~~Bender ~~Growth & Income REIT~~ are ~~also~~executive ~~advised~~officers byof ~~KBS~~POSOR ~~Capital Advisors~~I. ~~Keppel-KBS~~As USa ~~REIT~~result isof ~~externally~~their ~~managed~~interests byin aother ~~joint~~Pacific ~~venture~~Oak ~~between~~programs, ~~(i)~~their anobligations ~~entity~~to inother ~~which~~investors ~~Messrs. Hall~~ and ~~McMillan~~the ~~have~~fact anthat ~~indirect~~they ~~ownership~~engage ~~interest~~in and ~~(ii)~~they ~~Keppel~~will ~~Capital~~continue ~~Holding~~to ~~Pte.~~engage ~~Ltd.,~~in ~~which~~other isbusiness ~~not~~activities ~~affiliated~~on ~~with~~behalf ~~us,~~of themselves and ~~has~~others, ~~also~~Messrs. Hall, ~~engaged~~McMillan ~~KBS~~and ~~Capital~~Bender ~~Advisors~~face toconflicts ~~act~~of asinterest ~~its~~in ~~asset~~allocating ~~manager~~their intime ~~the~~among ~~United~~us, ~~States.~~POSOR ~~Through~~I, ~~KBS~~Pacific Oak Capital Advisors ~~these~~and ~~programs~~other ~~rely~~Pacific onOak-sponsored ~~many~~programs ofas ~~the~~well ~~same real estate and debt finance professionals~~ as ~~will~~other ~~future~~business ~~programs~~activities ~~advised~~in bywhich ~~our~~they ~~advisor~~are orinvolved. ~~professionals~~In ~~associated~~addition, ~~with~~Pacific ~~our~~Oak ~~advisor.~~Capital ~~Messrs.~~Advisors ~~Bren~~ and ~~Schreiber~~their ~~and~~affiliates ~~several~~share many of the ~~other~~same key real estate and debt finance professionals. atDuring ~~KBS~~times ~~Capital~~of ~~Advisors~~intense ~~are~~activity ~~also~~in ~~the~~other ~~key~~programs ~~real estate~~ and ~~debt~~ventures, ~~finance~~these ~~professionals~~individuals atmay ~~KBS~~devote ~~Realty~~less ~~Advisors~~time and ~~its~~fewer ~~affiliates,~~resources ~~the advisors~~ to ~~the~~our ~~private~~business ~~KBS-sponsored~~than ~~programs~~are ~~and~~necessary ~~the~~or ~~investment~~appropriate ~~advisors~~ to ~~KBS-advised~~manage ~~investors.~~our ~~In addition~~business. Furthermore, ~~Messrs.~~some ~~Hall~~or ~~and~~all ~~McMillan~~of ~~have~~these ~~founded~~individuals ~~Pacific~~may ~~Oaks~~become ~~Capital~~employees ~~Group,~~of aanother ~~real~~Pacific ~~estate~~Oak-sponsored ~~management~~program ~~company,~~in ~~and~~an ~~its~~internalization ~~family~~transaction ~~of companies in 2018. As such~~or, if we ~~and~~internalize ~~other~~our ~~programs~~advisor, ~~will~~may ~~rely~~not onbecome ~~the~~our ~~real~~employees ~~estate and debt finance professionals employed by KBS Capital Advisors,~~ as ~~will~~a ~~future~~result ~~KBS-sponsored~~of ~~programs,~~their ~~KBS-advised~~relationship ~~investors~~with ~~and~~ other ~~programs~~Pacific Oak-sponsored ~~by Messrs~~programs. ~~Bren, Hall, McMillan and Schreiber.~~ If ~~the~~these ~~KBS~~events ~~team of real estate professionals directs creditworthy prospective tenants to properties owned by other program they advise~~occur, ~~when~~the itreturns ~~could~~on ~~direct such tenants to~~ our ~~properties~~investments, ~~our~~and ~~tenant~~the ~~base~~value ~~may~~of ~~have more inherent risk and~~ our ~~properties~~stockholders’ ~~occupancy~~investments, may ~~be lower than might otherwise be the case~~decline.

InAll ~~addition,~~of weour ~~and~~executive ~~other~~officers ~~programs~~and ~~advised~~some byof ~~KBS~~our ~~Capital~~directors ~~Advisors~~ and ~~its~~the ~~affiliates or~~ key real estate ~~professionals, rely on our sponsor~~ and ~~other~~debt ~~key~~finance ~~real estate~~ professionals atassembled by our advisor toface ~~sell~~conflicts ~~our~~of ~~properties.~~interest ~~These~~related ~~programs~~to ~~and~~their ~~KBS-advised~~positions ~~investors may possess properties in similar locations~~ and/or ofinterests ~~the~~in ~~same~~Pacific ~~property~~Oak ~~types~~Capital asAdvisors ~~ours~~ and ~~may~~its beaffiliates, ~~attempting~~which tocould ~~sell~~hinder ~~these properties at the same time we are attempting to sell some of~~ our ~~properties.~~ability ~~If our advisor directs potential purchasers~~ to ~~properties~~implement ~~owned by other programs they advise when it could direct such purchasers to~~ our ~~properties, we~~business ~~may~~strategy beand ~~unable~~ to ~~sell~~generate ~~some~~returns ~~or all of our properties at the time or at the price we otherwise would, which could limit our ability~~ to ~~pay distributions and reduce~~ our stockholders~~’ overall investment return~~.

~~KBS~~All ~~Capital~~of ~~Advisors~~our ~~will~~executive ~~face~~officers, ~~conflicts~~some of our directors and other key real estate and debt finance professionals assembled by our advisor are also executive officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest ~~relating~~in toour ~~joint~~advisor, ~~ventures~~and ~~that~~other weaffiliated ~~may~~Pacific ~~form~~Oak ~~with~~entities. ~~affiliates~~Through Pacific Oak-affiliated entities, some of ~~KBS~~ these persons also serve as the investment advisors to institutional investors in real estate and real estate-related assets and through Pacific Oak Capital Advisors and its affiliates these persons serve as the advisor to POSOR I and other Pacific Oak-sponsored programs. As a result, they owe fiduciary duties to each of these entities, their members and limited partners and these investors, which ~~conflicts~~fiduciary duties may from time to time conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities and investors could result in aaction ~~disproportionate~~or ~~benefit~~inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Further, Messrs. Hall and McMillan and existing and future Pacific Oak-sponsored programs and Pacific Oak-advised investors generally are not and will not be prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture ~~partners~~or atventures, ~~our~~including ~~expense~~businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.

IfOur ~~approved~~board ~~by a majority~~ of ~~our independent~~ directors,’ weloyalties ~~may~~to ~~enter~~POSOR ~~into~~I ~~joint~~and ~~venture~~Keppel ~~agreements~~Pacific ~~with~~Oak ~~other~~US ~~KBS-sponsored~~REIT ~~programs or affiliated entities for the acquisition, development or improvement of properties or other investments. KBS Capital Advisors~~ and ~~KBS~~possibly ~~Realty Advisors and its affiliates, the advisors~~ to ~~the~~future ~~other~~Pacific ~~KBS~~Oak-sponsored programs ~~and~~could ~~the~~influence ~~investment~~its ~~advisers to KBS-advised investors~~judgment, ~~have~~resulting ~~some of the same executive officers, directors and other key real estate and debt finance professionals; and these persons will face conflicts of interest~~ in ~~determining~~actions ~~which~~that ~~KBS program or investor should enter into any particular joint venture agreement. These persons~~ may ~~also~~not ~~face~~be ~~a conflict~~ in ~~structuring the terms of the relationship between~~ our ~~interests~~stockholders’ ~~and~~best ~~the~~interest ~~interests~~or ofthat ~~the~~result ~~KBS-affiliated co-venturer and~~ in ~~managing the joint venture. Any joint venture agreement or transaction between us and~~ a ~~KBS-affiliated~~disproportionate ~~co-venturer will not have the~~ benefit ofto ~~arm’s-length~~another ~~negotiation~~Pacific ~~of the type normally conducted between unrelated co~~Oak-~~venturers. The~~sponsored ~~KBS-affiliated~~program ~~co-venturer~~at ~~may have economic or business interests or goals that are or may become inconsistent with~~ our ~~business interests or goals~~expense. ~~These co-venturers may thus benefit to our and our investors’ detriment.~~

Three 11of our directors, including one of our independent directors, Mr. Yee, are also directors of POSOR I. In addition, one of our directors, Mr. McMillan, is also a director of Keppel Pacific Oak US REIT. The loyalties of our directors serving on the boards of directors of POSOR I and Keppel Pacific Oak US REIT, or possibly on the boards of directors of future Pacific Oak-sponsored programs, may influence the judgment of our board when considering issues for us that also may affect other Pacific Oak-sponsored programs, such as the following:

•The conflicts committee of our board must evaluate the performance of Pacific Oak Capital Advisors with respect to whether Pacific Oak Capital Advisors is presenting to us our fair share of investment opportunities. If our advisor is not presenting a sufficient number of investment opportunities to us because it is presenting many opportunities to other Pacific Oak-sponsored programs or if our advisor is giving preferential treatment to other Pacific Oak-sponsored programs in this regard, the conflicts committee may not be well suited to enforce our rights under the terms of the advisory agreement or to seek a new advisor.

Table of Contents

~~KBS~~•We could enter into transactions with other Pacific Oak-sponsored programs, such as property sales, acquisitions or financing arrangements. Such transactions might entitle Pacific Oak Capital Advisors or its affiliates to fees and other compensation from both parties to the transaction. For example, acquisitions from other Pacific Oak-sponsored programs might entitle Pacific Oak Capital Advisors or its affiliates to disposition fees and possible subordinated incentive fees in connection with its services for the ~~real~~seller ~~estate~~in addition to acquisition and ~~debt~~origination ~~finance~~fees ~~professionals~~and ~~assembled~~other byfees ~~our~~that ~~advisor~~we might pay to Pacific Oak Capital Advisors in connection with such transaction. Similarly, ~~their~~property sales to other Pacific Oak-sponsored programs might entitle Pacific Oak Capital Advisors or its affiliates to acquisition and ~~our~~origination ~~officers~~fees ~~face~~in ~~competing~~connection ~~demands~~with onits ~~their~~services ~~time~~to the purchaser in addition to disposition and ~~this~~other fees that we might pay to Pacific Oak Capital Advisors in connection with such transaction. Decisions of our board of directors and the conflicts committee regarding the terms of those transactions may ~~cause~~be influenced by our ~~operations~~board’s and anthe ~~investment~~conflicts incommittee’s usloyalties to ~~suffer~~such other Pacific Oak-sponsored programs.

We•A ~~rely~~decision on KBS Capital Advisors and the real estate and debt finance professionals our advisor has assembled, including Messrs. Bren, Hall, McMillan, Schreiber and Jeffrey K. Waldvogel and Ms. Stacie K. Yamane, for the day-to-day operation of our ~~business.~~board ~~KBS REIT II, KBS Strategic Opportunity REIT, KBS REIT III and KBS Growth & Income REIT are also advised by KBS Capital Advisors and rely on many~~ of ~~the same real estate, debt finance, management and accounting professionals, as will future KBS-sponsored programs and KBS-advised investors. Further, our officers and affiliated~~ directors ~~are also officers and/~~or ~~an affiliated directors of some or all of~~ the ~~other~~conflicts ~~public~~committee ~~KBS-sponsored~~regarding programs. Messrs. Bren, Schreiber and Waldvogel and Ms. Yamane are also executive officers of KBS REIT II, KBS REIT III, and KBS Growth & Income REIT; and Messrs. Hall, McMillan and Waldvogel and Ms. Yamane are executive officers of KBS Strategic Opportunity REIT. In addition, Messrs. Bren and Schreiber are executive officers of KBS Realty Advisors and its affiliates, the ~~advisors~~timing of ~~the private KBS-sponsored programs and the investment advisors to KBS-advised investors. As~~ a result of their interests in other KBS-sponsored programs, their obligations to other KBS-advised investors and the fact that they engage in and they will continue to engage in other business activities on behalf of themselves and others, Messrs. Bren, Hall, McMillan, Schreiber and Waldvogel and Ms. Yamane face conflicts of interest in allocating their time among us, KBS REIT II, KBS REIT III, KBS Strategic Opportunity REIT, KBS Growth & Income REIT, KBS Capital Advisors and other KBS-sponsored programs and KBS-advised investors, as well as other business activities in which they are involved. In addition, KBS Capital Advisors and KBS Realty Advisors and its affiliates share many of the same key real estate and debt ~~finance professionals. During times of intense activity in other programs and ventures, these individuals may devote less time and fewer resources to our business than are necessary~~ or ~~appropriate~~equity tooffering ~~manage~~could ~~our~~be ~~business. Furthermore,~~influenced ~~some~~by orconcerns ~~all~~that ofsuch ~~these~~offering ~~individuals~~would ~~may~~compete ~~become~~with ~~employees of another KBS-sponsored program in~~ an ~~internalization~~offering ~~transaction or, if we internalize our advisor, may not become our employees as a result~~ of ~~their relationship with~~ other ~~KBS~~Pacific Oak-sponsored programs. ~~If these events occur, the returns on our investments, and the value of an investment in us, may decline.~~

~~All~~•A decision of our ~~executive~~board ~~officers~~of ~~and our affiliated~~ directors ~~and~~or the ~~key~~conflicts ~~real~~committee ~~estate~~regarding ~~and~~the ~~debt~~timing ~~finance professionals assembled by our advisor face conflicts~~ of ~~interest~~property ~~related~~sales ~~to their positions and/or interests in KBS Capital Advisors and its affiliates, including our dealer manager, which~~ could ~~hinder~~be ~~our~~influenced ~~ability~~by toconcerns ~~implement~~that ~~our~~the ~~business~~sales ~~strategy~~would ~~and~~compete towith ~~generate~~those ~~returns~~of toother ~~our~~Pacific ~~stockholders~~Oak-sponsored programs.

~~All~~•A decision of our ~~executive~~board ~~officers~~of ~~and our affiliated~~ directors ~~and other key real estate and debt finance professionals assembled by our advisor are also executive officers, directors, managers, key professionals and/~~or ~~holders of a direct or indirect controlling interest in our advisor, our dealer manager and/or other KBS-affiliated entities. Through KBS-affiliated entities, some of these persons also serve as~~ the ~~investment~~conflicts ~~advisors~~committee toregarding ~~KBS-advised~~whether ~~investors~~ and ~~through~~when ~~KBS~~we ~~Capital~~seek ~~Advisors and its affiliates these persons serve as the advisor~~ to ~~KBS~~list ~~REIT~~our ~~II,~~shares ~~KBS~~of ~~REIT~~common ~~III,~~stock ~~KBS~~on ~~Strategic Opportunity REIT, KBS Growth & Income REIT, and other KBS-sponsored programs. As~~ a ~~result,~~national ~~they~~securities ~~owe~~exchange fiduciary duties to each of these entities, their members and limited partners and these investors, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities and investors could ~~result~~be ininfluenced ~~action~~by orconcerns ~~inaction~~ that issuch ~~detrimental~~listing ~~to our business, which~~ could ~~harm~~adversely affect the ~~implementation~~sales ofefforts ~~our~~for ~~business~~other ~~strategy~~Pacific ~~and our investment and leasing opportunities. Further, Messrs. Bren, Hall, McMillan and Schreiber and existing and future KBS~~Oak-sponsored programs ~~and KBS-advised investors are not prohibited from engaging~~, ~~directly~~depending oron ~~indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in~~ the ~~acquisition,~~price ~~development,~~at ~~ownership,~~which ~~leasing or sale of real estate investments. If we do not successfully implement~~ our ~~business~~shares ~~strategy, we may be unable to generate the cash needed to pay distributions to our stockholders and to maintain or increase the value of our assets~~trade.

Table of Contents

Our board of directors’ loyalties to KBS Strategic Opportunity REIT and Keppel-KBS US REIT and possibly to future KBS-sponsored programs could influence its judgment, resulting in actions that may not be in our stockholders’ best interest or that result in a disproportionate benefit to another KBS-sponsored program at our expense.

Three of our directors, including one of our independent directors, Mr. Yee, are also directors of KBS Strategic Opportunity REIT. In addition, one of our directors, Mr. McMillan, is also director of Keppel-KBS US REIT. The loyalties of our directors serving on the boards of directors of KBS Strategic Opportunity REIT and Keppel-KBS US REIT, or possibly on the boards of directors of future KBS-sponsored programs, may influence the judgment of our board when considering issues for us that also may affect other KBS-sponsored programs, such as the following:

• The conflicts committee of our board must evaluate the performance of KBS Capital Advisors with respect to whether KBS Capital Advisors is presenting to us our fair share of investment opportunities. If our advisor is not presenting a sufficient number of investment opportunities to us because it is presenting many opportunities to other KBS-sponsored programs or if our advisor is giving preferential treatment to other KBS-sponsored programs in this regard, the conflicts committee may not be well suited to enforce our rights under the terms of the advisory agreement or to seek a new advisor.

• We could enter into transactions with other KBS-sponsored programs, such as property sales, acquisitions or financing arrangements. Such transactions might entitle KBS Capital Advisors or its affiliates to fees and other compensation from both parties to the transaction. For example, acquisitions from other KBS-sponsored programs might entitle KBS Capital Advisors or its affiliates to disposition fees and possible subordinated incentive fees in connection with its services for the seller in addition to acquisition and origination fees and other fees that we might pay to KBS Capital Advisors in connection with such transaction. Similarly, property sales to other KBS-sponsored programs might entitle KBS Capital Advisors or its affiliates to acquisition and origination fees in connection with its services to the purchaser in addition to disposition and other fees that we might pay to KBS Capital Advisors in connection with such transaction. Decisions of our board of directors and the conflicts committee regarding the terms of those transactions may be influenced by our board’s and the conflicts committee’s loyalties to such other KBS-sponsored programs.

• A decision of our board of directors or the conflicts committee regarding the timing of a debt or equity offering could be influenced by concerns that such offering would compete with an offering of other KBS-sponsored programs.

• A decision of our board of directors or the conflicts committee regarding the timing of property sales could be influenced by concerns that the sales would compete with those of other KBS-sponsored programs.

• A decision of our board of directors or the conflicts committee regarding whether and when we seek to list our shares of common stock on a national securities exchange could be influenced by concerns that such listing could adversely affect the sales efforts for other KBS-sponsored programs, depending on the price at which our shares trade.

Risks Related to Our Corporate Structure

Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, our charter prohibits a person from directly or constructively owning more than 9.8% of our outstanding shares, unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.

Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.

Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.

Table of Contents

Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to our company, our directors, our officers or our employees (we note we currently have no employees). This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or employees, which may discourage meritorious claims from being asserted against us and our directors, officers and employees. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. We adopted this provision because we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements, and we believe the risk of a court declining to enforce this provision is remote, as the General Assembly of Maryland has specifically amended the Maryland General Corporation Law to authorize the adoption of such provisions.

Table of Contents

Our stockholders’ investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we or our subsidiaries become an unregistered investment company, we could not continue our business.

Neither we nor any of our subsidiaries intend to register as investment companies under the Investment Company Act. If we or our subsidiaries were obligated to register as investment companies, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:

• limitations on capital structure;

• restrictions on specified investments;

• prohibitions on transactions with affiliates; and

• compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:

• pursuant to Section 3(a)(1)(A) is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities (the “primarily engaged test”); or

• pursuant to Section 3(a)(1)(C) is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).

We believe that neither we nor our Operating Partnership will be required to register as an investment company based on the following analyses. With respect to the 40% test, most of the entities through which we and our Operating Partnership own our assets will be majority-owned subsidiaries that will not themselves be investment companies and will not be relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7).

With respect to the primarily engaged test, we and our Operating Partnership will be holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our Operating Partnership, we and our Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.

Table of Contents

If any of the subsidiaries of our Operating Partnership fail to meet the 40% test, we believe they will usually, if not always, be able to rely on Section 3(c)(5)(C) of the Investment Company Act for an exception from the definition of an investment company. (Otherwise, they should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act.) As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate,” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that any of the subsidiaries of our Operating Partnership relying on Section 3(c)(5)(C) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. If any subsidiary relies on Section 3(c)(5)(C), we expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

Table of Contents

To maintain compliance with the Investment Company Act, our subsidiaries may be unable to sell assets we would otherwise want them to sell and may need to sell assets we would otherwise wish them to retain. In addition, our subsidiaries may have to acquire additional assets that they might not otherwise have acquired or may have to forego opportunities to make investments that we would otherwise want them to make and would be important to our investment strategy. Moreover, the SEC or its staff may issue interpretations with respect to various types of assets that are contrary to our views and current SEC staff interpretations are subject to change, which increases the risk of non-compliance and the risk that we may be forced to make adverse changes to our portfolio. In this regard, we note that in 2011 the SEC issued a concept release indicating that the SEC and its staff were reviewing interpretive issues relating to Section 3(c)(5)(C) and soliciting views on the application of Section 3(c)(5)(C) to companies engaged in the business of acquiring mortgages and mortgage related instruments. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement and a court could appoint a receiver to take control of us and liquidate our business. For more information related to compliance with the Investment Company Act, see “Investment Objectives and Criteria-Investment Limitations Under the Investment Company Act of 1940.”

Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exception from the definition of an investment company under the Investment Company Act.

If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, we may need to modify our investment portfolio in order to maintain our REIT qualification or exception from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.

Our stockholders have limited control over changes in our policies and operations, which increases the uncertainty and risks our stockholders face.

Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face.

Table of Contents

Because our charter does not require our listing or liquidation by a specified date, or at all, investors should only purchase our shares as a long-term investment and be prepared to hold them for an indefinite period of time.

We may seek to list our shares of common stock on a national securities exchange if our independent directors believe listing would be in the best interest of our stockholders. If we do not list our shares of common stock on a national securities exchange within ten years from commencement of our initial public offering, our charter requires that we either seek stockholder approval of the liquidation of the company; or postpone the decision of whether to liquidate the company, if a majority of the conflicts committee determines that liquidation is not then in the best interests of the stockholders. If a majority of the conflicts committee does determine that liquidation is not then in the best interests of our stockholders, our charter requires that the conflicts committee revisit the issue of liquidation at least annually. Further postponement of listing or stockholder action regarding liquidation would only be permitted if a majority of the conflicts committee again determined that liquidation would not be in the best interest of our stockholders. If we sought and failed to obtain stockholder approval of our liquidation, our charter would not require us to list or liquidate and would not require the conflicts committee to revisit the issue of liquidation, and we could continue to operate as before. Because our charter does not require our listing or liquidation by a specified date, or at all, investors should only purchase our shares as a long-term investment and be prepared to hold them for an indefinite period of time.

Table of Contents

If funds are not available from our dividend reinvestment plan offering for general corporate purposes, then we may have to use a greater proportion of our cash flow from operations to meet our general cash requirements, which would reduce cash available for distributions and limit our ability to redeem shares under our share redemption program.

We depend on the proceeds from our dividend reinvestment plan offering for general corporate purposes, including, but not limited to, the repurchase of shares under our share redemption program; reserves required by any financings of our investments; future funding obligations under any real estate loan receivable we acquire or originate; the acquisition or origination of assets, which would include payment of acquisition and origination fees to our advisor; the repayment of debt; and expenses relating to our investments, such as purchasing a loan senior to ours to protect our junior position in the event of a default by the borrower on the senior loan, making protective advances to preserve collateral securing a loan, or making capital and tenant improvements or paying leasing costs and commissions related to real property. We cannot predict with any certainty how much, if any, dividend reinvestment plan proceeds will be available for general corporate purposes. If such funds are not available from our dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet our general cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.

The estimated NAV per share of our common stock may not reflect the value that stockholders will receive for their investment and does not take into account how developments subsequent to the valuation date related to individual assets, the financial or real estate markets or other events may have increased or decreased the value of our portfolio.

On December 617, ~~2018~~2019, our board of directors approved an estimated NAV per share of our common stock of $910.6525 based on the estimated value of the our assets less the estimated value of our liabilities, or NAV, divided by the number of shares outstanding, all as of September 30, ~~2018~~2019, ~~see~~with ~~Part~~the IIexception of the following adjustments: (i) our consolidated investments in real estate properties were valued as of October 31, ~~Item~~2019; 5(ii) ~~“Market~~an adjustment to reduce cash for ~~Registrant’s~~the ~~Common~~amount ~~Equity,~~of ~~Related~~capital ~~Stockholder~~expenditures ~~Matters~~incurred in October 2019; (iii) an adjustment for disposition costs and ~~Issuer~~fees ~~Purchases~~incurred ofin ~~Equity~~connection ~~Securities~~with –the ~~Market~~disposition ~~Information~~of 2200 Paseo Verde.” ~~There~~Other than the adjustments, there were no material changes between September 30, ~~2018~~2019 and December 6 17, ~~2018~~2019 that impacted the overall estimated NAV per share. We ~~provided~~are providing this estimated NAV per share to assist broker-dealers ~~who~~that ~~participate~~participated in ~~this~~our initial public offering in meeting their customer account statement reporting obligations under ~~NASD~~National Association of Securities Dealers Conduct Rule 2340 as required by the Financial Industry Regulatory Authority (“FINRA”). This valuation was performed in accordance with the provisions of and also to comply with Practice Guideline 2013–01, Valuations of Publicly Registered, Non-Listed REITs, issued by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) (“IPA”) in April 2013 (the “IPA Valuation Guidelines”).

As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete.

Different parties with different assumptions and estimates could derive a different estimated NAV per share of our common stock and this difference could be significant, nor does it represent a liquidation value of our assets and liabilities or the price at which our shares of common stock would trade on a national securities exchange. The estimated NAV per share is not audited and does not represent the fair value of our assets less the fair value of our liabilities according to GAAP.

Table of Contents

Accordingly, with respect to our estimated NAV per share, we can give no assurance that:

• a stockholder would be able to resell his or her shares at our estimated NAV per share;

• a stockholder would ultimately realize distributions per share equal to our estimated NAV per share upon liquidation of our assets and settlement of our liabilities or a sale of our company;

• our shares of common stock would trade at our estimated NAV per share on a national securities exchange;

• a third party would offer our estimated NAV per share in an arm’s-length transaction to purchase all or substantially all of our shares of common stock;

• another independent third-party appraiser or third-party valuation firm would agree with our estimated NAV per share; or

• the methodology used to determine our estimated NAV per share would be acceptable to FINRA for compliance with ERISA reporting requirements.

~~Further,~~For ~~our~~a ~~estimated~~full ~~NAV~~description ~~per share is based on the estimated value~~ of ~~our assets less~~ the ~~estimated~~methodologies ~~value of our liabilities, divided by the number of shares outstanding, all as of September 30, 2018. As of September 30, 2018, there were 17,963,199~~ and ~~12,100,736~~assumptions ~~shares~~used ~~of Class A and Class T common stock issued and outstanding, respectively. We did not make any adjustments~~ to our estimated NAV subsequent to September 30, 2018, including adjustments relating to the following, among others: (i) the issuance of common stock and the payment of related offering costs; (ii) net operating income earned and distributions declared; and (iii) the redemption of shares. The value of our ~~shares~~assets ~~will~~and ~~fluctuate~~liabilities ~~over time~~ in ~~response~~connection towith ~~developments related to~~ the ~~capital~~calculation ~~raised during our offering stage, future investments, the performance~~ of ~~individual assets in our portfolio,~~ the ~~management of those assets, and the real estate and finance markets. Our~~ estimated ~~NAV~~value per share, ~~does~~see ~~not~~Part ~~reflect~~II, aItem ~~discount for the fact that we are externally managed~~5, ~~nor~~“Market ~~does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per share does not take into account estimated disposition costs and fees~~ for ~~real~~Registrant’s ~~estate~~Common ~~properties~~Equity, ~~debt~~Related ~~prepayment~~Stockholder ~~penalties~~Matters ~~that~~and ~~could~~Issuer ~~apply~~Purchases ~~upon the prepayment~~ of ~~certain~~Equity ofSecurities ~~our~~— ~~debt~~Market ~~obligations, the impact of restrictions on the assumption of debt~~Information.” The estimated NAV per share does not take into consideration acquisition-related costs and financing costs related to future acquisitions. We expect to utilize our advisor and/or an independent valuation firm to update our estimated NAV per share annually. We cannot assure our stockholders that our estimated NAV per share will increase or that it will not decrease.

Payment of fees to KBS Capital Advisors and its affiliates reduces cash available for distribution and increases the risk that stockholders will not be able to recover the amount of an investment in our shares.18

~~KBS~~Table ~~Capital Advisors and its affiliates perform services for us in connection with the selection, acquisition, origination, management, and administration~~ of our investments. We pay them substantial fees for these services, which will result in immediate dilution to the value of an investment in us and reduce the amount of cash available for distribution to stockholders. Compensation to be paid to our advisor may be increased without stockholder approval, which would further dilute our stockholders’ investment and reduce the amount of cash available for distribution to stockholders.Contents

Payment of fees to Pacific Oak Capital Advisors and its affiliates reduces cash available for distribution and increases the risk that stockholders will not be able to recover the amount of an investment in our shares.

Pacific Oak Capital Advisors and its affiliates perform services for us in connection with the selection, acquisition, origination, management, and administration of our investments. We pay them substantial fees for these services, which will result in immediate dilution to the value of an investment in us and reduce the amount of cash available for distribution to stockholders. Compensation to be paid to our advisor may be increased without stockholder approval, which would further dilute our stockholders’ investment and reduce the amount of cash available for distribution to stockholders.

We may also pay significant fees during our listing/liquidation stage. Although most of the fees payable during our listing/liquidation stage are contingent on our investors first enjoying agreed-upon investment returns, the investment-return thresholds may be reduced subject to approval by our conflicts committee and the other limitations in our charter.

These fees increase the risk that the amount of cash available for distribution to common stockholders upon a liquidation of our portfolio would be less than the estimated NAV per share. These substantial fees and other payments also increase the risk that our stockholders will not be able to resell their shares at a profit, even if our shares are listed on a national securities exchange.

Failure to procure adequate capital and funding would negatively impact our results and may, in turn, negatively affect our ability to pay distributions to our stockholders.

We will depend upon the availability of adequate funding and capital for our operations. The failure to secure acceptable financing could reduce our taxable income, as our investments would no longer generate the same level of net interest income due to the lack of funding or increase in funding costs. A reduction in our net income could reduce our liquidity and our ability to pay distributions to our stockholders. We cannot assure our stockholders that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. Therefore, in the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on our ability to pay distributions.

Table of Contents

Stockholders may be more likely to sustain a loss on their investment because our sponsors do not have as strong an economic incentive to avoid losses as do sponsors who have made significant equity investments in their companies.

KBS ~~Holdings, through its ownership interest in KBS~~ Capital Advisors, has only invested $200,000 in us through the purchase of 21,739 shares of our Class A common stock at $9.20 per share. In addition, Messrs. Hall and McMillan, through their ownership interest in Willowbrook Capital Group LLC have invested $2,000,000 in us through the purchase of 240,211 shares of our Class A common stock at $8.33 per share. Therefore, ~~if we are successful in raising enough proceeds to reimburse~~ our ~~sponsors~~former ~~for~~sponsor ~~our significant organization~~ and ~~offering~~current ~~expenses,~~sponsor ~~our~~have ~~sponsors will~~ have little exposure to loss in the value of our shares. Without this exposure, our stockholders may be at a greater risk of loss because our sponsors do not have as much to lose from a decrease in the value of our shares as do those sponsors who make more significant equity investments in their companies.

Although we will not currently be afforded the protection of the Maryland General Corporation Law relating to deterring or defending hostile takeovers, our board of directors could opt into these provisions of Maryland law in the future, which may discourage others from trying to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.

Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders or affiliates of interested stockholders are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Also under Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation are excluded from the vote on whether to accord voting rights to the control shares. Should our board of directors opt into these provisions of Maryland law, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law could provide similar anti-takeover protection.

Our charter includes an anti-takeover provision that may discourage a stockholder from launching a tender offer for our shares.

Our charter provides that any tender offer made by a stockholder, including any “mini-tender” offer, must comply with most provisions of Regulation 14D of the Securities Exchange Act of 1934, as amended. The offering stockholder must provide our company notice of such tender offer at least 10 business days before initiating the tender offer. If the offering stockholder does not comply with these requirements, all tendering stockholders will have the ability to rescind the tender of their shares. In addition, the noncomplying stockholder shall be responsible for all of our company’s expenses in connection with that stockholder’s noncompliance. This provision of our charter may discourage a stockholder from initiating a tender offer for our shares and prevent our stockholders from receiving a premium price for their shares in such a transaction.

1819

Table of Contents

Risks Related to Our Investments

Our investments will be subject to the risks typically associated with real estate.

We intend to invest in a portfolio of real estate-related loans, opportunistic real estate, real estate equity securities and other real estate-related investments, including direct investments in opportunistic real estate. Each of these investments will be subject to the risks typically associated with real estate. Our loans held for investment will generally be directly or indirectly secured by a lien on real property (or the equity interests in an entity that owns real property) that, upon the occurrence of a default on the loan, could result in our acquiring ownership of the property. We will not know whether the values of the properties ultimately securing our loans will remain at the levels existing on the dates of origination or acquisition of those loans. If the values of the properties securing the loans drop, our risk will increase because of the lower value of the security associated with such loans. In this manner, real estate values could impact the values of our loan investments. Our investments in residential and commercial mortgage-backed securities, collateralized debt obligations and other real estate-related investments may be similarly affected by real estate property values. The value of real estate may be adversely affected by a number of risks, including:

• natural disasters such as hurricanes, earthquakes, floods and ~~floods~~pandemics;

• acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

• adverse changes in national and local economic and real estate conditions;

• an oversupply of (or a reduction in demand for) space in the areas where particular properties are located and the attractiveness of particular properties to prospective tenants;

• changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance therewith and the potential for liability under applicable laws;

• costs of remediation and liabilities associated with environmental conditions affecting properties; and

• the potential for uninsured or ~~underinsured~~under insured property losses.

The value of each property is affected significantly by its ability to generate cash flow and net income, which in turn depends on the amount of rental or other income that can be generated net of expenses required to be incurred with respect to the property. Many expenditures associated with properties (such as operating expenses and capital expenditures) cannot be reduced when there is a reduction in income from the properties. These factors may have a material adverse effect on the ability of our borrowers to pay their loans and our tenants to pay their rent, as well as on the value that we can realize from other real estate-related assets we originate, own or acquire.

Investments in non-performing real estate assets involve greater risks than investments in stabilized, performing assets and make our future performance more difficult to predict.

Traditional performance metrics of real estate assets are generally not meaningful for non-performing real estate. Non-performing properties, for example, do not have stabilized occupancy rates to provide a useful measure of revenue. Similarly, non-performing loans do not have a consistent stream of loan servicing or interest payments to provide a useful measure of revenue. In addition, for non-performing loans, often there is no expectation that the face amount of the note will be paid in full. Appraisals may provide a sense of the value of the investment, but any appraisal of the property or property securing the loan will be based on numerous estimates, judgments and assumptions that significantly affect the appraised value of the property securing the loan. Further, an appraisal of a nonstabilized property, in particular, involves a high degree of subjectivity due to high vacancy levels and uncertainties with respect to future market rental rates and timing of lease-up and stabilization. Accordingly, different assumptions may materially change the appraised value of the property. In addition, the value of the property will change over time.

We may pursue more than one strategy to create value in a non-performing real estate investment. With respect to a property, these strategies may include development, redevelopment, or lease-up of such property. With respect to a loan, these strategies may include negotiating with the borrower for a reduced payoff, restructuring the terms of the loan or enforcing our rights as lender under the loan and foreclosing on the collateral securing the loan.

The factors described above make it challenging to evaluate non-performing investments.

We are dependent on the third-party managers of our hotels.

We currently own two hotel properties. In order to qualify as a REIT, we are not able to operate any hotel properties or participate in the decisions affecting the daily operations of our hotels. We will lease any hotels we acquire to a taxable REIT subsidiary (“TRS”) in which we may own up to a 100% interest. Our TRS will enter into management agreements with eligible independent contractors that are not our subsidiaries or otherwise controlled by us to manage the hotels. Thus, independent hotel operators, under management agreements with our TRS, will control the daily operations of our hotels.

1920

Table of Contents

We depend on these independent management companies to adequately operate our hotels as provided in the management agreements. We will not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room and average daily rates, we may not be able to force the management company to change its method of operation of our hotels. We can only seek redress if a management company violates the terms of the applicable management agreement with the TRS, and then only to the extent of the remedies provided for under the terms of the management agreement. In the event that we need to replace our management company, we may be required by the terms of the management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotel.

We may have to make significant capital expenditures to maintain our hotels.

Hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. Generally, we will be responsible for the costs of these capital improvements, which gives rise to the following risks:

• cost overruns and delays;

• renovations can be disruptive to operations and can displace revenue at the hotels, including revenue lost while rooms under renovation are out of service;

• the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and

• the risk that the return on our investment in these capital improvements will not be what we expect.

If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to obtain financing or use proceeds from our initial public offering to fund future capital improvements.

General economic conditions and discretionary consumer spending may affect our hotels and lower the return on our stockholders’ investment.

The operations of our hotels will depend upon a number of factors relating to discretionary consumer spending. Unfavorable local, regional or national economic developments or uncertainties regarding future economic prospects as a result of terrorist attacks, military activity or natural disasters could reduce consumer spending in the markets in which we own hotels and adversely affect the operation of any hotels we may acquire. Consumer spending on luxury goods, travel and other leisure may decline as a result of lower consumer confidence levels, even if prevailing economic conditions are favorable. In an economic downturn, consumer discretionary spending levels generally decline, at times resulting in disproportionately large reductions in expenditures on luxury goods, travel and other leisure activities. Certain of the classes of properties that we may acquire may be unable to maintain their profitability during periods of adverse economic conditions or low consumer confidence, which could in turn affect the ability of operators to make scheduled rent payments to us.

Seasonal revenue variations in our hotels require the operators of such assets to manage cash flow properly over time to meet their non-seasonal scheduled rent payments to us.

Certain of our hotels may be seasonal in nature. For example, the typical beach season begins in early May and runs through August, during which time beach resorts generate the vast majority of their annual revenues. Revenues and profits at beach resorts and their related properties are substantially lower and historically result in losses during the winter months due to the weather. As a result of the seasonal nature of certain industries that may be conducted on properties we acquire, these businesses will experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us. The failure of an operator or a tenant to manage its cash flow properly may result in such operator or tenant having insufficient cash on hand to make its scheduled payments to us during seasonally slow periods, which may adversely affect our cash available for distribution to stockholders.

Adverse weather conditions may affect operations of our hotels or reduce our operators’ ability to make scheduled rent payments to us, which could reduce our cash flow from such investments.

Adverse weather conditions may disrupt operations and influence revenues at our hotels. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or merely reduced rainfall levels), excessive rain and floods. In particular, Springmaid Beach Resort Hotel, which represented 10% of our total assets as of December 31, ~~2018~~2019 is located in Myrtle Beach, South Carolina, an area that sustained significant damage from Hurricane Matthew in October 2016, which resulted in a number of rooms being offline during the year ended December 31, 2017. As of December 31, 2017, no rooms remained out of service. The pier was destroyed and certain restaurants and stores had been closed. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to 3% of replacement cost per incident.

2021

Table of Contents

Certain properties, such as Springmaid Beach Resort, are susceptible to damage from weather conditions such as hurricanes, which damage (including but not limited to property damage and loss of revenue) is not generally insurable at commercially reasonable rates. Thus, poor weather conditions and may adversely affect both the value of our tenants and operators to make their scheduled rent payments to us.

We may not have control over properties under construction.

We may acquire properties under development, such as 210 West 31st Street, as well as hotels that require extensive renovation, such as Springmaid Beach Resort. If we acquire a property for development or renovation, we may be subject to the risk that we cannot control construction costs and the timing of completion of construction or a developer’s ability to build in conformity with plans, specifications and timetables.

We are subject to the risk of increased hotel operating expenses.

We are subject to the risk of increased hotel operating expenses, including, but not limited to, the following cost elements:

• wage and benefit costs;

• repair and maintenance expenses;

• employee liabilities;

• energy costs;

• property taxes;

• insurance costs;

• other operating expenses; and

• the risk that the return on our investment in these capital improvements will not be what we expect.

Any increases in one or more of these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.

We are subject to the risk of potentially significant tax penalties in case our leases with our TRS do not qualify for tax purposes as arm’s length.

Any TRSs we form will incur taxes or accrue tax benefits consistent with a “C” corporation. If the leases between us and any of our TRSs were deemed by the IRS to not reflect arm’s length transactions for tax purposes, we may be subject to severe tax penalties as the lessor that will increase our lodging operating expenses and adversely impact our profitability and cash flows.

There may be operational limitations associated with management and franchise agreements affecting our hotels and these limitations may prevent us from using these properties to their best advantage for our stockholders.

Our TRSs will lease and hold some of our hotels and may enter into franchise or license agreements with nationally recognized hotel brands. These franchise agreements may contain specific standards for, and restrictions and limitations on, the operation and maintenance of any hotels we may acquire in order to maintain uniformity within the franchiser system. We expect that ~~franchisors~~franchisers will periodically inspect our properties to ensure that we maintain their standards. We do not know whether those limitations may restrict our business plans tailored to each property and to each market.

The standards are subject to change over time, in some cases at the direction of the ~~franchisor~~franchiser, and may restrict our TRS’s ability, as franchisee, to make improvements or modifications to a property without the consent of the ~~franchisor~~franchiser. Conversely, as a condition to the maintenance of a franchise license, a ~~franchisor~~franchiser could also require us to make capital expenditures, even if we do not believe the capital improvements are necessary, desirable, or likely to result in an acceptable return on our investment. Action or inaction on our part or by our TRS could result in a breach of those standards or other terms and conditions of the franchise agreements and could result in the loss or termination of a franchise license.

In connection with terminating or changing the franchise affiliation of a property, we may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the property covered by the franchise because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the ~~franchisor~~franchiser. A loss of a franchise license for one or more lodging properties could materially and adversely affect our results of operations, financial condition and cash flows, including our ability to service debt and pay distributions to our stockholders.

2122

Table of Contents

Newly constructed and existing multifamily rental properties or other properties that compete with any properties we may acquire in any particular location could adversely affect the operating results of our properties and our cash available for distribution.

We may acquire properties in locations that experience increases in construction of multifamily rental or other properties that compete with our properties. This increased competition and construction could:

• make it more difficult for us to find residents to lease units in our apartment communities;

• force us to lower our rental prices in order to lease units in our apartment communities; or

• substantially reduce our revenues and cash available for distribution.

Our efforts to upgrade multifamily rental properties to increase occupancy and raise rental rates through redevelopment and repositioning may fail, which may reduce our net income and the cash available for distributions.

The success of our ability to upgrade our multifamily rental properties and realize capital gains and current income for our investors on these investments materially depends upon the status of the economy where the multifamily rental property is located. Our revenues will be lower if the rental market cannot bear the higher rental rate that accompanies the upgraded multifamily rental property due to job losses or other economic hardships. Should the local market be unable to support a higher rental rate for a multifamily rental property that we upgraded, we may not realize the premium rental we had assumed by a given upgrade and we may realize reduced rental income or a reduced gain or even loss upon the sale of the property. These events could cause us to reduce the cash available for distributions.

Short-term multifamily leases expose us to the effects of declining market rent, which could adversely impact our ability to make cash distributions.

We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term or earlier in certain situations, such as when a resident loses his/her job, without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.

Retail properties or mixed-use properties with a retail component may be affected by an economic downturn in the United States, which may have an adverse impact on the retail industry generally. Slow or negative growth in the retail industry may result in defaults by retail tenants, which could have an adverse impact on our results of operations.

Economic conditions in the United States have had an adverse impact on the retail industry generally. As a result, the retail industry is facing reductions in sales revenues and increased bankruptcies throughout the United States. The continuation of adverse economic conditions may result in an increase in distressed or bankrupt retail companies, which in turn would result in an increase in defaults by tenants at our commercial properties. Additionally, slow economic growth is likely to hinder new entrants into the retail market which may make it difficult for us to fully lease space at any retail properties we may acquire. Tenant defaults and decreased demand for retail space would have an adverse impact on the value of any retail properties we acquire and our results of operations.

Any retail tenants we have will face competition from numerous retail channels, which may reduce our profitability and ability to pay distributions.

Retailers will face continued competition from discount or value retailers, factory outlet centers, wholesale clubs, mail order catalogues and operators, television shopping networks and shopping via the Internet. If retail tenants’ rent payments are based on the amount of sales revenue that they generate, such competition could adversely affect our tenants and, consequently, our revenues and funds available for distribution.

Table of Contents

Hedging against interest rate exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to our stockholders.

We may enter into interest rate swap agreements or pursue other interest rate hedging strategies. Our hedging activity will vary in scope based on the level of interest rates, the type of portfolio investments held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

• interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

• available interest rate hedging products may not correspond directly with the interest rate risk for which protection is sought;

• the duration of the hedge may not match the duration of the related liability or asset;

• the amount of income that a REIT may earn from hedging transactions to offset losses due to fluctuations in interest rates is limited by federal tax provisions governing REITs;

• the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

~~• the party owing money in the hedging transaction may default on its obligation to pay; and~~23

•Table ~~we may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out~~ of ~~the money.~~Contents

•the party owing money in the hedging transaction may default on its obligation to pay; and

•we may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out of the money.

Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the investments being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the interest rate risk sought to be hedged. Any such imperfect correlation may prevent us from achieving the intended accounting treatment and may expose us to risk of loss.

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot be certain that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

We will assume the credit risk of our counterparties with respect to derivative transactions.

We may enter into derivative contracts for risk management purposes to hedge our exposure to cash flow variability caused by changing interest rates on our future variable rate real estate loans receivable and variable rate notes payable. These derivative contracts generally are entered into with bank counterparties and are not traded on an organized exchange or guaranteed by a central clearing organization. We would therefore assume the credit risk that our counterparties will fail to make periodic payments when due under these contracts or become insolvent. If a counterparty fails to make a required payment, becomes the subject of a bankruptcy case, or otherwise defaults under the applicable contract, we would have the right to terminate all outstanding derivative transactions with that counterparty and settle them based on their net market value or replacement cost. In such an event, we may be required to make a termination payment to the counterparty, or we may have the right to collect a termination payment from such counterparty. We assume the credit risk that the counterparty will not be able to make any termination payment owing to us. We may not receive any collateral from a counterparty, or we may receive collateral that is insufficient to satisfy the counterparty’s obligation to make a termination payment. If a counterparty is the subject of a bankruptcy case, we will be an unsecured creditor in such case unless the counterparty has pledged sufficient collateral to us to satisfy the counterparty’s obligations to us.

Table of Contents

We will assume the risk that our derivative counterparty may terminate transactions early.

If we fail to make a required payment or otherwise default under the terms of a derivative contract, the counterparty would have the right to terminate all outstanding derivative transactions between us and that counterparty and settle them based on their net market value or replacement cost. In certain circumstances, the counterparty may have the right to terminate derivative transactions early even if we are not defaulting. If our derivative transactions are terminated early, it may not be possible for us to replace those transactions with another counterparty, on as favorable terms or at all.

Table of Contents

We may be required to collateralize our derivative transactions.

We may be required to secure our obligations to our counterparties under our derivative contracts by pledging collateral to our counterparties. That collateral may be in the form of cash, securities or other assets. If we default under a derivative contract with a counterparty, or if a counterparty otherwise terminates one or more derivative contracts early, that counterparty may apply such collateral toward our obligation to make a termination payment to the counterparty. If we have pledged securities or other assets, the counterparty may liquidate those assets in order to satisfy our obligations. If we are required to post cash or securities as collateral, such cash or securities will not be available for use in our business. Cash or securities pledged to counterparties may be repledged by counterparties and may not be held in segregated accounts. Therefore, in the event of a counterparty insolvency, we may not be entitled to recover some or all collateral pledged to that counterparty, which could result in losses and have an adverse effect on our operations.

There can be no assurance that the direct or indirect effects of the Dodd-Frank Act and other applicable non-U.S. regulations will not have an adverse effect on our interest rate hedging activities.

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) imposed additional regulations on derivatives markets and transactions. Such regulations and, to the extent we trade with counterparties organized in non-US jurisdictions, any applicable regulations in those jurisdictions, are still being implemented, and will affect our interest rate hedging activities. While the full impact of the regulation on our interest rate hedging activities cannot be fully assessed until all final rules and regulations are implemented, such regulation may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions, and/or may result in us entering into such transactions on less favorable terms than prior to implementation of such regulation. For example, but not by way of limitation, the Dodd-Frank Act and the rule-making thereunder provides for significantly increased regulation of the derivative transactions used to affect our interest rate hedging activities, including: (i) regulatory reporting, (ii) subject to an exemption for end-users of swaps upon which we and our subsidiaries generally rely, mandated clearing of certain derivatives transactions through central counterparties and execution on regulated exchanges or execution facilities and, (iii) to the extent we are required to clear any such transactions, margin and collateral requirements. The imposition, or the failure to comply with, any of the foregoing requirements may have an adverse effect on our business and our stockholders’ return.

Our investments in preferred and common equity securities will be subject to the specific risks relating to the particular issuer of the securities and may involve greater risk of loss than secured debt financings.

Our investments in preferred and common equity securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers that are REITs and other real estate companies are subject to the inherent risks associated with real estate and real estate-related investments discussed in our prospectus. Issuers that are debt finance companies are subject to the inherent risks associated with structured financing investments also discussed in our prospectus. Furthermore, preferred and common equity securities may involve greater risk of loss than secured debt financings due to a variety of factors, including that such investments are generally unsecured and may also be subordinated to other obligations of the issuer. As a result, investments in preferred and common equity securities are subject to risks of (i) substantial market price volatility resulting from changes in prevailing interest rates, (ii) subordination to the senior claims of banks and other lenders to the issuer, (iii) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (iv) the possibility that earnings of the issuer may be insufficient to meet its distribution obligations and (v) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic downturn. These risks may adversely affect the value of outstanding preferred and common equity securities and the ability of the issuers thereof to make distribution payments to us.

We may make investments in non-U.S. dollar denominated securities, which will be subject to currency rates exposure.

We may purchase real estate-related securities denominated in foreign currencies. A change in foreign currency exchange rates may have an adverse impact on returns on our non-U.S. dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income qualification tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations.

Table of Contents

Investments in properties or other real estate investments outside the United States subject us to foreign currency risks, which may adversely affect distributions and our REIT status.

Revenues generated from any properties or other real estate investments we acquire or ventures we enter into relating to transactions involving assets located in markets outside the United States likely will be denominated in the local currency. Therefore, any investments we make outside the United States may subject us to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. As a result, changes in exchange rates of any such foreign currency to U.S. dollars may affect our revenues, operating margins and distributions and may also affect the book value of our assets and the amount of stockholders’ equity.

Table of Contents

Changes in foreign currency exchange rates used to value a REIT’s foreign assets may be considered changes in the value of the REIT’s assets. These changes may adversely affect our status as a REIT. Further, bank accounts in foreign currency which are not considered cash or cash equivalents may adversely affect our status as a REIT.

Inflation in foreign countries, along with government measures to curb inflation, may have an adverse effect on our investments.

Certain countries have in the past experienced extremely high rates of inflation. Inflation, along with governmental measures to curb inflation, coupled with public speculation about possible future governmental measures to be adopted, has had significant negative effects on these international economies in the past and this could occur again in the future. The introduction of governmental policies to curb inflation can have an adverse effect on our business. High inflation in the countries where we purchase real estate or make other investments could increase our expenses and we may not be able to pass these increased costs on to our tenants.

Concerns regarding the European debt crisis and market perceptions concerning the instability of the euro could adversely affect our business, results of operations and financing.

Concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the euro dissolve entirely, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could materially adversely affect the value of any euro-denominated assets and obligations we may acquire.

Our dependence on the management of other entities in which we invest may adversely affect our business.

We will not control the management, investment decisions or operations of the companies in which we may invest. Management of those enterprises may decide to change the nature of their assets, or management may otherwise change in a manner that is not satisfactory to us. We will have no ability to affect these management decisions and we may have only limited ability to dispose of our investments.

Many of our investments will be illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions.

Certain of the real estate-related securities that we may purchase in connection with privately negotiated transactions will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. Some of the CMBS and RMBS that we may purchase may be traded in private, unregistered transactions and are therefore subject to restrictions on resale or otherwise have no established trading market. The mezzanine and bridge loans we may purchase or originate will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment in the event of a borrower’s default. This illiquidity may limit our ability to vary our portfolio in response to changes in economic and other conditions, which could increase the likelihood that the value of the stockholders’ investment in us will decrease as a result of such changes in economic and other conditions.

Declines in the market values of our investments may adversely affect periodic reported results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

We expect that a substantial portion of our assets will be classified for accounting purposes as “available-for-sale.” These investments are carried at estimated fair value and temporary changes in the market values of those assets will be directly charged or credited to stockholders’ equity without impacting net income on the income statement. Moreover, if we determine that a decline in the estimated fair value of an available-for-sale security below its amortized value is other-than-temporary, we will recognize a loss on that security on the income statement, which will reduce our earnings in the period recognized.

Table of Contents

A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we may have to sell assets at a time when we might not otherwise choose to do so. A reduction in available credit may reduce our earnings and, in turn, cash available for distribution to stockholders.

Further, credit facility providers may require us to maintain a certain amount of cash reserves or to set aside unleveraged assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. If the market value of our investments declines, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. In the event that we are unable to meet these contractual obligations, our financial condition could deteriorate rapidly.

Market values of our real estate-related investments may decline for a number of reasons, such as changes in prevailing market rates, increases in defaults related to the collateral, increases in voluntary prepayments for our investments that are subject to prepayment risk, widening of credit spreads and downgrades of ratings of the securities by ratings agencies.26

Table of Contents

Some of our investments will be carried at an estimated fair value and we will be required to disclose the fair value of other investments quarterly. The estimated fair value will be determined by us and, as a result, there may be uncertainty as to the value of these investments.

Some of our investments will be in the form of securities that are recorded at fair value but that have limited liquidity or are not publicly traded. In addition, we must disclose the fair value of our investments in loans each quarter. Such estimates are inherently uncertain. The fair value of securities and other investments, including loans that have limited liquidity or are not publicly traded, may not be readily determinable. We will estimate the fair value of these investments on a quarterly basis. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on numerous estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.

Our joint venture partners could take actions that decrease the value of an investment to us and lower our stockholders’ overall return.

We have entered into, and may continue to enter into, joint ventures with third parties to make investments. We may also make investments in partnerships or other co-ownership arrangements or participations. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:

• that our co-venturer or partner in an investment could become insolvent or bankrupt;

• that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;

• that such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; or

• that disputes between us and our co-venturer or partner in an investment could result in litigation, thereby increasing our expenses and preventing our executive officers and directors from focusing available time and effort on our ongoing business operations.

Any of the above might subject us to liabilities and thus reduce our returns on our investment with that co-venturer or partner.

Properties that have significant vacancies could be difficult to sell, which could diminish the return on these properties.

A property may incur vacancies either by the expiration of tenant leases or the continued default of tenants under their leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash available to distribute to our stockholders. In addition, because a property’s market value depends principally upon the value of the leases associated with that property, the resale value of a property with high or prolonged vacancies could suffer, which could further reduce our returns. Such a reduction in the resale value of a property could also reduce the value of our stockholders’ investment.

We depend on tenants for a portion of our revenue, and lease defaults or terminations could reduce our net income and limit our ability to pay distributions to our stockholders.

The success of our real estate investments materially depends on the financial stability of our tenants. A default or termination by a significant tenant on its lease payments to us would cause us to lose the revenue associated with such lease and could require us to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure, if the property is subject to a mortgage. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property.

Table of Contents

If a tenant defaults on or terminates a significant lease, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. These events could cause us to reduce the amount of distributions to our stockholders.

Table of Contents

Our inability to sell a property at the time and on the terms we want could limit our ability to pay cash distributions to our stockholders.

Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to pay distributions to our stockholders and could reduce the value of our shares.

Our revenue and net income may vary significantly from one period to another due to investments in opportunity-oriented properties and portfolio acquisitions, which could increase the variability of our cash available for distributions.

Our opportunistic property acquisition strategy may include investments in properties in various phases of development, redevelopment or repositioning and portfolio acquisitions, which may cause our revenues and net income to fluctuate significantly from one period to another. Projects do not produce revenue while in development or redevelopment. During any period when our projects in development or redevelopment or those with significant capital requirements increase without a corresponding increase in stable revenue-producing properties, our revenues and net income will likely decrease. Many factors may have a negative impact on the level of revenues or net income produced by our portfolio of properties and projects, including higher than expected construction costs, failure to complete projects on a timely basis, failure of the properties to perform at expected levels upon completion of development or redevelopment, and increased borrowings necessary to fund higher than expected construction or other costs related to the project. Further, our net income and stockholders’ equity could be negatively affected during periods with large portfolio acquisitions, which generally require large cash outlays and may require the incurrence of additional financing. Any such reduction in our revenues and net income during such periods could cause a resulting decrease in our cash available for distributions during the same periods.

If we sell a property by providing financing to the purchaser, we will bear the risk of default by the purchaser, which could delay or reduce the distributions available to our stockholders.

In some instances, we may sell our properties by providing financing to purchasers. When we provide financing to a purchaser, we will bear the risk that the purchaser may default, which could reduce our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of the sale to our stockholders, or the reinvestment of the proceeds in other assets, will be delayed until the promissory note or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed.

Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks, which could diminish our stockholders’ return on their investment in us.

We may invest some of the proceeds available for investment in the acquisition, development and/or redevelopment of properties upon which we will develop and construct improvements. We could incur substantial capital obligations in connection with these types of investments. We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities and/or community groups and our builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. The builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases for space at a newly developed project. We may incur additional risks when we make periodic progress payments or other advances to such builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. Substantial capital obligations could delay our ability to pay distributions. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.

Table of Contents

In addition, we may invest in unimproved real property. Returns from development of unimproved properties are also subject to risks and uncertainties associated with rezoning the land for development and environmental concerns of governmental entities and/or community groups. Although our intention is to limit any investment in unimproved property to property we intend to develop, our stockholders’ investment nevertheless is subject to the risks associated with investments in unimproved real property.

Table of Contents

If the properties related to our investments are concentrated by type or geographic area, then we will be exposed to increased risk with respect to those property types or that geographic area.

Our investments may at times be concentrated in certain property types that are subject to a higher risk of foreclosure. In addition, our investments may be secured by properties concentrated in a limited number of geographic locations. Adverse conditions in the areas where the properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of the properties securing the loans our investments. A material decline in demand or the ability of tenants to pay rent or of a buyer to consummate a purchase in these geographic areas may result in a material decline in our cash available for distribution.

Costs imposed pursuant to governmental laws and regulations may reduce our net income and the cash available for distributions to our stockholders.

Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials, and other health and safety-related concerns.

Some of these laws and regulations may impose joint and several liability on the tenants, owners or operators of real property for the costs to investigate or remediate contaminated properties, regardless of fault, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. Activities of our tenants, the condition of properties at the time we buy them, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties.

The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Any material expenditures, fines, penalties, or damages we must pay will reduce our ability to pay distributions and may reduce the value of our shares.

The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury or other damage claims could reduce the cash available for distribution to our stockholders.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances and governments may seek recovery for natural resource damage. The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the cash available for distribution to our stockholders.

Table of Contents

Costs associated with complying with the Americans with Disabilities Act may decrease cash available for distribution.

Our properties may be subject to the Americans with Disabilities Act of 1990, as amended, or the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. Any funds used for Disabilities Act compliance will reduce our net income and the amount of cash available for distribution to our stockholders.

Table of Contents

Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flow from operations and the return on our stockholders’ investment in us.

There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases may insist that commercial property owners purchase coverage against terrorism as a condition to providing mortgage loans. Such insurance policies may not be available at reasonable costs, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which will reduce the value of our stockholders’ investment in us. In addition, other than any working capital reserve or other reserves we may establish, we have limited sources of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to our stockholders.

Terrorist attacks and other acts of violence or war may affect the markets in which we plan to operate, which could delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.

Terrorist attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. We may not be able to obtain insurance against the risk of terrorism because it may not be available or may not be available on terms that are economically feasible. The terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. The inability to obtain sufficient terrorism insurance or any terrorism insurance at all could limit our investment, financing and refinancing options as some mortgage lenders have begun to insist that specific coverage against terrorism be purchased by commercial owners as a condition to providing loans.

Risks Related to Our Financing Strategy

We have obtained mortgage indebtedness and other borrowings, which increases our risk of loss due to potential foreclosure.

We have obtained long-term financing that are secured by our real estate investments. In some instances, we may acquire real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt. We may also incur mortgage debt on properties that we already own in order to obtain funds to acquire additional properties, to fund property improvements and other capital expenditures, to pay distributions and for other purposes. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the dividends-paid deduction and excluding net capital gain). However, we can give our stockholders no assurance that we will be able to obtain such borrowings on satisfactory terms or at all.

If we do mortgage a property and there is a shortfall between the cash flow generated by that property and the cash flow needed to service mortgage debt on that property, then the amount of cash available for distribution to our stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of our stockholders’ investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We may give full or partial guaranties to lenders of mortgage or other debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of all or a part of the debt or other amounts related to the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a mortgage secured by a single property could affect mortgages secured by other properties.

Table of Contents

We may also obtain recourse debt to finance our acquisitions and meet our REIT distribution requirements. If we have insufficient income to service our recourse debt obligations, our lenders could institute proceedings against us to foreclose upon our assets. If a lender successfully forecloses upon any of our assets, our ability to pay cash distributions to our stockholders will be limited and our stockholders could lose all or part of their investment.

Table of Contents

High mortgage rates or changes in underwriting standards may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flow from operations and the amount of cash available for distribution to our stockholders.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on a property, we run the risk of being unable to refinance part or all of the debt when it becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance properties subject to mortgage debt, our income could be reduced. We may be unable to refinance or may only be able to partly refinance properties if underwriting standards, including loan to value ratios and yield requirements, among other requirements, are more strict than when we originally financed the properties. If any of these events occurs, our cash flow could be reduced and/or we might have to pay down existing mortgages. This, in turn, would reduce cash available for distribution to our stockholders, could cause us to require additional capital and may hinder our ability to raise capital by issuing more stock or by borrowing more money.

High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of real properties. For the mortgage debt we place on properties, we run the risk of being unable to refinance our indebtedness when the loans become due, or of being unable to refinance our indebtedness on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. We may be unable to refinance properties. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to pay distributions to our stockholders.

When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan agreements into which we may enter may contain covenants that limit our ability to further mortgage a property or that prohibit us from discontinuing insurance coverage or replacing ~~KBS~~Pacific Oak Capital Advisors as our advisor. These or other limitations would decrease our operating flexibility and our ability to achieve our operating objectives.

In a period of rising interest rates, our interest expense could increase while the interest we earn on our fixed-rate assets would not change, which would adversely affect our profitability.

Our operating results will depend in large part on differences between the income from our assets, net of credit losses and financing costs. Income from our assets may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and market value of our assets. Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us and may limit our ability to pay distributions to our stockholders. We have incurred debt and increases in interest rates will increase the cost of that debt, which could reduce our cash flow from operations and the cash we have available for distribution to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments.

Changes to the LIBOR settling process and potential phasing out of LIBOR after 2021 could adversely affect our ability to make distributions to our stockholders.

As of December 31, ~~2018~~2019, we have $~~328~~329.86 million variable rate debt outstanding for which we pay interest based on the London Interbank Offered Rate (“LIBOR”). InLIBOR ~~July~~and ~~2017,~~certain ~~the~~other ~~Financial~~interest ~~Conduct~~“benchmarks” ~~Authority~~may ~~announced~~be subject to regulatory guidance and/or reform that bycould cause interest rates under our current or future debt agreements to perform differently than in the ~~end~~past ofor ~~2021,~~cause ~~LIBOR~~other ~~would~~unanticipated beconsequences. ~~replaced~~The ~~with~~United aKingdom’s ~~more~~Financial ~~reliable~~Conduct ~~alternative~~Authority, ~~due~~which toregulates LIBOR, ~~rate~~has ~~manipulation~~announced ~~and~~that ~~the~~it ~~resulting~~intends ~~fines~~to ~~assessed~~stop onencouraging ~~several~~or ~~major~~requiring ~~financial~~banks ~~institutions~~to ~~over~~submit rates for the ~~past~~calculation ~~several~~of ~~years.~~LIBOR Itrates after 2021, and it is unclear whether new methods of calculating LIBOR will be established, such that LIBOR may continue to exist after 2021. AtWhile ~~this~~there ~~time,~~is weno doconsensus ~~not~~on ~~know~~ what ~~changes~~rate ~~will~~or berates ~~made~~may bybecome accepted alternatives to LIBOR, the ~~Financial~~Alternative ~~Conduct~~Reference ~~Authority~~Rates Committee, ora ~~how~~steering committee comprised of U.S. financial market participants, selected the ~~changes~~Secured toOvernight orFinance ~~replacement~~Rate of(“SOFR”) as an alternative to LIBOR. ~~will~~SOFR ~~affect~~is a broad measure of the ~~interest~~cost weof ~~pay~~borrowing oncash ~~our~~in ~~unsecured~~the ~~credit~~overnight ~~facility~~U.S. treasury repo market, and ~~other~~the ~~debt~~Federal ~~instruments~~Reserve Bank of New York started to publish the SOFR in May 2018. ~~Additionally~~At this time, ~~there~~it is noimpossible ~~guarantee~~to ~~that~~predict awhether ~~transition~~the ~~from~~SOFR ~~LIBOR~~or toanother anreference ~~alternative~~ rate will ~~not~~become ~~result~~an inaccepted ~~financial~~alternative ~~market~~to ~~disruptions~~LIBOR. The discontinuation, ~~significant~~reform ~~increases~~or inreplacement ~~benchmark~~of ~~interest~~LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or ~~borrowing~~cause ~~costs,~~disruption ~~any~~to ofthe ~~which~~broader ~~may~~financial markets, and could have an adverse effect on usLIBOR-based interest rates on our current or future debt obligations.

3031

Table of Contents

We have broad authority to incur debt and high debt levels could hinder our ability to pay distributions and decrease the value of an investment in us.

Although we expect that once we have fully invested the proceeds of our initial public offering, our debt financing and other liabilities will be 60% or less of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), our debt financing and other liabilities may exceed this level during our offering stage. Our charter limits our total liabilities to 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves); however, we may exceed this limit with the approval of the conflicts committee of our board of directors. During the early stages of our initial public offering, and to the extent financing in excess of this limit is available on attractive terms, the conflicts committee may approve debt such that our total liabilities would exceed this limit. High debt levels would cause us to incur higher interest charges and higher debt service payments and could also be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of an investment in us.

We may not be able to access financing sources on attractive terms, which could adversely affect our ability to execute our business plan.

We may finance our assets over the long-term through a variety of means, including repurchase agreements, credit facilities, issuances of commercial mortgage-backed securities and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long-term financing for our assets. If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase agreements may not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flow, thereby reducing cash available for distribution to our stockholders and funds available for operations as well as for future business opportunities.

Federal Income Tax Risks

~~Our~~Failure ~~failure~~ to ~~continue to~~ qualify as a REIT would ~~subject~~reduce usour tonet ~~federal~~earnings ~~income tax and reduce cash~~ available for ~~distribution~~investment toor ~~you~~distribution.

WeOur ~~elected~~qualification ~~to be taxed~~ as a REIT ~~under~~will ~~the~~depend ~~Internal~~upon ~~Revenue Code commencing with~~ our ~~taxable~~ability ~~year ended December 31, 2014. We intend~~ to ~~continue~~meet torequirements ~~operate~~regarding inour aorganization ~~manner~~and soownership, asdistributions toof ~~continue~~our toincome, ~~qualify~~the asnature aand ~~REIT~~diversification ~~for~~of ~~federal~~our income ~~tax~~and ~~purposes.~~assets ~~Qualification~~and asother atests ~~REIT~~imposed ~~involves~~by the ~~application of highly technical and complex~~ Internal Revenue Code. ~~provisions~~If ~~for~~we ~~which~~fail ~~only~~to aqualify ~~limited~~as ~~number~~a ofREIT ~~judicial~~for ~~and~~any ~~administrative~~taxable ~~interpretations~~year ~~exist.~~after ~~Even~~electing ~~an inadvertent or technical mistake could jeopardize our~~ REIT status., ~~Our~~we ~~continued~~will ~~qualification~~be assubject ato ~~REIT~~federal ~~will~~income ~~depend~~tax on our ~~satisfaction~~taxable ~~of certain asset,~~ income, ~~organizational,~~at ~~distribution,~~corporate ~~stockholder~~rates ~~ownership and other requirements on~~ (a ~~continuing~~maximum ~~basis.~~rate ~~Moreover,~~of ~~new~~35% ~~tax~~applied ~~legislation,~~through ~~administrative guidance or court decisions~~2017, ~~in each instance potentially~~ with ~~retroactive~~a ~~effect,~~21% ~~could~~rate ~~make~~beginning ~~it more difficult or impossible for us to continue to qualify as a REIT~~2018). IfIn ~~we fail to continue to qualify as a REIT in any taxable year~~addition, we would generally be ~~subject~~disqualified tofrom ~~federal~~treatment ~~and~~as ~~applicable~~a ~~state~~REIT ~~and~~for ~~local~~the ~~income~~four ~~tax on our~~ taxable ~~income~~years atfollowing ~~corporate~~the ~~rates,~~year in which ~~case~~ we ~~might~~lost beour ~~required~~REIT ~~to borrow or liquidate some investments in order to pay the applicable tax~~status. Losing our REIT status would reduce our net ~~income~~earnings available for investment or distribution to ~~you~~stockholders because of the additional tax liability. In addition, distributions to ~~you~~stockholders would no longer qualify for the dividends-paid deduction and we would no longer be required to ~~make~~pay distributions. ~~Furthermore,~~If ifthis ~~we fail to qualify as a REIT in any taxable year for which we have elected to be taxed as a REIT~~occurs, we ~~would~~might ~~generally~~ be ~~unable~~required to ~~elect~~borrow ~~REIT~~funds ~~status~~or ~~for~~liquidate ~~the~~some ~~four~~investments ~~taxable years following the year~~ in ~~which~~order ~~our~~to ~~REIT~~pay ~~status~~the isapplicable ~~lost~~tax.

~~Complying~~Failure ~~with~~to ~~REIT~~qualify ~~requirements~~as ~~may~~a ~~force~~REIT uswould tosubject ~~borrow~~us ~~funds~~ to ~~make~~U.S. ~~distributions~~federal toincome ~~you~~tax, orwhich ~~otherwise~~would ~~depend~~reduce onthe ~~external~~cash ~~sources~~available offor ~~capital~~distribution to ~~fund~~our ~~such distributions~~stockholders.

ToWe believe that we have operated and will continue to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes, wecommencing with the taxable year ended December 31, 2014. However, the U.S. federal income tax laws governing REITs are ~~required~~extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to ~~distribute~~meet ~~annually~~various attests ~~least~~regarding ~~90%~~the nature of our ~~taxable~~assets and our income, ~~subject~~the toownership ~~certain~~of ~~adjustments~~our outstanding stock, toand the amount of our ~~stockholders~~distributions on an ongoing basis. ToAccordingly, ~~the~~we ~~extent~~cannot be certain that we ~~satisfy~~will ~~the~~be ~~distribution~~successful ~~requirement,~~in ~~but~~operating ~~distribute~~so ~~less~~we ~~than~~can ~~100%~~remain ofqualified ~~our~~as ~~taxable~~a ~~income,~~REIT. While we ~~will~~intend beto ~~subject~~continue to ~~federal~~operate ~~corporate~~so ~~income~~that ~~tax~~we onwill ~~our~~qualify ~~undistributed~~as ~~taxable~~a ~~income.~~REIT, Ingiven ~~addition~~the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may ~~elect~~make, toand ~~retain~~the ~~and~~possibility ~~pay~~of ~~income~~future ~~tax~~changes onin our ~~net~~circumstances, ~~long-term~~no ~~capital~~assurance ~~gain.~~can Inbe given that ~~case,~~we ifwill so qualify for any particular year. If we sofail ~~elect,~~to qualify as a ~~stockholder~~REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be ~~taxed~~required onto ~~its~~pay ~~proportionate~~U.S. ~~share~~federal ofincome tax on our ~~undistributed~~taxable ~~long-term~~income ~~gain~~at regular corporate rates, and ~~would~~distributions ~~receive~~to aour ~~credit~~stockholders orwould ~~refund~~not ~~for~~be ~~its~~deductible ~~proportionate~~by ~~share~~us ofin ~~the~~determining ~~tax~~our wetaxable ~~paid~~income. AIn ~~stockholder~~such a case, ~~including~~we amight ~~tax-exempt~~need orto ~~foreign~~borrow ~~stockholder,~~money ~~would~~or ~~have~~sell assets to ~~file~~pay athat ~~federal~~tax. Our payment of income tax ~~return~~would todecrease ~~claim~~the ~~that~~amount ~~credit~~of orour ~~refund~~income available for distribution to our stockholders. Furthermore, if we ~~will~~fail beto ~~subject~~maintain toour qualification as a 4%REIT ~~nondeductible~~and ~~excise~~we ~~tax~~do ifnot ~~the~~qualify ~~actual~~for ~~amount~~certain ~~that~~statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. inUnless aour ~~calendar~~failure ~~year~~to isqualify ~~less~~as ~~than~~ a ~~minimum~~REIT ~~amount~~were ~~specified~~excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.

Table of Contents

From time-to-time, we may generate taxable income greater than our net income (loss) for U.S. GAAP. In addition, our taxable income may be greater than our cash flow available for distribution to you as a result of, among other things, investments in assets that generate taxable income in advance of the corresponding cash flow from the assets (for instance, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise).

If we do not have other funds available in the situations described in the preceding paragraphs, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.

Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital will depend upon a number of factors, including our current and potential future earnings and cash distributions.

Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you.

Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income or property. Any of these taxes would decrease cash available for distribution to you. For instance:

• In order to continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain for this purpose) to you.

• To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income.

• We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

• If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

• If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business and do not qualify for a safe harbor in the Internal Revenue Code, our gain would be subject to the 100% “prohibited transaction” tax.

• Any domestic taxable REIT subsidiary, or TRS, of ours will be subject to federal corporate income tax on its income, and on any non-arm’s-length transactions between us and any TRS, for instance, excessive rents charged to a TRS could be subject to a 100% tax. We may be subject to tax on income from certain activities conducted as a result of taking title to collateral.

• We may be subject to state or local income, property and transfer taxes, such as mortgage recording taxes.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

To continue to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to you at disadvantageous times or when we do not have funds readily available for distribution. Additionally, we may be unable to pursue investments that would be otherwise attractive to us in order to satisfy the requirements for qualifying as a REIT.

Table of Contents

WeOur ~~must~~stockholders also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets) and no more than 20% of the value of our gross assets (25% for tax years before 2018) may behave ~~represented~~current by securities of one or more TRSs. Finally, for the taxable years after 2015, no more than 25% of our assets may consist of debt investments that are issued by “publicly offered REITs” and would not otherwise be treated as qualifying real estate assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax ~~consequences,~~liability ~~unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely~~ on ~~the~~distributions ~~basis~~they ofelect ~~profit maximization and may require us~~ to ~~liquidate~~reinvest ~~investments~~in ~~from~~ our ~~portfolio,~~common ~~or refrain from making, otherwise attractive investments~~stock. ~~These actions could have the effect of reducing our income and amounts available for distribution to stockholders.~~

~~Our~~If ~~acquisition~~our ofstockholders ~~debt~~participate orin ~~securities~~our ~~investments~~dividend ~~may~~reinvestment ~~cause~~plan, usthey will be deemed to ~~recognize~~have ~~income~~received, and for ~~federal~~ income tax purposes ~~even~~will ~~though~~be notaxed ~~cash~~on, ~~payments~~the ~~have~~amount ~~been~~reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value, if any. As a result, unless our stockholders are tax-exempt entities, they may have to use funds from other sources to pay their tax liability on the ~~debt~~value ~~investments~~of the shares of common stock received.

WeEven ~~may~~if ~~acquire~~we ~~debt~~qualify ~~or securities investments in the secondary market for less than their face amount. The amount of such discount will generally be treated~~ as a ~~“market~~REIT ~~discount”~~ for ~~federal income tax purposes~~U.S. ~~If these debt or securities investments provide for “payment-in-kind” interest, we may recognize “original issue discount,” or OID, for~~ federal income tax purposes~~. Moreover~~, we may acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt constitute “significant modifications” under the applicable Treasury Regulations, the modified debt may be ~~considered~~subject to ~~have been reissued to us in a debt-for-debt exchange with the borrower. In that event~~federal, ~~if the debt is considered to be “publicly traded” for federal income tax purposes~~state, ~~the~~local ~~modified~~or ~~debt~~other in our hands may be considered to have been issued with OID to the extent the fair market value of the modified debt is less than the principal amount of the outstanding debt. In the event the debt is not considered to be “publicly traded” for federal income tax ~~purposes,~~liabilities ~~we may be required to recognize taxable income to the extent~~ that ~~the~~reduce ~~principal amount of the modified debt exceeds~~ our ~~cost~~cash offlow ~~purchasing it. Also, certain loans that we originate~~ and ~~later~~our ~~modify~~ability ~~and~~to ~~certain~~pay ~~previously~~distributions ~~modified debt we acquire in the secondary market may be considered~~ to ~~have~~our ~~been issued with the OID at the time it was modified~~stockholders.

InEven ~~general,~~if we ~~will~~qualify beas ~~required to accrue OID on~~ a ~~debt~~REIT ~~instrument~~for asU.S. ~~taxable income in accordance with applicable~~ federal income tax ~~rules~~purposes, ~~even~~we ~~though~~may nobe ~~cash~~subject ~~payments~~to ~~may~~some befederal, ~~received~~state onand ~~such~~local ~~debt~~taxes ~~instrument~~ on aour ~~current~~income ~~basis~~or property. For example:

•In ~~the~~order ~~event~~to aqualify ~~borrower~~as ~~with respect to~~ a ~~particular~~REIT, ~~debt~~we ~~instrument~~must ~~encounters~~distribute ~~financial~~annually ~~difficulty~~at ~~rendering~~least it90% ~~unable~~of toour ~~pay~~REIT ~~stated~~taxable ~~interest~~income asto ~~due,~~our westockholders ~~may~~(which ~~nonetheless~~is bedetermined ~~required~~without toregard ~~continue~~ to ~~recognize~~ the ~~unpaid~~dividends-paid ~~interest~~deduction asor ~~taxable~~net ~~income~~capital gain). ~~Similarly,~~To the extent that we ~~may~~satisfy bethe ~~required~~distribution torequirement ~~accrue~~but ~~interest~~distribute ~~income~~less ~~with~~than ~~respect~~100% toof ~~subordinate~~our ~~mortgage-backed~~REIT ~~securities~~taxable atincome, ~~the~~we ~~stated~~will ~~rate~~be ~~regardless~~subject ofto ~~when~~federal ~~their~~corporate ~~corresponding~~income ~~cash~~tax ~~payments~~on ~~are~~the ~~received~~undistributed income.

In•We ~~order~~will tobe ~~meet~~subject ~~the~~to ~~REIT~~a ~~distribution~~4% ~~requirements,~~nondeductible itexcise ~~might~~tax beon ~~necessary~~the ~~for us to arrange for short-term~~amount, orif ~~possibly longterm borrowings~~any, orby towhich ~~pay~~ distributions inwe ~~the~~pay ~~form of our shares or other taxable~~ in~~-kind~~ ~~distributions~~any ofcalendar ~~property.~~year ~~We may need to borrow funds at times when the market conditions~~ are ~~unfavorable.~~less ~~Such~~than ~~borrowings could increase our costs and reduce~~ the ~~value~~sum of ~~your~~85% ~~investment.~~of Inour ~~the~~ordinary ~~event in-kind distributions are made~~income, ~~your~~95% ~~tax~~of ~~liabilities associated with an investment in~~ our ~~common~~capital ~~stock~~gain ~~for~~net aincome ~~given~~and ~~year~~100% ~~may exceed the amount~~ of ~~cash~~our weundistributed ~~distribute~~income tofrom ~~you~~prior ~~during such year~~years.

~~Complying~~•If we elect to treat property that we acquire in connection with ~~REIT~~a ~~requirements~~foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may ~~limit~~avoid ~~our~~the ~~ability~~100% tax on the gain from a resale of that property, but the income from the sale or operation of that property may be subject to ~~hedge~~corporate ~~effectively~~income tax at the highest applicable rate.

~~The~~•If ~~REIT~~we ~~provisions~~sell ofan ~~the~~asset, ~~Internal~~other ~~Revenue~~than ~~Code~~foreclosure ~~may~~property, ~~limit~~that ~~our~~we ~~ability~~hold toprimarily ~~hedge~~for ~~our~~sale ~~operations~~to ~~effectively.~~customers ~~Our~~in ~~aggregate~~the ~~gross~~ordinary ~~income~~course ~~from non-qualifying hedges, fees and certain other non-qualifying sources cannot exceed 5%~~ of ~~our annual gross income. As a result~~business, ~~we might have to limit~~ our ~~use~~gain ~~of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS~~ would be subject to ~~federal,~~the ~~state~~100% ~~and~~“prohibited ~~local~~transaction” ~~income~~ tax atunless ~~regular~~such ~~corporate~~sale ~~rates.~~were ~~This~~made ~~could~~by ~~increase~~one ~~the cost~~ of our ~~hedging~~taxable ~~activities~~REIT subsidiaries or ~~expose~~the ussale tomet ~~greater~~certain ~~risks~~“safe ~~associated~~harbor” ~~with~~requirements ~~interest~~under ~~rate~~the orInternal ~~other~~Revenue ~~changes than we would otherwise incur~~Code.

~~Liquidation~~•Any domestic taxable REIT subsidiary, or TRS, of ~~assets~~ours will be subject to U.S. federal corporate income tax on its income, and on any non-arm’s-length transactions between us and any TRS, for instance, excessive rents charged to a TRS could be subject to a 100% tax. We may ~~jeopardize~~be ~~our~~subject ~~REIT~~to ~~qualification~~tax on income from certain activities conducted as a result of taking title to collateral.

To•We continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be ~~unable~~subject to ~~comply~~state ~~with~~or ~~these~~local ~~requirements~~income, ~~ultimately~~property ~~jeopardizing~~and ~~our~~transfer ~~qualification as a REIT~~taxes, orsuch ~~we may be subject to a 100% prohibited transaction tax on any resulting gain if we sell assets that are treated~~ as ~~dealer~~mortgage ~~property~~recording ~~or inventory~~taxes.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.

From time to time, we may generate taxable income greater than our income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to pay distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirements and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Table of Contents

~~The~~To ~~prohibited~~maintain ~~transactions~~our ~~tax~~REIT ~~may~~status, ~~limit~~we ~~our~~may ~~ability~~be forced to ~~engage~~forego inotherwise ~~transactions,~~attractive ~~including~~business ~~disposition~~or ofinvestment ~~assets~~opportunities, ~~and~~which ~~certain~~may ~~methods~~delay ofor ~~securitizing~~hinder ~~loans,~~our ~~which~~ability ~~would~~to bemeet ~~treated~~our asinvestment ~~sales~~objectives ~~for~~and ~~federal~~reduce ~~income~~our ~~tax~~stockholders’ ~~purposes~~overall return.

ATo ~~REIT’s~~qualify ~~net~~as ~~income from prohibited transactions is subject to~~ a ~~100% tax. In general~~REIT, ~~prohibited~~we ~~transactions~~must ~~are~~satisfy ~~sales~~certain ortests ~~other~~on ~~dispositions~~an ofongoing ~~dealer~~basis ~~property~~concerning, among other ~~than foreclosure property~~things, ~~but including loans held primarily for sale to customers in~~ the ~~ordinary~~sources ~~course~~ of ~~business.~~our ~~We might be subject to the prohibited transaction tax if we were to dispose of or securitize loans in a manner that is treated as a sale of the loans, for federal~~ income ~~tax purposes. In order to avoid the prohibited transactions tax~~, wenature ~~may choose not to engage in certain sales~~ of ~~loans~~our assets and ~~may limit~~ the ~~structures~~amounts we ~~use~~distribute ~~for any securitization financing transactions, even though such sales or structures might otherwise be beneficial~~ to usour stockholders. ~~Additionally,~~We we may be ~~subject~~required to ~~the~~pay ~~prohibited~~distributions ~~transaction~~to ~~tax~~stockholders ~~upon~~at atimes ~~disposition~~when ofit ~~real~~would ~~property.~~be ~~Although~~more aadvantageous ~~safe-harbor exception~~ to ~~prohibited~~reinvest ~~transaction~~cash ~~treatment~~in isour ~~available,~~business weor ~~cannot~~when ~~assure you that~~ we ~~can~~do ~~comply~~not ~~with~~have ~~such~~funds ~~safe~~readily ~~harbor~~available orfor ~~that~~distribution. weCompliance ~~will~~with ~~avoid~~the ~~owning~~REIT ~~property~~requirements ~~that~~ may behinder ~~characterized~~our asability ~~held primarily for sale~~ to ~~customers~~operate insolely on the ~~ordinary~~basis ~~course~~ of ~~our~~maximizing ~~trade~~profits orand ~~business.~~reduce ~~Consequently,~~the wevalue ~~may choose not to engage in certain sales~~ of ~~real~~our ~~property~~stockholders’ ~~or may conduct such sales through a TRS~~investment.

ItIf ~~may~~our beoperating ~~possible~~partnership fails to ~~reduce~~maintain ~~the~~its ~~impact~~status ofas ~~the~~a ~~prohibited~~partnership ~~transaction~~for ~~tax by conducting certain activities through a TRS~~U.S. ~~However,~~federal toincome ~~the~~tax ~~extent that we engage in such activities through a TRS~~purposes, ~~the~~its income ~~associated~~would ~~with such activities will~~ be subject to ataxation ~~corporate income tax. In addition, the IRS may attempt to ignore or otherwise recast such activities in order to impose a prohibited transaction tax on us,~~ and ~~there~~our ~~can~~REIT bestatus nowould ~~assurance that such recast will not~~ be ~~successful~~terminated.

We ~~also~~intend ~~may~~to ~~not~~maintain bethe ~~able~~status of our operating partnership as a partnership for U.S. federal income tax purposes. However, if the Internal Revenue Service (“Internal Revenue Service” or “IRS”) were to ~~use~~successfully ~~secured~~challenge ~~financing~~the ~~structures~~status ~~that~~of our operating partnership as a partnership, it would ~~create~~be taxable ~~mortgage~~as ~~pools~~a corporation. In such event, ~~other~~this ~~than~~would reduce the amount of distributions that our operating partnership could make to us. This would also result in our losing REIT status and becoming subject to a ~~TRS~~corporate orlevel tax on our own income. This would substantially reduce our cash available to pay distributions and the return on your investment. In addition, if any of the entities through which our operating partnership owns its properties, in whole or in part, loses its characterization as a ~~subsidiary~~partnership for U.S. federal income tax purposes, the underlying entity would become subject to taxation as a corporation, thereby reducing distributions to our operating partnership and jeopardizing our ability to maintain REIT status.

WePotential ~~may~~characterization ~~recognize substantial amounts~~ of ~~REIT~~distributions ~~taxable~~or ~~income,~~gain ~~which~~on wesale ~~would~~may be ~~required~~treated toas ~~distribute~~unrelated tobusiness ~~you,~~taxable inincome ato ~~year~~tax-exempt ~~in which we are not profitable under U~~investors.~~S. GAAP principles or other economic measures.~~

WeIf ~~may~~(i) ~~recognize~~all ~~substantial~~or ~~amounts~~a portion of ~~REIT~~our ~~taxable~~assets ~~income~~are insubject ~~years~~to inthe ~~which~~rules werelating ~~are~~to ~~not~~taxable ~~profitable~~mortgage ~~under~~pools, ~~U.S.~~(ii) ~~GAAP~~we orare ~~other~~a ~~economic~~“pension-held ~~measures~~REIT,” as(iii) a ~~result of the differences between U.S. GAAP and~~ tax-exempt ~~accounting~~stockholder ~~methods.~~has ~~For~~incurred ~~instance,~~debt ~~certain of our assets will be marked-~~to~~-market~~ ~~for~~purchase ~~U.S.~~or ~~GAAP~~hold ~~purposes~~our ~~but~~common ~~not for tax purposes~~stock, ~~which~~or ~~could~~(iv) ~~result~~the inresidual ~~losses~~Real ~~for~~Estate ~~U.S.~~Mortgage ~~GAAP~~Investment ~~purposes~~Conduit ~~that~~interests, ~~are~~or ~~not~~REMICs, ~~recognized~~we inbuy ~~computing~~(if ~~our~~any) ~~REIT~~generate ~~taxable~~“excess ~~income.~~inclusion ~~Additionally~~income,” wethen ~~may~~a ~~deduct~~portion ~~our~~of ~~capital~~the ~~losses~~distributions ~~only~~ to ~~the~~and, ~~extent of our capital gains~~ in ~~computing~~the ~~our~~case ~~REIT~~of ~~taxable income for~~ a ~~given~~stockholder ~~taxable~~described ~~year.~~in ~~Consequently~~clause (iii), wegains ~~could~~realized ~~recognize~~on ~~substantial~~the ~~amounts~~sale of ~~REIT~~common ~~taxable~~stock ~~income~~by ~~and~~such ~~would~~tax-exempt stockholder may be ~~required~~subject to ~~distribute~~U.S. ~~such~~federal income totax ~~you,~~as inunrelated abusiness ~~year~~taxable inincome ~~which we are not profitable~~ under ~~U.S.~~the ~~GAAP~~Internal orRevenue ~~other economic measures~~Code.

WeThe ~~may~~tax ~~distribute~~on ~~our~~prohibited ~~common~~transactions ~~stock~~will inlimit ~~a taxable distribution, in which case you may sell shares of~~ our ~~common~~ability ~~stock~~ to ~~pay~~engage ~~tax~~in ontransactions ~~such~~that ~~distributions,~~would ~~and~~be ~~you~~treated ~~may~~as ~~receive~~sales ~~less~~for inU.S. ~~cash~~federal ~~than~~income ~~the~~tax ~~amount of the dividend that is taxable~~purposes.

WeA ~~may~~REIT’s ~~make~~net ~~taxable~~income ~~distributions~~from ~~that~~prohibited ~~are~~transactions ~~payable~~is insubject ~~cash and common stock. The IRS has issued private letter rulings~~ to ~~other~~a ~~REITs~~100% treating certain distributions that are paid partly in cash and partly in stock as taxable distributions that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for federal income tax ~~purposes~~. ~~Those~~In ~~rulings~~general, ~~may~~prohibited betransactions ~~relied~~are ~~upon~~sales ~~only~~or byother ~~taxpayers~~dispositions toof ~~whom they were issued~~assets, ~~but~~other wethan ~~could~~foreclosure ~~request a similar ruling from the IRS. Accordingly~~property, itdeemed isheld ~~unclear~~primarily ~~whether~~for ~~and~~sale to ~~what~~customers ~~extent we will be able to make taxable distributions payable~~ in ~~cash~~the ~~and~~ordinary ~~common~~course ~~stock~~of business. IfWe wemight ~~made a taxable dividend payable in cash and common stock, taxable stockholders receiving such distributions will~~ be ~~required~~subject to ~~include~~this ~~the~~tax ~~dividend~~if aswe ~~taxable~~were ~~income~~ to ~~the~~dispose ~~extent~~ of ~~our~~loans ~~current~~in ~~and~~a ~~accumulated~~manner ~~earnings~~that ~~and~~was ~~profits,~~treated as ~~determined for federal income tax purposes. As~~ a ~~result,~~sale ~~you may be required to pay income tax with respect to such distributions in excess~~ of the ~~cash~~loans ~~distributions~~for ~~received. If a~~ U.S. ~~stockholder~~federal ~~sells~~income ~~the~~tax ~~common~~purposes. ~~stock~~Therefore, ~~that it receives as a dividend~~ in order to ~~pay~~avoid ~~this~~the prohibited transactions tax, ~~the~~we ~~sales proceeds~~ may bechoose ~~less~~not ~~than~~to ~~the~~engage ~~amount recorded~~ in ~~earnings~~certain ~~with~~sales ~~respect to the dividend, depending on the market price~~ of ~~our~~loans ~~common stock~~ at the ~~time~~REIT ~~of the sale. Furthermore~~level, ~~with~~and ~~respect~~may tolimit ~~certain~~the ~~non-U.S.~~structures ~~stockholders,~~ we ~~may~~utilize befor ~~required~~our tosecuritization ~~withhold U.S. federal income tax with respect to such dividends~~transactions, ~~including~~even inthough ~~respect~~the ofsales ~~all~~ or astructures ~~portion~~might ofotherwise ~~such~~be ~~dividend~~beneficial ~~that~~to ~~is payable in common stock~~us.

It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through taxable REIT ~~distribution~~subsidiaries. ~~requirements~~However, ~~could~~to ~~adversely~~the ~~affect~~extent ~~our~~that ~~ability~~we engage in such activities through taxable REIT subsidiaries, the income associated with such activities may be subject to ~~execute~~full ~~our~~corporate ~~business~~income ~~plan~~tax.

WeOur ~~generally~~acquisition ~~must distribute annually at least 90%~~ of ~~our~~debt ~~REIT~~or ~~taxable~~securities ~~income~~investments ~~(which~~may iscause ~~determined~~us ~~without regard~~ to ~~the~~recognize ~~dividends~~income ~~paid deduction or net capital gain~~ for ~~this purpose) in order to continue to qualify as a REIT~~U.S. Wefederal ~~intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code and to avoid corporate~~ income tax ~~and~~purposes ~~the~~even 4%though ~~excise~~no ~~tax. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest~~ cash inpayments ~~our business or when we do not~~ have ~~funds~~been ~~readily~~received ~~available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely~~ on the ~~basis~~debt ~~of maximizing profits~~investments.

We may acquire debt or securities investments in the secondary market for less than their face amount. The amount of such discount will generally be treated as a “market discount” for U.S. federal income tax purposes. If these debt or securities investments provide for “payment-in-kind” interest, we may recognize “original issue discount,” or OID, for U.S. federal income tax purposes. Moreover, we may acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt constitute “significant modifications” under the applicable Department of the Treasury regulations (“Treasury Regulations”), the modified debt may be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, if the debt is considered to be “publicly traded” for U.S. federal income tax purposes, the modified debt in our hands may be considered to have been issued with OID to the extent the fair market value of the modified debt is less than the principal amount of the outstanding debt. In the event the debt is not considered to be “publicly traded” for U.S. federal income tax purposes, we may be required to recognize taxable income to the extent that the principal amount of the modified debt exceeds our cost of purchasing it. Also, certain loans that we originate and later modify and certain previously modified debt we acquire in the secondary market may be considered to have been issued with the OID at the time it was modified.

Table of Contents

~~Our~~In ~~qualification~~general, aswe awill ~~REIT~~be ~~could~~required beto ~~jeopardized~~accrue asOID on a ~~result~~debt ofinstrument anas ~~interest~~taxable income in ~~joint~~accordance ~~ventures~~with orapplicable ~~investment~~federal ~~funds~~income tax rules even though no cash payments may be received on such debt instrument on a current basis.

WeIn ~~may~~the ~~hold~~event ~~certain~~a ~~limited~~borrower ~~partner~~with orrespect ~~non-managing~~to ~~member interests in partnerships or limited liability companies that are joint ventures or investment funds. If~~ a ~~partnership~~particular ordebt ~~limited~~instrument ~~liability~~encounters ~~company~~financial indifficulty ~~which~~rendering weit ~~own~~unable ~~an interest takes or expects~~ to ~~take~~pay ~~actions~~stated ~~that~~interest ~~could jeopardize our qualification~~ as ~~a REIT or require us to pay tax~~due, we may nonetheless be ~~forced~~required to ~~dispose~~continue ~~of our interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action which could cause us~~ to ~~fail~~recognize athe ~~REIT~~unpaid ~~gross income or asset test, and that we would not become aware of such action in time to dispose of our~~ interest inas ~~the~~taxable ~~partnership or limited liability company or take other corrective action on a timely basis~~income. ~~In that case~~Similarly, we ~~could~~may ~~fail~~be torequired ~~continue~~ to ~~qualify~~accrue asinterest aincome ~~REIT~~with ~~unless~~respect ~~we are able~~ to ~~qualify~~subordinate ~~for~~mortgage-backed asecurities ~~statutory~~at ~~REIT~~the ~~“savings”~~stated ~~provision,~~rate ~~which~~regardless ~~may~~of ~~require~~when ustheir tocorresponding ~~pay~~cash apayments ~~significant~~are ~~penalty tax to maintain our REIT qualification~~received.

~~Distributions~~In ~~paid~~order byto ~~REITs~~meet dothe ~~not~~REIT ~~qualify~~distribution requirements, it might be necessary for ~~the~~us ~~reduced~~to ~~tax~~arrange ~~rates~~for ~~that~~short-term, ~~apply~~or possibly long-term borrowings, or to pay distributions in the form of our shares or other ~~corporate~~taxable in-kind distributions of property. We may need to borrow funds at times when the market conditions are unfavorable. Such borrowings could increase our costs and reduce the value of your investment. In the event in-kind distributions are made, your tax liabilities associated with an investment in our common stock for a given year may exceed the amount of cash we distribute to you during such year.

~~The~~Complying ~~maximum~~with ~~tax~~REIT ~~rate~~requirements ~~for~~may ~~“qualified~~force ~~dividends”~~us ~~paid by corporations~~ to ~~non-corporate~~liquidate ~~stockholders~~otherwise isattractive ~~currently 20%~~investments. Distributions paid by REITs, however, generally are taxed at ordinary income rates (currently subject to a maximum rate of 37% for non-corporate stockholders), rather than the preferential rate applicable to qualified dividends.

To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and residential and commercial mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 20% (25% for taxable years before 2018) of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries and no more than 25% of the value of our total assets can be represented by “non-qualified publicly offered REIT debt instruments.” If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Liquidation of assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the purpose of the instrument is to (i) hedge interest rate risk on liabilities incurred to carry or acquire real estate, (ii) hedge risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, or (iii) manage risk with respect to the termination of certain prior hedging transactions described in (i) and/or (ii) above and, in each case, such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

Table of Contents

Our ownership of and relationship with our taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 20% (25% for taxable years before 2018) of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A domestic taxable REIT subsidiary will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. We cannot assure our stockholders that we will be able to comply with the 20% value limitation on ownership of taxable REIT subsidiary stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s length transactions.

Our qualification as a REIT may depend upon the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets we acquire.

When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining, among other things, whether such securities represent debt or equity securities for U.S. federal income tax purposes, the value of such securities, and also to what extent those securities constitute qualified real estate assets for purposes of the REIT asset tests and produce qualified income for purposes of the 75% gross income test. The inaccuracy of any such opinions, advice or statements may adversely affect our ability to qualify as a REIT and result in significant corporate-level tax.

Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price paid to you.

Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, among other purposes, our charter prohibits a person from directly or constructively owning more than 9.8% in value of the aggregate of the outstanding shares of our stock of any class or series or more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, unless exempted (prospectively or retroactively) by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price for holders of our shares of common stock.

~~Stockholders~~The ~~may~~ability ~~have~~of ~~current~~our ~~tax~~board ~~liability~~of ondirectors ~~distributions~~to ~~they~~revoke ~~elect~~our REIT qualification without stockholder approval may subject us to ~~reinvest~~U.S. infederal ~~our~~income ~~common~~tax ~~stock~~and reduce distributions to our stockholders.

IfOur acharter ~~stockholder~~provides ~~participates~~that in our ~~dividend~~board ~~reinvestment~~of ~~plan,~~directors hemay revoke or ~~she~~otherwise ~~will~~terminate beour ~~deemed~~REIT toelection, ~~have~~without ~~received,~~the ~~and~~approval ~~for~~of ~~income~~our ~~tax~~stockholders, ~~purposes~~if ~~will~~it bedetermines ~~taxed~~that ~~on,~~it ~~the~~is ~~amount~~no ~~reinvested~~longer in ~~shares~~our ofbest ~~our~~interest ~~common~~to ~~stock~~continue to ~~the~~qualify ~~extent~~as ~~the~~a ~~amount~~REIT. ~~reinvested~~While ~~was~~we ~~not~~intend ato ~~tax-free~~elect ~~return~~and ofqualify ~~capital.~~to Inbe ~~addition,~~taxed ~~our~~as ~~stockholders~~a ~~will~~REIT, bewe ~~treated~~may ~~for~~not ~~tax~~elect ~~purposes~~to be treated as ~~having~~a ~~received~~REIT anor ~~additional~~may ~~distribution~~terminate toour ~~the~~REIT ~~extent~~election ~~the~~if ~~shares~~we ~~are~~determine ~~purchased~~that atqualifying as a ~~discount~~REIT tois ~~fair~~no ~~market~~longer ~~value,~~in ifour ~~any~~best interests. AsIf we cease to be a ~~result~~REIT, ~~unless~~we awould ~~stockholder~~become issubject ato U.S. federal income tax~~-exempt~~ ~~entity,~~on aour ~~stockholder~~taxable ~~may~~income ~~have~~and would no longer be required to ~~use~~distribute ~~funds~~most ~~from~~of ~~other~~our ~~sources~~taxable income to ~~pay~~our ~~their~~stockholders, ~~tax~~which ~~liability~~may have adverse consequences on ~~the~~our ~~value~~total ofreturn to our stockholders and on the ~~shares~~market price of our common stock ~~received~~.

If our operating partnership fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status would be terminated.

We intend to maintain the status of our operating partnership as a partnership for federal income tax purposes. However, if the IRS were to successfully challenge the status of our operating partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our operating partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders’ investment. In addition, if any of the entities through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, the underlying entity would become subject to taxation as a corporation, thereby reducing distributions to our operating partnership and jeopardizing our ability to maintain REIT status.

Table of Contents

Early investors may receive tax benefits from our election to accelerate depreciation expense deductions of certain components of our investments, including land improvements and fixtures, from which later investors may not benefit.

For U.S. federal income tax purposes, distributions received, including distributions that are reinvested pursuant to our dividend reinvestment plan, by our investors generally will be considered ordinary dividends to the extent that the distributions are paid out of our current and accumulated earnings and profits (excluding distributions of amounts either attributable to income subject to corporate-level taxation or designated as a capital gain dividend). However, depreciation expenses, among other deductible items, reduce taxable income and earnings and profits but do not reduce cash available for distribution. To the extent that a portion of any distributions to our investors exceed our current and accumulated earnings and profits, that portion will be considered a return of capital (a non-taxable distribution) for U.S. federal income tax purposes up to the amount of their tax basis in their shares (and any excess over their tax basis in their shares will result in capital gain from the deemed disposition of the investors’ shares). The amount of distributions considered a return of capital for U.S. federal income tax purposes will not be subject to tax immediately but will instead reduce the tax basis of our investors’ investments, generally deferring any tax on that portion of the distribution until they sell their shares or we liquidate. Because we may choose to increase depreciation expense deductions in the earlier years after acquisition of an asset, for U.S. federal income tax purposes, of certain components of our investments, including land improvements and fixtures through the use of cost segregation studies, our early investors may benefit to the extent that increased depreciation causes all or a portion of the distributions they receive to be considered a return of capital for U.S. federal income tax purposes thereby deferring tax on those distributions, while later investors may not benefit to the extent that the depreciation of these components has already been deducted.

Non-U.S. income or other taxes, and a requirement to withhold any non-U.S. taxes, may apply, and, if so, the amount of net cash from operations payable to our stockholders will be reduced.

We intend to acquire real property located outside the U.S. and may invest in stock or other securities of entities owning real property located outside the United States. As a result, we may be subject to foreign (i.e., non-U.S.) income taxes, stamp taxes, real property conveyance taxes, withholding taxes, and other foreign taxes or similar impositions in connection with our ownership of foreign real property or foreign securities. The country in which the real property is located may impose such taxes regardless of whether we are profitable and in addition to any U.S. income tax or other U.S. taxes imposed on profits from our investments in such real property or securities. If a foreign country imposes income taxes on profits from our investment in foreign real property or foreign securities, our stockholders will not be eligible to claim a tax credit on their U.S. federal income tax returns to offset the income taxes paid to the foreign country, and the imposition of any foreign taxes in connection with our ownership and operation of foreign real property or our investment in securities of foreign entities will reduce the amounts distributable to our stockholders. Similarly, the imposition of withholding taxes by a foreign country will reduce the amounts distributable to our stockholders. We expect the organizational costs associated with non-U.S. investments, including costs to structure the investments so as to minimize the impact of foreign taxes, will be higher than those associated with U.S. investments. Moreover, we may be required to file income tax or other information returns in foreign jurisdictions as a result of our investments made outside of the U.S. Any organizational costs and reporting requirements will increase our administrative expenses and reduce the amount of cash available for distribution to our stockholders. Investors are urged to consult with their own tax advisors with respect to the impact of applicable non-U.S. taxes and tax withholding requirements on an investment in our common stock.

Our foreign investments will be subject to changes in foreign tax or other laws, as well as to changes in U.S. tax laws, and such changes could negatively impact our returns from any particular investment.

We may make investments in real estate located outside of the United States. Such investments will typically be structured to minimize non-U.S. taxes, and generally include the use of holding companies. Our ownership, operation and disposition strategy with respect to non-U.S. investments will take into account foreign tax considerations. For example, it is typically advantageous from a tax perspective in non-U.S. jurisdictions to sell interests in a holding company that owns real estate rather than the real estate itself. Buyers of such entities, however, will often discount their purchase price by evaluating any inherent risks or expected tax liability in such entity. Additionally, the pool of buyers for interests in such holding companies is typically more limited than buyers of direct interests in real estate, and we may be forced to dispose of real estate directly, thus potentially incurring higher foreign taxes and negatively affecting the return on the investment.

We will also capitalize our holding companies with debt and equity to reduce foreign income and withholding taxes as appropriate and with consultation with local counsel in each jurisdiction. Such capitalization structures are complex and potentially subject to challenge by foreign and domestic taxing authorities.

We may use certain holding structures for our non-U.S. investments to accommodate the needs of one class of investors which reduce the after-tax returns to other classes of investors. For example, if we interpose an entity treated as a corporation for United States tax purposes in our chain of ownership with respect to any particular investment, U.S. tax-exempt investors will generally benefit as such investment will no longer generate unrelated business taxable income. However, if a corporate entity is interposed in a non-U.S. investment holding structure, this would prevent individual investors from claiming a foreign tax credit for any non-U.S. income taxes incurred by the corporate entity or its subsidiaries.

Table of Contents

Foreign investments are subject to changes in foreign tax or other laws. Any such law changes may require us to modify or abandon a particular holding structure. Such changes may also lead to higher tax rates on our foreign investments than we anticipated, regardless of structuring modifications. Additionally, U.S. tax laws with respect to foreign investments are subject to change, and such changes could negatively impact our returns from any particular investment.

Changes recently made to the U.S. tax laws could have a negative impact on our business.

The President signed a tax reform bill into law on December 22, 2017 (the “Tax Cuts and Jobs Act”). Among other things, the Tax Cuts and Jobs Act:

• Reduces the corporate income tax rate from 35% to 21% (including with respect to ~~our~~a taxable REIT subsidiary);

• Reduces the rate of U.S. federal withholding tax on distributions made to non-U.S. stockholders by a REIT that are attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;

• If elected, allows an immediate 100% deduction of the cost of certain capital asset investments (generally excluding real estate assets), subject to a phase-down of the deduction percentage over time;

• Changes the recovery periods for certain real property and building improvements (for example, to 15 years for qualified improvement property under the modified accelerated cost recovery system if a technical correction is passed, and to 30 years (previously 40 years) for residential real property and 20 years (previously 40 years) for qualified improvement property under the alternative depreciation system);

• Restricts the deductibility of interest expense by businesses (generally, to 30% of the business’ adjusted taxable income) except, among others, real property businesses electing out of such restriction; we have not yet determined whether we and/or our subsidiaries can and/or will make such an election;36

•Table ~~Requires the use~~ of ~~the less favorable alternative depreciation system to depreciate real property in the event a real property business elects to avoid the interest deduction restriction above;~~Contents

• Restricts the ~~benefits~~deductibility of ~~like-kind~~interest ~~exchanges~~expense ~~that~~by ~~defer~~businesses ~~capital~~(generally, ~~gains~~to ~~for~~30% ~~tax~~of ~~purposes~~the tobusiness’ ~~exchanges~~adjusted oftaxable income) except, among others, real property businesses electing out of such restriction; we have not yet determined whether we and/or our subsidiaries can and/or will make such an election;

•Requires ~~Permanently repeals~~ the ~~“technical~~use ~~termination” rule for partnerships, meaning sales or exchanges~~ of the ~~interests~~less infavorable aalternative ~~partnership~~depreciation ~~will~~system ~~be less likely~~ to, ~~among~~depreciate ~~other~~real ~~things,~~property ~~terminate~~in the ~~taxable~~event ~~year~~a ~~of,~~real ~~and~~property ~~restart~~business ~~the~~elects ~~depreciable~~to ~~lives~~avoid ofthe ~~assets~~interest ~~held~~deduction ~~by,~~restriction ~~such partnership for tax purposes~~above;

•Restricts ~~Requires accrual method taxpayers to take certain amounts in income no later than~~ the ~~taxable~~benefits ~~year~~of inlike-kind ~~which~~exchanges ~~such~~that ~~income~~defer iscapital ~~taken~~gains ~~into~~for ~~account~~tax aspurposes ~~revenue in an applicable financial statement prepared under GAAP, which, with respect~~ to ~~certain~~exchanges ~~leases, could accelerate the inclusion~~ of ~~rental~~real ~~income~~property;

•Permanently ~~Eliminates~~repeals the ~~federal~~“technical ~~corporate~~termination” ~~alternative~~rule ~~minimum~~for partnerships, meaning sales or exchanges of the interests in a partnership will be less likely to, among other things, terminate the taxable year of, and restart the depreciable lives of assets held by, such partnership for tax purposes;

•Requires ~~Reduces~~accrual ~~the~~method ~~highest~~taxpayers ~~marginal~~to take certain amounts in income ~~tax~~no ~~rate~~later ~~for~~than ~~individuals~~the totaxable ~~37%~~year ~~from~~in ~~39.6%~~which ~~(excluding,~~such income is taken into account as revenue in ~~each~~an ~~case~~applicable financial statement prepared under GAAP, ~~the~~which, ~~3.8%~~with ~~Medicare~~respect ~~tax~~to oncertain ~~net~~leases, ~~investment~~could accelerate the inclusion of rental income);

•Eliminates ~~Generally~~the allows a deduction for individuals equal to 20% of certain income from pass-through entities, including ordinary dividends distributed by a REIT (excluding capital gain dividends and qualified dividend income), generally resulting in a maximum effective federal ~~income~~corporate ~~tax~~alternative ~~rate~~minimum ~~applicable to such dividends of 29.6% compared to 37% (excluding, in each case, the 3.8% Medicare~~ tax ~~on net investment income)~~; ~~and~~

•Reduces ~~Limits~~the ~~certain~~highest ~~deductions~~marginal ~~for~~income ~~individuals,~~tax ~~including~~rate ~~deductions~~ for ~~state~~individuals ~~and~~to ~~local~~37% ~~income~~from ~~taxes~~39.6% (excluding, ~~and~~in ~~eliminates~~each ~~deductions~~case, ~~for~~the ~~miscellaneous~~3.8% ~~itemized~~Medicare ~~deductions~~tax ~~(including~~on ~~certain~~net investment ~~expenses~~income).;

•Generally allows a deduction for individuals equal to 20% of certain income from pass-through entities, including ordinary dividends distributed by a REIT (excluding capital gain dividends and qualified dividend income), generally resulting in a maximum effective U.S. federal income tax rate applicable to such dividends of 29.6% compared to 37% (excluding, in each case, the 3.8% Medicare tax on net investment income); and

•Limits certain deductions for individuals, including deductions for state and local income taxes, and eliminates deductions for miscellaneous itemized deductions (including certain investment expenses).

Many of the provisions in the Tax Cuts and Jobs Act, in particular those affecting individual taxpayers, expire at the end of 2025.

As a result of the changes to U.S. federal tax laws implemented by the Tax Cuts and Jobs Act, our taxable income and the amount of distributions to our stockholders required in order to maintain our REIT status, and our relative tax advantage as a REIT, could change. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders annually.

The Tax Cuts and Jobs Act is a complex revision to the U.S. federal income tax laws with various impacts on different categories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impact of the Tax Cuts and Jobs Act on the overall economy, government revenues, our tenants, us, and the real estate industry cannot be reliably predicted at this time. Furthermore, the Tax Cuts and Jobs Act may negatively impact certain of our tenants’ operating results, financial condition, and future business plans. The Tax Cuts and Jobs Act may also result in reduced government revenues, and therefore reduced government spending, which may negatively impact some of our tenants that rely on government funding. There can be no assurance that the Tax Cuts and Jobs Act will not negatively impact our operating results, financial condition, and future business operations.

Dividends payable by REITs do not qualify for the reduced tax rates.

In general, the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for this reduced rate; provided under current law, individuals may be able to deduct 20% of income received as ordinary REIT dividends, thus reducing the maximum effective U.S. federal income tax rate on such dividend. In addition, Treasury Regulations impose a minimum holding period for the 20% deduction that was not set forth in the Internal Revenue Code. Under the Treasury Regulations, in order for a REIT dividend with respect to a share of REIT stock to be treated as a qualified REIT dividend, the U.S. stockholder (i) must have held the share for more than 45 days during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend and (ii) cannot have been under an obligation to make related payments with respect to positions in substantially similar or related property, e.g., pursuant to a short sale. While this tax treatment does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts or estates to perceive investments in REITs to be relatively less attractive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

Table of Contents

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce your anticipated return from an investment in us.

Distributions that we make to our taxable stockholders to the extent of our current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (i) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (ii) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from non-REIT corporations, such as our taxable REIT subsidiaries, or (iii) constitute a return of capital generally to the extent that they exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital distribution is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.

We may be required to pay some taxes due to actions of a taxable REIT subsidiary which would reduce our cash available for distribution to you.

Any net taxable income earned directly by a taxable REIT subsidiary, or through entities that are disregarded for U.S. federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of U.S. federal income taxation. For example, a taxable REIT subsidiary may be limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT's customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to U.S. federal income tax on that income because not all states and localities follow the U.S. federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to you.

We may distribute our common stock in a taxable distribution, in which case you may sell shares of our common stock to pay tax on such distributions, and you may receive less in cash than the amount of the dividend that is taxable.

We may make taxable distributions that are payable in cash and common stock. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable distributions that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. Accordingly, it is unclear whether and to what extent we will be able to make taxable distributions payable in cash and common stock. If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such distributions will be required to include the dividend as taxable income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, you may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount recorded in earnings with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock.

Investments in other REITs and real estate partnerships could subject us to the tax risks associated with the tax status of such entities.

We may invest in the securities of other REITs and real estate partnerships. Such investments are subject to the risk that any such REIT or partnership may fail to satisfy the requirements to qualify as a REIT or a partnership, as the case may be, in any given taxable year. In the case of a REIT, such failure would subject such entity to taxation as a corporation, may require such REIT to incur indebtedness to pay its tax liabilities, may reduce its ability to make distributions to us, and may render it ineligible to elect REIT status prior to the fifth taxable year following the year in which it fails to so qualify. In the case of a partnership, such failure could subject such partnership to an entity level tax and reduce the entity’s ability to make distributions to us. In addition, such failures could, depending on the circumstances, jeopardize our ability to qualify as a REIT.

Table of Contents

Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.

Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, capital gain distributions attributable to sales or exchanges of “U.S. real property interests,” or USRPIs, generally (subject to certain exceptions for “qualified foreign pension funds” and certain “qualified shareholders”) will be taxed to a non-U.S. stockholder (other than a qualified foreign pension plan, entities wholly owned by a qualified foreign pension plan and certain publicly traded foreign entities) as if such gain were effectively connected with a U.S. trade or business unless FIRPTA provides an exemption. However, a capital gain dividend will not be treated as effectively connected income if (i) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (ii) the non-U.S. stockholder does not own more than 10% of the class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be “regularly traded” on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.

Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA (subject to specific FIRPTA exemptions for certain non-U.S. stockholders). Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure you, that we will be a domestically-controlled qualified investment entity.

Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our common stock will be “regularly traded” on an established market. We encourage you to consult your tax advisor to determine the tax consequences applicable to you if you are a non-U.S. stockholder.

We may be subject to adverse legislative or regulatory tax changes.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Retirement Plan Risks

If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or an owner of a retirement arrangement subject to Section 4975 of the Internal Revenue Code (such as an IRA) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.

There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. Fiduciaries and IRA owners investing the assets of such a plan or account in our common stock should satisfy themselves that:

• the investment is consistent with their fiduciary and other obligations under ERISA and the Internal Revenue Code;

• the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;

• the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;

• the investment in our shares, for which no public market currently exists, is consistent with the liquidity needs of the plan or IRA;

• the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;

~~• our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and~~39

•Table ~~the investment will not constitute a prohibited transaction under Section 406~~ of ~~ERISA or Section 4975 of the Internal Revenue Code.~~Contents

•our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and

•the investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

With respect to the annual valuation requirements described above, we will provide an estimated value for our stock annually. We can make no claim whether such estimated value will satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the Internal Revenue Service may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common stock. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions.

Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In addition, the investment transaction must be undone. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA owners should consult with counsel before making an investment in our common stock.

Table of Contents

If our assets are deemed to be plan assets, our advisor and we may be exposed to liabilities under Title I of ERISA and the Internal Revenue Code.

In some circumstances where an ERISA plan holds an interest in an entity, the assets of the entity are deemed to be ERISA plan assets unless an exception applies. This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA or Section 4975 of the Internal Revenue Code, may be applicable, and there may be liability under these and other provisions of ERISA and the Internal Revenue Code. We believe that our assets should not be treated as plan assets because the shares should qualify as “publicly-offered securities” that are exempt from the look-through rules under applicable Treasury Regulations. We note, however, that because certain limitations are imposed upon the transferability of shares so that we may qualify as a REIT, and perhaps for other reasons, it is possible that this exemption may not apply. If that is the case, and if we or our advisor are exposed to liability under ERISA or the Internal Revenue Code, our performance and results of operations could be adversely affected. Stockholders should consult with their legal and other advisors concerning the impact of ERISA and the Internal Revenue Code on their investment and our performance.

Risks Related to the Merger

The merger consideration would not be adjusted in the event of any change in the relative values of the common stock of POSOR or us.

Upon the consummation of the Merger, each outstanding share of our common stock will be converted automatically into the right to receive 0.9643 shares of POSOR common stock. The exchange ratio will not be adjusted before or after consummation of the Merger. Except as expressly contemplated in the Merger Agreement, no change in the Merger consideration will be made for any reason, including the following (which may occur prior to consummation of the Merger or any time thereafter):

•changes in the respective businesses, operations, assets, liabilities and prospects of POSOR or us;

•changes in the estimated value per share of either the shares of POSOR common stock or our common stock;

•interest rates, general market and economic conditions, market and economic conditions in specific geographic regions, and other factors generally affecting the businesses of POSOR and us;

•federal, state and local legislation, governmental regulation and legal developments in the businesses in which POSOR and we operate;

•dissident stockholder activity, including any stockholder litigation challenging the transaction; and

•acquisitions, disposals or new development opportunities.

Table of Contents

Completion of the Merger is subject to many conditions and if these conditions are not satisfied or waived, the Merger will not be completed, which could result in the expenditure of significant unrecoverable transaction costs.

The Merger Agreement is subject to many conditions, which must be satisfied or waived in order to complete the Merger. The mutual conditions of the parties include, among others, the approval by our stockholders of the Merger and an amendment to our charter. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including, among others: (a) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (b) the other party’s compliance with its covenants and agreements contained in the Merger Agreement (subject to customary materiality qualifiers); (c) the absence of any change, event, circumstance or development arising during the period from the date of the Merger Agreement until the effective time of the Merger that has had or would have a material adverse effect on the other party; (d) the receipt of an opinion of counsel of the other party to the effect that such party has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT; and (e) the receipt of an opinion of counsel of each party to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code.

There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed. Failure to consummate the Merger may adversely affect POSOR’s or our results of operations and business prospects for the following reasons, among others: (i) each of POSOR and we have incurred and will continue to incur certain transaction costs, regardless of whether the Merger closes, which could adversely affect each company’s financial condition, results of operations and ability to make distributions to its stockholders; and (ii) the Merger, whether or not it closes, will divert the attention of certain management and other key employees of POSOR and us from ongoing business activities, including the pursuit of other opportunities that could be beneficial to POSOR or us, respectively. In addition, POSOR or we may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Merger is not completed by the November 19, 2020 (the “Outside Date”).

Failure to complete the Merger could negatively impact our future business and financial results.

If the Merger is not completed, our ongoing business could be materially and adversely affected and we will be subject to a variety of risks associated with the failure to complete the Merger, including the following:

•our being required to pay to POSOR a termination fee of up to $9.28 million and up to $3 million as reimbursement for POSOR’s expenses in the event of termination of the Merger Agreement under certain circumstances;

•our having to pay certain costs relating to the proposed merger, such as legal, accounting, financial advisor, filing, printing and mailing fees; and

•the diversion of our management focus and resources from operational matters and other strategic opportunities while working to implement the Merger.

If the Merger is not completed, these risks could materially affect our business and financial results.

The pendency of the Merger, including as a result of the restrictions on the operation of POSOR’s and our business during the period between signing the Merger Agreement and the completion of the Merger, could adversely affect the business and operations of POSOR, us, or both.

In connection with the pending Merger, some business partners or vendors of each of POSOR and ours may delay or defer decisions, which could negatively impact the revenues, earnings, cash flows and expenses of POSOR and us, regardless of whether the Merger is completed. In addition, due to operating covenants in the Merger Agreement, each of POSOR and we may be unable, during the pendency of the Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial.

Table of Contents

We are seeking approval of its stockholders of an amendment to our charter, which would remove substantive and procedural protections relating to Roll-Up Transactions such as the Merger.

We are seeking approval of its stockholders of an amendment to our charter. If adopted, this proposal would remove substantive and procedural protections relating to Roll-Up Transactions. A “Roll-up Transaction” is a transaction involving the acquisition, merger, conversion or consolidation, directly or indirectly, of us and the issuance of securities of an entity that is created or would survive after the successful completion of a Roll-up Transaction. The proposed charter amendment would eliminate certain protections that would have applied to the Merger. For example, the our charter provides that prior to conducting a Roll-Up Transaction, we would be required to obtain an appraisal of our assets. In addition, as part of the Roll-Up Transaction, we would be required to provide stockholders certain rights including the right to remain as a stockholder of us and preserve their interests therein on the same terms and conditions as existed previously, or to receive cash in an amount equal to the stockholders pro rata share of our appraised value of the net assets, even if the our board of directors concludes that transaction would be in our best interests. Because the Merger is conditioned on approval of the amendment to our charter, our stockholders will not be entitled to the benefit of these protections in connection with the Merger.

The Merger Agreement prohibits us from soliciting proposals after the Go Shop Period End Time, and places conditions on its ability to negotiate and accept a Superior Proposal, which may adversely affect our stockholders.

In the Merger Agreement, we agreed that, beginning as of 11:59 p.m. April 4, 2020 (the “Go Shop Period End Time”), we will be subject to restrictions relating to, among other things, the initiation, solicitation, knowing encouragement or facilitation of any inquiries, offers, or other actions that constitute or may reasonably be expected to lead to an Acquisition Proposal (as such term is defined under the Merger Agreement). After that date, under certain circumstances, if we receive an Acquisition Proposal from any person that did not result from a breach of its obligations and if our special committee determines that such Acquisition Proposal is or is reasonably expected to lead to a Superior Proposal (as such term is defined under the Merger Agreement), our special committee may take certain actions, including furnishing non-public information with respect to us (subject to compliance with certain matters). We may, upon our board of directors making certain determinations relating to its duties, disclose to our stockholders any information required to be disclosed under applicable law.

Pursuant to the Merger Agreement, our board of directors may also, upon making certain determinations, to make an Adverse Recommendation Change (as such term is defined under the Merger Agreement), terminate the Merger Agreement, pay a termination fee to POSOR and enter into an agreement relating to a Superior Proposal. The limitations, requirements and conditions described above may make it more unlikely that after the Go Shop Period End Time, a proposal relating to an alternative business combination transaction would emerge for us and may make it more difficult and expensive for us to accept a proposal relating to an alternative business combination transaction that the our special committee determines to be superior to the Merger.

The Merger Agreement contains provisions that could discourage a potential competing acquirer of us or could result in a competing Acquisition Proposal being at a lower price than it might otherwise be.

Except for a 45-day go shop period that expires at the Go Shop Period End Time, the Merger Agreement contains provisions that, subject to limited exceptions, restrict our ability to solicit, initiate or knowingly facilitate or encourage any Acquisition Proposal. With respect to any written, bona fide Acquisition Proposal that we receive, POSOR generally has an opportunity to offer to modify the terms of the Merger Agreement in response to such proposal before our board of directors may change, withdraw, or modify its recommendation to stockholders in response to such Acquisition Proposal or terminate the Merger Agreement to enter into an agreement with respect to such Acquisition Proposal. Upon termination of the Merger Agreement under certain circumstances relating to an Acquisition Proposal, we would have to pay POSOR a termination fee of $9.28 million in connection with a transaction initiated after the go shop process and, in addition, up to $3 million as reimbursement for POSOR’s expenses.

These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our business from considering or making a competing Acquisition Proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than that market value proposed to be received or realized in the Merger, or might cause a potential competing acquirer to propose to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the Merger Agreement.

Table of Contents

Some of the directors and executive officers of POSOR I and POSOR II have interests in seeing the Merger completed that are different from, or in addition to, those of the POSOR I and POSOR II stockholders. Specifically, Keith D. Hall and Peter McMillan III control and indirectly own Pacific Oak Holding Group, LLC, our sponsor and POSOR I’s sponsor since November 1, 2019. Pacific Oak Holding is the sole owner of Pacific Oak Capital Advisors, LLC, our advisor and POSOR I’s advisor since November 1, 2019. Messrs. Hall and McMillan are also two of our executive officers and directors and two of POSOR I’s executive officers and directors. Pacific Oak Capital Advisors earns fees from our advisory agreement with them and from POSOR II’s advisory agreement with them. The Merger may make it more likely that Pacific Oak Capital Advisors will continue to earn fees under the advisory agreement with respect to our and POSOR II’s assets, as compared to other strategic alternatives for us or POSOR I (such as a sale of our assets to a third party for cash).

In certain circumstances, either of POSOR or we may terminate the Merger Agreement.

POSOR or we may terminate the Merger Agreement if the Merger has not been consummated by the Outside Date. Also, the Merger Agreement may be terminated if a final and non-appealable order is entered prohibiting or disapproving the transaction, upon a material uncured breach by the other party that would cause the closing conditions not to be satisfied, or upon the failure to obtain receipt of approvals of the our stockholders. In addition, we have the right to terminate the Merger Agreement at any time prior to obtaining the necessary approvals of the our stockholders in order to enter into an Alternative Acquisition Agreement (as such term is defined under the Merger Agreement) with respect to a Superior Proposal. Finally, POSOR has the right to terminate the Merger Agreement at any time prior to obtaining the approvals of the our stockholders, upon an Adverse Recommendation Change (as such term is defined under the Merger Agreement) or upon the commencement of a tender offer.

POSOR and we each expect to incur substantial expenses related to the Merger.

POSOR and we each expect to incur substantial expenses in connection with completing the Merger and integrating our properties and operations with those of POSOR. While POSOR and we each have assumed that a certain level of transaction expenses would be incurred, there are a number of factors beyond the control of each company that could affect the total amount or the timing of such expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction expenses associated with the Merger could, particularly in the near term, exceed the savings that POSOR expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings following the completion of the Merger.

The ownership positions of POSOR and our stockholders will be diluted by the Merger.

The Merger will dilute the ownership position of POSOR stockholders and result in our stockholders having an ownership stake in the combined company (“Combined Company”) that is smaller than their current stake in us. Upon completion of the Merger, based on the number of shares of POSOR common stock and our common stock outstanding on March 23, 2020, continuing POSOR stockholders will own approximately 69.4% of the issued and outstanding shares of Combined Company common stock, and our stockholders will own approximately 30.6% of the issued and outstanding shares of common stock of the Combined Company. Consequently, POSOR stockholders and our stockholders, as a general matter, will have less influence over the management and policies of the Combined Company following the Merger than each currently exercise over the management and policies of POSOR and us, as applicable.

Litigation challenging the Merger may increase transaction costs and prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

If any stockholder files a lawsuit challenging the Merger, POSOR and we can provide no assurances as to the outcome of any such lawsuit, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may prevent the completion of the Merger in the expected time frame, or may prevent it from being completed altogether. Whether or not any such plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operations of each company’s business.

Table of Contents

Risks Related to the Combined Company Following the Merger

The Combined Company will have substantial indebtedness upon completion of the Merger.

In connection with the Merger, the Combined Company will assume and/or refinance certain indebtedness of ours and will be subject to risks associated with debt financing. As of December 31, 2019, POSOR had $678.1 million of outstanding debt, comprised of $385.4 million of variable interest and $292.7 million of fixed interest loans. After giving effect to the Merger, the Combined Company’s total pro forma consolidated indebtedness will increase. Taking into account our existing indebtedness, transaction expenses, and the assumption and/or refinancing of indebtedness in the Merger, the Combined Company’s pro forma consolidated indebtedness as of December 31, 2019, after giving effect to the Merger, would be approximately $1.0 billion. The indebtedness of the Combined Company will be comprised of $715.0 million of variable interest loans and $292.7 million of fixed interest loans.

The Combined Company’s indebtedness could have important consequences to holders of its common stock, including our stockholders who receive POSOR common stock in the Merger, including:

•vulnerability of the Combined Company to general adverse economic and industry conditions;

•limiting the Combined Company’s ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements;

•requiring the use of a substantial portion of the Combined Company’s cash flow from operations for the payment of principal and interest on its indebtedness, thereby reducing its ability to use its cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements;

•limiting the Combined Company’s flexibility in planning for, or reacting to, changes in its business and its industry; and

•putting the Combined Company at a disadvantage compared to its competitors with less indebtedness;

If the Combined Company defaults under a mortgage loan, it would automatically be in default under any other loan that has cross-default provisions, and it may lose the properties securing these loans.

Following the consummation of the Merger, our stockholders will receive a lower dollar amount per share in monthly distributions if the Combined Company continues to pay distributions at POSOR’s current rate.

POSOR’s distributions are currently equivalent to a 0.00258% annualized distribution rate based on a purchase price of $10.00 per share, or $0.0258 per share annually. Our distributions are currently equivalent to a 0.0112% annualized distribution rate based on $10.00 per share, or $0.112 per share annually. Based on the merger consideration of 0.9643 shares of POSOR common stock for each share of our common stock, annual distributions post-merger are expected to be approximately $0.0258 per share at the current POSOR distribution rate. There is no guarantee that the Combined Company will continue to pay distributions at this rate, if at all, and all decisions regarding future distributions will remain entirely at the discretion of the Combined Company’s board of directors.

Stockholders of the Combined Company will have no contractual or other legal right to distributions that have not been authorized by the Combined Company’s board of directors and declared by the Combined Company.

The Combined Company may incur adverse tax consequences if prior to the Merger, POSOR or we failed to qualify as a REIT for U.S. federal income tax purposes.

Each of POSOR and we have operated in a manner that it believes has allowed it to qualify as a REIT for U.S. federal income tax purposes under the Code and intends to continue to do so through the time of the Merger, and the Combined Company intends to continue operating in such a manner following the Merger. None of POSOR or we have requested or plans to request a ruling from the Internal Revenue Service, or the IRS, that it qualifies as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury Regulations is greater in the case of a REIT, like each of POSOR and us, that holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within the control of POSOR or us may affect its ability to qualify as a REIT. In order to qualify as a REIT, each of POSOR and we must satisfy a number of requirements, including requirements regarding the ownership of its stock and the composition of its gross income and assets. Also, a REIT must make distributions to stockholders aggregating annually at least 90% of its REIT taxable income, excluding any net capital gains.

Table of Contents

If POSOR or our company (or, following the Merger, the Combined Company) loses its REIT status, or is determined to have lost its REIT status in a prior year, it will face serious tax consequences that would substantially reduce its cash available for distribution, including cash available to pay dividends to its stockholders, because:

•it would be subject to U.S. federal corporate income tax on its net income for the years it did not qualify for taxation as a REIT (and, for such years, would not be allowed a deduction for dividends paid to stockholders in computing its taxable income);

•it could be subject to the federal alternative minimum tax for taxable years prior to January 1, 2018 and possibly increased state and local taxes for such periods;

•unless it is entitled to relief under applicable statutory provisions, neither it nor any “successor” company could elect to be taxed as a REIT until the fifth taxable year following the year during which it was disqualified; and

•for five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, it could be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.

As a result of all these factors, any of POSOR, our or the Combined Company’s failure to qualify as a REIT could impair the Combined Company’s ability to expand its business and have other material adverse effects on the Combined Company. In addition, for years in which the Combined Company does not qualify as a REIT, it would not otherwise be required to make distributions to stockholders.

In certain circumstances, even if the Combined Company qualifies as a REIT, it and its subsidiaries may be subject to certain U.S. federal, state, and other taxes, which would reduce the Combined Company’s cash available for distribution to its stockholders.

Even if the Combined Company has qualified and continues to qualify as a REIT, it may be subject to some U.S. federal, state and local taxes on its income or property and, in certain cases, a 100% penalty tax, in the event it sells property as a dealer. Any U.S. federal, state or other taxes the Combined Company pays will reduce its cash available for distribution to stockholders.

If the Merger does not qualify as a tax-free reorganization, there may be adverse tax consequences.

The Merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. The closing of the Merger is conditioned on the receipt by each of POSOR and us of an opinion of its counsel to the effect that the Merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. However, these legal opinions will not be binding on the IRS or on the courts. If, for any reason, the Merger were to fail to qualify as a tax-free reorganization, then each of our stockholders generally would recognize gain or loss, as applicable, equal to the difference between (i) the merger consideration (i.e. the fair market value of the shares of POSOR common stock) received by our stockholders in the Merger; and (ii) our stockholder’s adjusted tax basis in our common stock.

The Combined Company may have difficulty providing liquidity to stockholders through its share redemption program and/or tender offers.

The Merger is not a liquidity event for our stockholders or those of POSOR I. Both we and POSOR have had recent difficulty in satisfying redemption requests under our respective share redemption programs. In January 2019, we exhausted funds available for redemptions under our share redemption program, other than special redemption requests submitted in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence.” As a result, in 2019, we redeemed a total of 277,452 shares in connection with ordinary redemption requests. In January 2020, we again exhausted funds available for redemptions other than special redemptions. We currently have outstanding and unfulfilled ordinary redemption requests representing 808,172 shares. With respect to POSOR, other than special redemption requests, for the first, second, third and fourth quarters of 2019, it had unfulfilled requests to redeem 3,294,070, 3,782,675, 4,595,566 and 5,813,699 shares, respectively, or 94.2%, 94.9%, 95.7% and 96.8%, respectively, of the shares submitted for redemption, due to funding limitations. It currently has $0.8 million available for redemptions in 2020, all of which is reserved exclusively for special redemptions.

We cannot predict the demand for liquidity by stockholders of the Combined Company following the Merger, but if it simply remains at 2019 and 2020 levels, the Combined Company will need to provide additional funding compared to prior years in order to meet demand. We may not have sufficient funding to satisfy the demand for liquidity. The Combined Company’s primary source for funding is currently expected to be a portion of the net proceeds from new ongoing public offerings as an NAV REIT and potential Israeli offerings, but we cannot guarantee that the net proceeds raised will be sufficient to satisfy the demand for liquidity and our other capital needs, such as capital expenditures and funds for new investments. If future redemption requests exceed the amount of funding available under the Combined Company’s share redemption program and any additional funding made available under one or more self-tender offers, the number of rejected redemption or repurchase requests will increase over time.

Table of Contents

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments.

ITEM 2. PROPERTIES

As of December 31, ~~2018~~2019, we owned two hotel properties, ~~four~~three office properties and one apartment property. Additionally, as of December 31, ~~2018~~2019, we had entered into a consolidated joint venture to develop one office/retail property.

Hotel Properties

The following table provides summary information regarding our hotel properties as of December 31, ~~2018~~2019:

PropertyLocation of Property	~~Date Acquired~~	~~Number of Rooms~~	~~Percentage~~Date ~~Occupied for the Year Ended December 31, 2018~~Acquired		~~Average Daily Rate~~		Number of Rooms	~~Average Revenue per Available Room~~		~~Ownership %~~	Occupancy		Average Daily Rate		Average Revenue per Available Room		Ownership %
Springmaid Beach ResortMyrtle Beach, SC	12/30/2014	452	60.6	%	$	157.47		$	95.47	90.0%
Springmaid Beach Resort Myrtle Beach, SC			12/30/2014				453				65.0	%	$	138.06	$	89.80	90.0%
Q&C Hotel New Orleans, LA	~~12/17/2015~~	~~196~~	~~77.8~~12/17/2015	%	$	~~158.92~~	196	$	~~123.69~~	~~90.0%~~	73.3	%	$	165.37	$	121.13	90.0%

TRS Leases

Our hotels are leased by the respective joint venture owners of each hotel (the “Hotel Owner Joint Venture”) to a second joint venture (the “Hotel Operations Joint Venture”) we have formed between each hotel’s respective joint venture partner and an indirect wholly owned subsidiary we have formed with respect to each hotel that we have elected to treat as a TRS.

Each lease agreement provides for a five-year term with the right for the respective Hotel Operations Joint Venture to extend the term of the lease for up to three additional terms of three years each; provided, however, that the Hotel Owner Joint Venture has the right to terminate the lease upon the sale of the hotel or any members of the Hotel Owner Joint Venture buying out any other member, as well as upon the occurrence of an event of default under the respective lease agreement.

Pursuant to the lease agreements, the Hotel Operations Joint Venture will pay to the Hotel Owner Joint Venture, on a monthly basis, an annual base rent. The annual base rent will be adjusted as set forth in the lease agreements beginning in 2016 as well as prorated for any partial years. For the Springmaid Beach Resort, the annual base rent was $3.31 million for ~~2018~~2019 and is $3.12 million for ~~2019~~2020. For the Q&C Hotel the annual base rent was $3.45 million for ~~2018~~2019 and is $3.56 million for ~~2019~~2020.

In addition to annual base rent, each respective Hotel Operations Joint Venture will pay a monthly percentage rent to the respective Hotel Owner Joint Venture equal to (i) an agreed percentage of year-to-date gross revenue that exceeds certain annual threshold amounts, less (ii) all prior percentage rent payments. Each respective Hotel Operations Joint Venture is also required to establish and fund a repairs and replacement reserve for the periodic refurbishment, replacements and non-routine repairs of all tangible personal property owned by the respective Hotel Owner Joint Venture. For each lease, the reserve is a percentage of gross receipts as set forth in the lease agreement. For Springmaid Beach Resort, this percentage ranges from 1% to 4%. For Q&C Hotel, this percentage ranges from 2% to 5%. In addition, the lease agreements require each Hotel Operations Joint Venture to pay all income taxes, rent, and all costs and expenses and utility and other charges incurred in the operations of the respective hotel.

Table of Contents

Management Agreements

For us to qualify as a REIT, we cannot directly or indirectly operate any of our hotels. Third parties must operate our hotels. As described above, our hotels are leased to TRS lessees, which in turn have engaged property managers to manage our hotels pursuant to a hotel management agreement.

Springmaid Beach Resort

The Springmaid Hotel Operations Joint Venture has entered a management agreement with Doubletree Management LLC, an independent third-party hotel operator (“Doubletree”) pursuant to which Doubletree will manage and operate the Springmaid Beach Resort. The hotel was branded a DoubleTree by Hilton in September 2016 (the “Brand Commencement Date”).

Table of Contents

The management agreement requires us to maintain a minimum working capital reserve for the Springmaid Beach Resort. In addition, the Springmaid Hotel Owner Joint Venture is responsible for providing funds to meet the cash needs for the hotel operations if at any time the funds available from hotel operations are insufficient to meet the financial requirements of the hotel. The management agreement expires on December 31 of the 20th full year following the Brand Commencement Date. Upon mutual agreement, the parties may extend the term of the agreement for two successive periods of five years each. If an event of default occurs and continues beyond any applicable notice and cure periods set forth in the management agreement, the non-defaulting party generally has, among other remedies, the option of terminating the management agreement upon written notice to the defaulting party with no termination fee payable to Doubletree. In addition, we have the right to terminate the management agreement without the payment of a termination fee if Doubletree fails to achieve certain criteria relating to the performance of the hotel for any two consecutive years following the Brand Commencement Date. Under certain circumstances following a casualty or condemnation event, either party may terminate the management agreement provided Doubletree receives a termination fee an amount equal to two years of the base fee. We are permitted to terminate the management agreement upon a sale, lease or other transfer of the Springmaid Beach Resort any time so long as the buyer is approved for, and enters into a DoubleTree by Hilton franchise agreement for the balance of the agreement’s term. Finally, we are restricted in our ability to assign the management agreement upon a sale, lease or other transfer the Springmaid Beach Resort unless the transferee is approved by Doubletree to assume the management agreement.

Pursuant to the management agreement Doubletree receives the following fees:

• a base fee, which is a percentage of total operating revenue that starts at 2.5% and increases to 2.75% in the second year following the Brand Commencement Date and further increases in the third year following the Brand Commencement Date and thereafter to 3.0%;

• a campground area management fee, which is 2% of any campground revenue;

• an incentive fee, which is 15% of operating cash flow (after deduction for capital renewals reserve and the Springmaid Hotel Owner Joint Venture’s priority, which is 12% of the Springmaid Hotel Owner Joint Venture’s total investment);

• an additional services fee in the amount reasonably determined by Doubletree from time to time; and

• a brand services fee in the amount of 4% of total rooms revenue, and an other brand services fee in an amount determined by Doubletree from time to time.

Q&C Hotel

A wholly owned subsidiary of the Q&C Hotel Operations Joint Venture (“Q&C Hotel Operations”) has entered a management agreement with Encore Hospitality, LLC (“Encore Hospitality”), an affiliate of the Q&C JV Partner, pursuant to which Encore Hospitality will manage and operate the Q&C Hotel. The management agreement expires on December 17, 2035. Subject to certain conditions, Encore Hospitality may extend the term of the agreement for a period of five years. Q&C Hotel Operations may terminate the management agreement upon (1) the occurrence of an event of default that continues beyond any applicable notice and cure periods, (2) a sale of the Q&C Hotel, (3) a change of control of Encore Hospitality without Q&C Hotel Operations’ approval, (4) a failure of Encore Hospitality to meet certain performance thresholds, (5) a sale of the Q&C Joint Venture Partner’s interest in the joint venture to us, and (6) if Q&C Hotel Operations is required to do so pursuant to the terms of the loan documents or the franchise agreement. Pursuant to the management agreement Encore Hospitality will receive a base fee, which is 4.0% of gross revenue (as defined in the management agreement).

Table of Contents

Q&C Hotel Operations has also entered a franchise agreement with Marriott International (“Marriott”) pursuant to which Marriott has granted Q&C Hotel Operations a limited, non-exclusive license to establish and operate the Q&C Hotel using certain of Marriott’s proprietary marks and systems and the hotel was branded as a Marriott Autograph Collection hotel on May 25, 2016. The franchise agreement will expire on May 25, 2041 with no renewal options. Marriott may terminate the franchise agreement immediately upon certain defaults and after an opportunity to cure with respect to certain other defaults. Pursuant to the franchise agreement, commencing on May 25, 2016, Q&C Hotel Operations will pay Marriott a monthly franchise fee equal to a percent of gross room sales on a sliding scale that is initially 2% and increases to 5% after the third anniversary of the opening date and a monthly marketing fund contribution fee equal to 1.5% of the Q&C Hotel’s gross room sales. In addition, the franchise agreement requires the maintenance of a reserve account to fund all renovations at the hotel based on a percentage of gross revenues which starts at 2% of gross revenues and increases to 5% of gross revenues after May 25, 2019. Q&C Hotel Operations will also be responsible for the payment of certain other fees, charges and costs as set forth in the agreement.

In addition, in connection with the execution of the franchise agreement, ~~KBS~~Pacific Oak SOR US Properties II LLC (“SOR US Properties II”), our indirect wholly owned subsidiary, is providing an unconditional guarantee that all Q&C Hotel Operations’ obligations under the franchise agreement will be punctually paid and performed. Finally, certain transfers of the Q&C Hotel or an ownership interest therein are subject to a notice and consent requirement, and the franchise agreement further provides Marriott with a right of first refusal with respect to a sale of the hotel to a competitor of Marriott.

Table of Contents

Office Properties

The following table provides summary information regarding our office properties as of December 31, ~~2018~~2019:

PropertyLocation of Property	~~Date Acquired~~	~~Property Type~~	~~Rentable~~Date ~~Square Feet~~Acquired	~~Total Real Estate at Cost(in thousands)~~		Property Type	~~Occupancy~~	~~Annualized Base Rent (1)(in thousands)~~		Rentable Square Feet	~~Average Annualized Base Rent per Square Foot (2)~~		~~Average Remaining Lease Term in Years~~	Total Real Estate at Cost(in thousands)		~~Ownership %~~	Occupancy	Annualized Base Rent (1)(in thousands)		Average Annualized Base Rent per Square Foot (2)		Average Remaining Lease Term in Years	Ownership %
2200 Paseo VerdeHenderson, NV	12/23/2015	Office	59,818	$	14,118		88.3%	$	1,635		$	30.96	4.1			100.0%
Lincoln Court Campbell, CA			05/20/2016			Office				123,529				$	52,810		81.0%	$	5,291	$	52.87	2.7	100.0%
Lincoln CourtCampbell, CA	05/20/2016	Office	123,529	51,706			72.7%	4,653			51.82		3.1			100.0%
Oakland City Center Oakland, CA			08/18/2017			Office				368,595				174,748			82.2%	13,529		44.68		3.2	100.0%
Oakland City CenterOakland, CA	08/18/2017	Office	368,032	172,790			89.6%	13,755			41.73		2.9			100.0%
Madison Square Phoenix, AZ			10/03/2017			Office				313,991				35,350			47.1%	3,182		21.50		5.0	90.0%
Madison Square (3)Phoenix, AZ	10/03/2017	Office	313,561	33,493			42.4%	2,834			21.29		5.8			90.0%
										806,115				$	262,908		68.3%	$	22,002	$	39.94	3.3
			864,940	$	272,107		70.0%	$	22,877		$	37.79	3.7

_____________________

(1) Annualized base rent represents annualized contractual base rental income as of December 31, ~~2018~~2019, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

⁽²⁾ Average annualized base rent per square foot is calculated as the annualized base rent divided by the leased square feet.

~~(3)~~As ~~This~~of ~~property~~December 31, ~~was~~2019, ~~formerly~~there ~~known~~were asno ~~Grace~~tenants ~~Court~~occupying ~~and~~10% ~~was~~or ~~re-named~~more ~~Madison~~of ~~Square~~our intotal ~~connection~~rentable ~~with~~square footage. As of December 31, 2019, our ~~re-branding~~real ~~strategy~~estate ~~for~~portfolio’s ~~this~~highest ~~property.~~tenant industry concentrations (greater than 10% of annualized base rent) were as follows:

As of December 31, 2018, there were no tenants occupying 10% or more of our total rentable square footage. As of December 31, 2018, our real estate portfolio’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:


Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Legal Services	13	$	4,547	20.7	%
Public Administration	6	3,589		16.3	%
Professional, Scientific, and Technical Services	12	3,123		14.2	%

		$	11,259	51.2	%

Industry	Number of Tenants	Annualized Base Rent (1) (in thousands)		Percentage of Annualized Base Rent
Professional, Scientific and Legal	14	$	3,753	16.4	%
Legal Services	12	3,657		16.0	%
Public Administration (Government)	6	3,195		14.0	%
Finance	13	2,519		11.0	%
		$	13,124	57.4	%

_____________________

Table of Contents

Portfolio Lease Expiration

The following table reflects lease expirations of our office properties as of December 31, ~~2018~~2019:

Year of Expiration	~~Number of LeasesExpiring~~	~~Annualized Base Rent (in thousands) (1)~~	Number of LeasesExpiring	~~% of Portfolio Annualized Base RentExpiring~~		~~Leased~~Annualized ~~Rentable~~Base ~~Square~~Rent ~~Feet~~(in ~~Expiring~~thousands) (1)		~~% of Portfolio Rentable Square FeetExpiring~~		% of Portfolio Annualized Base RentExpiring		Leased Rentable Square Feet Expiring	% of Portfolio Rentable Square FeetExpiring
Month-to-Month	3	$	286	1.3	%	7,528		1.2	%
2020			18			$	3,987			18.1	%	103,568	18.9	%
2019	17	3,205		14.0	%	82,203		13.6	%
2021			15			3,603				16.4	%	79,692	14.5	%
2020	15	4,095		17.9	%	115,355		19.1	%
2022			19			3,899				17.7	%	92,529	16.9	%
2021	14	3,068		13.4	%	72,308		11.9	%
2023			15			3,141				14.3	%	60,407	11.0	%
2022	11	2,982		13.0	%	83,165		13.7	%
2024			7			1,435				6.5	%	31,623	5.8	%
2023	14	2,901		12.7	%	60,204		9.9	%
2025			15			4,522				20.6	%	138,086	25.2	%
2024	5	1,068		4.7	%	28,341		4.7	%
2026			5			910				4.1	%	32,502	5.9	%
2025	6	4,205		18.4	%	117,769		19.5	%
2027			2			267				1.2	%	5,145	0.9	%
2026	3	456		2.0	%	22,169		3.7	%
2028			2			238				1.1	%	5,170	0.9	%
2027	1	32		0.1	%	887		0.1	%
Total			98			$	22,002			100	%	548,722	100	%
2028	3	579		2.5	%	15,360		2.6	%
Total	92	$	22,877	100	%	605,289		100	%

_____________________

Table of Contents

Apartment Property

The following table provides summary information regarding our apartment property as of December 31, ~~2018~~2019:

PropertyLocation of Property	~~Date Acquired~~	~~Property Type~~	~~Number~~Date ~~of Units~~Acquired	~~Monthly Rent (1)~~		Property Type	~~Occupancy (2)~~		~~Average Monthly Rent perLeased Unit (3)~~		Number of Units	~~Ownership %~~	Monthly Rent (1)		Occupancy (2)		Average Monthly Rent perLeased Unit (3)		Ownership %
Lofts at NoHo CommonsNorth Hollywood, CA	11/16/2016	Apartment	292	$	607,000		94.9	%	$	2,190		90.0%
Lofts at NoHo Commons North Hollywood, CA			11/16/2016			Apartment					292		$	692,000	93.5	%	$	2,535	90.0%

_____________________

(1) Monthly rent is based on the aggregate contractual rent from tenant leases in effect as of December 31, ~~2018~~2019, adjusted to reflect any contractual tenant concessions.

(2) Occupancy percentage is calculated as the number of occupied units divided by the total number of units of the property as of December 31, ~~2018~~2019.

(3) Average monthly rent per leased unit is calculated as the aggregate contractual rent from leases in effect as of December 31, ~~2018~~2019, adjusted to reflect any

contractual tenant concessions, divided by the number of leased units.

Development Property

On December 1, 2016, we, through a joint venture (the “210 West 31st Street Joint Venture”), acquired a leasehold interest to develop one office/retail property in 210 West 31st Street, New York, New York (“210 West 31st Street”). The leasehold interest for 210 West 31st Street expires January 31, 2114. We own an 80% equity interest in the 210 West 31st Street Joint Venture.

210 West 31st Street is located in New York, New York and consists of an 8,637 square foot development site located directly across the street from Madison Square Garden and Penn Station. As of December 31, ~~2018~~2019, the book value of our construction project was $5455.92 million.

ITEM 3. 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 4. MINE SAFETY DISCLOSURES

Not applicable.

4249

Table of Contents

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stockholder Information

As of March 423, ~~2019~~2020, we had 17,~~920~~842,~~460~~301 and 12,~~216~~222,~~244~~529 shares of Class A and Class T common stock, respectively, outstanding held by a total of approximately 3,200 and 2,600 stockholders, respectively. The number of stockholders is based on the records of DST Systems, Inc., who serves as our transfer agent.

Market Information

No public market currently exists for our shares of common stock, and we currently have no plans to list our shares on a national securities exchange. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets applicable suitability and minimum purchase requirements. In addition, our charter prohibits the ownership of more than 9.8% of our stock, unless exempted by our board of directors. Consequently, there is the risk that our stockholders may not be able to sell their shares at a time or price acceptable to them.

We provide an estimated value per share to assist broker-dealers that participate in our initial public offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340 as required by the Financial Industry Regulatory Authority (“FINRA”). This valuation was performed in accordance with the provisions of and also to comply with Practice Guideline 2013-01, Valuations of Publicly Registered, Non-Listed REITs issued by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) (“IPA”) in April 2013 (the “IPA Valuation Guidelines”). For this purpose, we estimated the value of the shares of our common stock as $910.6525 per share as of December 31, ~~2018~~2019. This estimated value per share is based on our board of directors’ approval on December 617, ~~2018~~2019 of an estimated value per share of our common stock of $910.6525 based on the estimated value of our assets less the estimated value of our liabilities, or NAV, divided by the number of shares outstanding, all as of September 30, ~~2018~~2019, with the exception of the following adjustments: (i) our consolidated investments in real estate properties were valued as of October 31, 2019; (ii) an adjustment to reduce cash for the amount of capital expenditures incurred in October 2019; (iii) an adjustment for disposition costs and fees incurred in connection with the disposition of 2200 Paseo Verde (collectively the "Adjustments"). ~~There~~ Other than the Adjustments, there were no material changes between September 30, ~~2018~~2019 and December 6 17, ~~2018~~2019 that impacted the overall estimated NAV per share.

Our conflicts committee, composed solely of all of our independent directors, is responsible for the oversight of the valuation process used to determine the estimated NAV per share of our common stock, including the review and approval of the valuation and appraisal processes and methodologies used to determine our estimated NAV per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The estimated NAV per share was based upon the recommendation and valuation prepared by our advisor. ~~With~~ ~~the~~Our ~~approval~~advisor's valuation of ~~the~~our ~~conflicts~~consolidated ~~committee,~~investments wein ~~engaged~~real ~~Duff~~estate &properties ~~Phelps,~~was ~~LLC~~based on (~~“Duff~~i) &appraisals ~~Phelps~~of all but one property (“Appraised Properties”), anperformed by the independent third-party real estate valuation firm, toDuff ~~provide~~& ~~appraisals~~Phelps, ~~for~~LLC ~~each~~(“Duff of& ~~our~~Phelps”) ~~consolidated~~and ~~investments~~(ii) inthe ~~real~~contractual ~~properties~~sale ~~owned~~price asless ~~of September 30,~~estimated ~~2018 (the~~selling ~~“Appraised~~credits ~~Properties”)~~ for ~~use~~an byoffice ~~our~~property ~~advisor~~located in ~~calculating~~Henderson, ~~and~~Nevada ~~recommending~~(2200 anPaseo ~~estimated~~Verde) ~~NAV~~which ~~per~~was ~~share~~sold on November 4, 2019. Duff & Phelps prepared appraisal reports, summarizing key inputs and assumptions for each of the Appraised Properties. Our advisor performed valuations of our cash, restricted cash, investment in real estate equity securities, investment in an unconsolidated entity, other assets, mortgage debt and other liabilities. The methodologies and assumptions used to determine the estimated value of our assets and the estimated value of our liabilities are described further below.

Our advisor used the appraised values of the Appraised Properties and in the case of 2200 Paseo Verde, the contractual sales price less estimated selling credits, together with its estimated value of each of our other assets and liabilities, to calculate and recommend an estimated NAV per share of our common stock. Based on (i) the conflicts committee’s receipt and review of our advisor’'s valuation report, including our advisor’'s summary of the appraisal reports prepared by Duff & Phelps and our advisor’'s estimated value of each of our other assets and ~~our~~ liabilities, (ii) the conflicts committee’s review of the reasonableness of our estimated NAV per share resulting from our advisor’s valuation process, and (iii) other factors considered by the conflicts committee and the conflicts committee’s own extensive knowledge of our assets and liabilities, the conflicts committee concluded that the estimated NAV per share proposed by our advisor was reasonable and recommended to our board of directors that it adopt $910.6525 as the estimated NAV per share of our common stock. The board of directors unanimously agreed to accept the recommendation of the conflicts committee and approved $910.6525 as the estimated NAV per share of our common stock, which determination is ultimately and solely the responsibility of the board of directors.

4350

Table of Contents

The table below sets forth the calculation of our estimated NAV per share as of December 617, ~~2018~~2019, as well as the calculation of our estimated NAV per share as of ~~June~~December 6, ~~2017~~2018. Duff & Phelps is not responsible for the determination of the estimated NAV per share as of December 617, ~~2018~~2019 or ~~June~~December 6, ~~2017~~2018.

	December 6, 2018Estimated NAV per Share			June 6, 2017Estimated NAV per Share (1)			Change in Estimated NAV per Share
				December 17, 2019Estimated NAV per Share					December 6, 2018Estimated NAV per Share (1)		Change in Estimated NAV per Share
Real estate properties (2)	$	~~20.54~~		$	1521.5576		$	~~4.99~~	$	20.54	$	1.22
Real estate equity securities (3)	~~0.23~~			—0.33			~~0.23~~		0.23		0.10
Real estate loan receivable	—			0.15			(0.15		)
Investment in unconsolidated entity				0.02					0.17		(0.15)
Investment in unconsolidated entity	0.17			0.10			0.07
Cash				0.95					0.90		0.05
Cash	0.90			3.01			(2.11		)
Other assets				0.35					0.42		(0.07)
Other assets	0.42			0.77			(0.35		)
Mortgage debt (4)				(11.65)					(11.02)		(0.63)
Mortgage debt (4)	(11.02		)	(9.08		)	(1.94		)
Other liabilities				(0.42)					(0.41)		(0.01)
Other liabilities	(0.41		)	(0.37		)	(0.04		)
Non-controlling interests				(1.09)					(1.18)		0.09
Non-controlling interests	(1.18		)	(1.08		)	(0.10		)
Estimated NAV per share				$	10.25				$	9.65	$	0.60
Estimated NAV per share	$	9.65		$	9.05		$	0.60
Estimated enterprise value premium				None assumed					None assumed		None assumed
Estimated enterprise value premium	None assumed			None assumed			None assumed
Total estimated NAV per share				$	10.25				$	9.65	$	0.60
Total estimated NAV per share	$	9.65		$	9.05		$	0.60

_____________________

(1) The ~~June~~ December 6, ~~2017~~2018 estimated value per share was based upon the recommendation and valuation of our former external advisor, KBS Capital Advisors LLC ("KBS Capital Advisors"). We engaged Duff & Phelps to provide appraisals of our consolidated investments in real properties and ~~our~~KBS ~~advisor~~Capital Advisors performed valuations of our cash, restricted cash, ~~real estate loan receivable,~~ investment in an unconsolidated entity, other assets, mortgage debt and other liabilities. For more information relating to the ~~June~~ December 6, ~~2017~~2018 estimated ~~value~~NAV per share and the assumptions and methodologies used by Duff & Phelps and ~~the~~KBS ~~Advisor~~Capital Advisors, see ~~our~~ou Current Report on Form 8-K filed with the SEC on ~~June 7~~December 11, ~~2017~~2018.

(2) The increase in the estimated value of real estate properties was due to ~~acquisitions of real estate properties and~~ increases in fair values of our real estate properties.

(3) The increase in the estimated value of real estate equity securities was due to acquisitions of real estate equity securities as well as unrealized gains on the securities.

(4) The increase in mortgage debt was primarily due to borrowings tofor ~~fund~~future ~~acquisitions~~capital ofneeds ~~real~~and ~~estate~~to ~~and~~fund capital expenditures on real estate.

The increase in our estimated NAV per share from the previous estimate was primarily due to the items noted below, which reflect the significant contributors to the increase in the estimated NAV per share from $9.0565 to $910.6525. The changes are not equal to the change in values of each real each asset and liability group presented in the table above due to real estate property acquisitions, debt financings and other factors, which caused the value of certain asset or liability groups to change with no impact to our fair value of equity or the overall estimated NAV per share.

	~~Change in Estimated NAV per Share~~			Change in Estimated NAV per Share
June 6, 2017 estimated NAV per share	$	9.05
December 6, 2018 estimated NAV per share (after stock distributions)				$	9.65
Changes to estimated NAV per share
Real estate
Investments
Real estate	~~2.12~~			1.47
Investment in unconsolidated entity	~~0.11~~			0.02
Capital expenditures on real estate	(1.03		)
Investment in equity securities				0.03
Total change related to real estate	1.20
Capital expenditures on real estate				(0.61)
Operating cash flows in excess of distributions declared (1)	0.02
Total change related to investments				0.91
Acquisition and financing costs	(0.31		)
Operating cash flow shortfall compared to distributions declared (1)				(0.14)
Notes payable	(0.08		)
Selling and financing costs (2)				(0.11)
Investment in equity securities	(0.01		)
Advisor disposition fees (3)				(0.01)
Other changes	(0.02		)
Notes payable				0.04
Total change in estimated NAV per share (before stock distributions)	0.80
Other changes				0.01
Stock distributions	(0.20		)
Total change in estimated NAV per share				0.70
December 6, 2018 estimated NAV per share (after stock distributions)	$	9.65
Stock distributions				(0.10)
December 17, 2019 estimated NAV per share				$	10.25

_____________________

⁽¹⁾ Operating cash flow reflects modified funds from operations (“MFFO”) adjusted to (i) deduct certain capitalized interest expense related to a development project, (ii) add back the amortization of deferred financing costs and (iii) deduct income from business interruption insurance recoveries. We compute MFFO in accordance with the definition included in the practice guideline issued by IPA in November 2010.

(2) 44Selling and financing costs include approximately, $0.7 million, or $0.02 per share, for the selling costs incurred subsequent to September 30, 2019 in connection with the 2200 Paseo Verde sale subsequent to September 30, 2019.

⁽³⁾ Advisor fees include approximately, $0.3 million, or $0.01 per share, for the disposition of 2200 Paseo Verde, subsequent to September 30, 2019.

Table of Contents

As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties using different assumptions and estimates could derive a different estimated NAV per share of our common stock, and this difference could be significant. The estimated NAV per share is not audited and does not represent the fair value of our assets less the fair value of our liabilities according to U.S. generally accepted accounting principles (“GAAP”), nor does it represent a liquidation value of our assets and liabilities or the price at which our shares of common stock would trade on a national securities exchange. The estimated NAV per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated NAV per share also does not take into account estimated disposition costs and fees for real estate properties or debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations, the impact of restrictions on the assumption of debt or swap breakage fees that may be incurred upon the termination of certain of our swaps prior to expiration. The estimated NAV per share does not take into consideration acquisition-related costs and financing costs related to future acquisitions. As of September 30, ~~2018~~2019, we had no potentially dilutive securities outstanding that would impact the estimated NAV per share of our common stock.

Our estimated NAV per share takes into consideration any potential liability related to a subordinated participation in cash flows our advisor is entitled to upon meeting certain stockholder return thresholds in accordance with our advisory agreement. For purposes of determining the estimated NAV per share, our advisor calculated the potential liability related to this incentive fee based on a hypothetical liquidation of our assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties, and determined that there would be no liability related to the subordinated participation in cash flows.

Methodology

Our goal for the valuation was to arrive at a reasonable and supportable estimated NAV per share, using a process that was designed to be in compliance with the IPA Valuation Guidelines and using what we and our advisor deemed to be appropriate valuation methodologies and assumptions. The following is a summary of the valuation and appraisal methodologies, assumptions and estimates used to value our assets and liabilities:

Real Estate

Independent Valuation Firm

Duff & Phelps⁽¹⁾ was selected by our advisor and approved by our conflicts committee and board of directors to appraise each of the Appraised Properties. Duff & Phelps is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our advisor. The compensation we paid to Duff & Phelps was based on the scope of work and not on the appraised values of the Appraised Properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation, as well as the requirements of the state where each real property is located. Each appraisal was reviewed, approved and signed by an individual with the professional designation of MAI (Member of the Appraisal Institute). The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives.

Duff & Phelps collected all reasonably available material information that it deemed relevant in appraising the Appraised Properties. Duff & Phelps obtained property-level information from our advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements; and (iii) information regarding recent or planned capital expenditures. Duff & Phelps reviewed and relied in part on the property-level information provided by our advisor and considered this information in light of its knowledge of each property’s specific market conditions.

_____________________

(1) Duff & Phelps is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public securities offerings, private placements, business combinations and similar transactions. We engaged Duff & Phelps to prepare appraisal reports for each of the Appraised Properties and Duff & Phelps received fees upon the delivery of such reports. In addition, we have agreed to indemnify Duff & Phelps against certain liabilities arising out of this engagement. In the ~~two~~three years prior to December 11 17, ~~2018~~2019, Duff & Phelps and its affiliates have provided a number of commercial real estate, appraisal, valuation and financial advisory services for our affiliates and have received fees in connection with such services. Duff & Phelps and its affiliates may from time to time in the future perform other commercial real estate, appraisal, valuation and financial advisory services for us and our affiliates in transactions related to the properties that are the subjects of the appraisals, so long as such other services do not adversely affect the independence of the applicable Duff & Phelps appraiser as certified in the applicable appraisal report.

4552

Table of Contents

In conducting its investigation and analyses, Duff & Phelps took into account customary and accepted financial and commercial procedures and considerations as it deemed relevant. Although Duff & Phelps reviewed information supplied or otherwise made available by us or our advisor for reasonableness, it assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to it by any other party and did not independently verify any such information. With respect to operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Duff & Phelps, Duff & Phelps assumed that such forecasts and other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, ~~our~~ board of directors, and/or our advisor. Duff & Phelps relied on us or our advisor to advise it promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.

In performing its analyses of the Appraised Properties, Duff & Phelps made numerous other assumptions as of various points in time with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond its and our control, as well as certain factual matters. For example, unless specifically informed to the contrary, Duff & Phelps assumed that we had clear and marketable title to each of the Appraised Properties, that no title defects existed, that any improvements were made in accordance with law, that no hazardous materials were present or had been present previously, that no deed restrictions existed, and that no changes to zoning ordinances or regulations governing use, density or shape were pending or being considered. Furthermore, Duff & Phelps’ analyses, opinions and conclusions were necessarily based upon market, economic, financial and other circumstances and conditions existing as of or prior to the date of the appraisals, and any material change in such circumstances and conditions may affect Duff & Phelps’ analyses and conclusions. Duff & Phelps’ appraisal reports contain other assumptions, qualifications and limitations that qualify the analyses, opinions and conclusions set forth therein. Furthermore, the prices at which the Appraised Properties may actually be sold could differ from their appraised values.

Although Duff & Phelps considered any comments to its appraisal reports received from us or our advisor, the appraised values of the Appraised Properties were determined by Duff & Phelps. The appraisal reports for the Appraised Properties are addressed solely to us to assist in the determination of the estimated NAV per share of our common stock. The appraisal reports are not addressed to the public and may not be relied upon by any other person to establish an estimated NAV per share of our common stock and do not constitute a recommendation to any person to purchase or sell any shares of our common stock. In preparing its appraisal reports, Duff & Phelps did not solicit third-party indications of interest for the Appraised Properties and did not, and was not requested to, solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us. While Duff & Phelps is responsible for providing appraisals of the Appraised Properties, Duff & Phelps is not responsible for, did not calculate, and did not participate in, the determination of our estimated NAV per share.

The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to Duff & Phelps’ appraisal reports. All of the Duff & Phelps appraisal reports, including the analyses, opinions and conclusions set forth in such reports, are qualified by the assumptions, qualifications and limitations set forth in the respective appraisal reports.

Real Estate Valuation

As of ~~September 30~~October 31, ~~2018~~2019, we ~~(i)~~ owned, ~~and the Appraised Properties consisted of,~~ two hotel properties, four office properties, one apartment building and one retail development property, which were acquired for a total purchase price of $492.5 million, exclusive of acquisition fees and acquisition expenses of $17.0 million, and (ii) had invested $48.9 million in capital expenditures, leasing commissions and other capitalized costs in the Appraised Properties. As of September 30, 2018, the total appraised value of the Appraised Properties as provided by Duff & Phelps using the appraisal methods described below was $617.5 million. The total appraised value of the Appraised Properties, compared to the total purchase price (exclusive of acquisition fees and acquisition expenses) of the Appraised Properties plus subsequent capital expenditures, leasing commissions and other capitalized costs in the Appraised Properties through September 30, 2018, results in an overall increase in the value of the Appraised Properties of approximately 14.1%.

~~Income-Generating~~We obtained appraisals for two hotel properties, three office properties, one apartment building and one retail development property. As of October 31, 2019, the total appraised value of the consolidated real estate properties, excluding 2200 Paseo Verde, as provided by Duff & Phelps using the appraisal methods described below was $638.2 million. The estimated value of 2200 Paseo Verde, based on the sales price less selling credits, was $18.7 million. Based on the appraisal and valuation methodologies described above, the total estimated value of our consolidated real estate properties was $656.9 million. The total cost basis of these properties as of October 31, 2019 was $570.1 million. This amount includes the acquisition cost of $492.5 million, $60.5 million in capital expenditures, leasing commissions and other capitalized costs and $17.0 million of acquisition fees and expenses. The total estimated value of our consolidated real estate properties, compared to the total purchase price (exclusive of acquisition fees and acquisition expenses) of our consolidated real estate properties plus subsequent capital expenditures, leasing commissions and other capitalized costs in our consolidated real estate properties through October 31, 2019, results in an overall increase in the value of the Appraised Properties of approximately 18.8%.

As of September 30, 2018, our income-generating properties consisted of two hotel properties, four office properties and one apartment building. Duff & Phelps appraised each of the income-generating properties using various methodologies including the direct capitalization approach, discounted cash flow analysis and sales comparison approach and relied primarily on 10-year discounted cash flow analyses for the final appraisal of the these properties. Duff & Phelps calculated the discounted cash flow value of each of the income-generating properties using property-level cash flow estimates, terminal capitalization rates and discount rates that fall within ranges it believes would be used by similar investors to value the properties, based on recent comparable market transactions adjusted for unique properties and market-specific factors.53

Table of Contents

~~The total appraised value of our income~~Income-~~generating~~Generating properties using the appraisal methodologies described above was $568.8 million, compared to a total cost basis of $497.6 million. This amount includes the acquisition price of $444.5 million, $38.1 million in capital expenditures, leasing commissions and tenant improvements and $15.0 million of acquisition fees and expenses. Properties

~~The~~As ~~following~~of ~~table~~October ~~summarizes~~31, 2019, the ~~key~~Appraised ~~assumptions~~Properties ~~that~~were appraised by Duff & Phelps ~~used~~and inconsisted of two hotel properties, three office properties and one apartment building. Duff & Phelps appraised each of these income-generating properties using various methodologies including the direct capitalization approach, discounted cash flow analysis and sales comparison approach and relied primarily on 10-year discounted cash flow analyses tofor ~~arrive~~the atfinal appraisal of the ~~appraised~~these properties. Duff & Phelps calculated the discounted cash flow value of ~~our~~each of these income-generating properties: using property-level cash flow estimates, terminal capitalization rates and discount rates that fall within ranges it believes would be used by similar investors to value the properties, based on recent comparable market transactions adjusted for unique properties and market-specific factors.

	Range in Values	Weighted-Average Basis
Terminal capitalization rate	4.25% to 7.50%	6.22%
Discount rate	6.25% to 9.50%	7.48%
Net operating income compounded annual growth rate (1)	3.61% to 24.91%	6.83%

The total appraised value of these income-generating properties using the appraisal methodologies described above was $591.0 million, compared to a total cost basis of $497.9 million. This amount includes the acquisition price of $431.2 million, $52.1 million in capital expenditures, leasing commissions and tenant improvements and $14.6 million of acquisition fees and expenses.

The following table summarizes the key assumptions that Duff & Phelps used in the discounted cash flow analyses to arrive at the appraised value of these income-generating properties:


	Range in Values	Weighted-Average Basis
Terminal capitalization rate	4.50% to 7.50%	5.99%
Discount rate	6.00% to 9.50%	7.11%
Net operating income compounded annual growth rate ⁽¹⁾	2.18% to 19.64%	5.28%

_____________________

⁽¹⁾ The net operating income compounded annual growth rates (“CAGRs”) reflect both the contractual and market rents and reimbursements (in cases where the contractual lease period is less than the valuation period of the property) net of expenses over the valuation period. The range of CAGRs shown is the constant annual rate at which the net operating income is projected to grow to reach the net operating income in the final year of the hold period for each of the properties.

While we believe that Duff & Phelps’ assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the appraised value of the income-generating properties and thus, our estimated NAV per share. The table below illustrates the impact on our estimated NAV per share; including an adjustment to non-controlling interest, if the terminal capitalization rates or discount rates Duff & Phelps used to appraise the income generating properties were adjusted by 25 basis points, assuming all other factors remain unchanged. Additionally, the table below illustrates the impact on our estimated NAV per share if these terminal capitalization rates or discount rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged:

	~~Increase (Decrease) on the Estimated NAV per Share due to~~		Increase (Decrease) on the Estimated NAV per Share due to
	~~Decrease of 25 basis points~~		Decrease of 25 basis points	~~Increase of 25 basis points~~			~~Decrease of 5%~~			~~Increase of 5%~~		Increase of 25 basis points			Decrease of 5%			Increase of 5%
Terminal capitalization rate	$	~~0.42~~	$	$	(0.3741	)	$	~~0.50~~	$	$	~~(0.45~~	(0.40)	$	0.48		$	(0.46)
Discount Rate		~~0.29~~			(0.2728	)		~~0.43~~			~~(0.40~~	(0.29)		0.39			(0.40)

Development Property

As of ~~September 30~~October 31, ~~2018~~2019, we had invested in a retail development project. Duff & Phelps considered various valuation methodologies including the cost approach, income capitalization approach and sales comparison approach and relied on a sales comparison approach for the final appraisal of this investment. Duff & Phelps gathered data on reasonably substitutable properties and adjusted for unique property and market-specific factors to arrive at a market value. The appraised value of our retail development project using the appraisal methodology described above was $4847.72 million, compared to a total cost basis, including acquisition fees and expenses, capital expenditures and other capitalized costs through ~~September 30~~October 31, ~~2018~~2019 of $6056.90 million.

Finally, a 1% increase in the appraised value of the Appraised Properties would result in an increase of $0.1817 to our estimated NAV per share and a 1% decrease in the appraised value of the Appraised Properties would result in a decrease of $0.18 to our estimated NAV per share, assuming all other factors remain unchanged.

Real Estate Equity Securities

As of September 30, ~~2018~~2019, we owned an investment in real estate equity securities. The estimated value of our real estate equity securities is equal to the GAAP fair value disclosed in our Quarterly Report on Form 10-Q for the period ended September 30, ~~2018~~2019, which also equals the book value of the real estate equity securities in accordance with GAAP. As of September 30, ~~2018~~2019, we owned ~~852~~1,~~797~~160,591 shares of Franklin Street Properties Corp. The fair values of these real estate equity securities were based on quoted prices in an active market on a major stock exchange. As of September 30, ~~2018~~2019, the fair value and carrying value of our real estate equity securities was $69.8 million.

4754

Table of Contents

Investment in Unconsolidated Entity

As of September 30, ~~2018~~2019, we had originated a participating loan facility in an amount up to €2.6 million ($3.0 million as of September 30, ~~2018~~2019). As September 30, ~~2018~~2019, we had funded the participating loan facility €2.1 million ($2.4 million as of September 30, ~~2018~~2019). The proceeds were used to fund a 5% general partner interest in a joint venture acquiring a portfolio of light industrial properties located throughout France. Under the terms of the participating loan facility, we participate in the expected residual profits of the portfolio and the terms are structured in a manner such that the risks and rewards of the arrangement are similar to those associated with an investment in a real estate joint venture. Accordingly, the participating loan facility is accounted for under the equity method of accounting. The estimated value of our investment in this participating loan facility was estimated by our advisor based on ~~actual~~its ~~and~~estimate ~~contractual~~of ~~sales~~the ~~prices~~final ~~for~~distribution ~~the~~to ~~properties~~be ~~and~~received ~~the~~by ~~resulting~~us ~~distributions~~in ~~expected~~the tonext beone ~~received~~to bytwo usquarters, pursuant to the terms of the participating loan facility. The fair value and carrying value of our investment in the participating loan facility is $50.25 million and $20.85 million, respectively.

Non-controlling Interest

We have an ownership interest in five consolidated joint ventures as of September 30, ~~2018~~2019. As we consolidate these joint ventures, the entire amount of the underlying assets and liabilities of each joint venture is reflected at fair value in the corresponding line items of the estimated NAV per share determination. AsGiven athis ~~result~~and the October 31, 2019 appraisal date for the real estate, we also must consider the fair value of any non-controlling interest liability as of ~~September 30~~October 31, ~~2018~~2019. In determining this fair value, we considered the various profit participation thresholds in each of the joint ventures that must be measured in determining the fair value of our non-controlling interest liability. We used the real estate appraisals provided by Duff & Phelps and calculated the amount that the joint venture partners would receive in a hypothetical liquidation of the underlying real estate properties (including all current assets and liabilities) at their current appraised values and the payoff of any related debt at its fair value, based on the profit participation thresholds contained in the joint venture agreements. The estimated payment to the joint venture partners was then reflected as the non-controlling interest liability in our determination of our estimated NAV per share.

Notes Payable

The estimated values of ~~our~~the Company’s notes payable are equal to the GAAP fair values disclosed in our Quarterly Report on Form 10-Q for the period ended September 30, ~~2018~~2019, but do not equal the book value of the loans in accordance with GAAP. Our advisor estimated the values of our notes payable using a discounted cash flow analysis. The discounted cash flow analysis was based on projected cash flow over the remaining loan terms, including extensions we expect to exercise, and management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio and type of collateral.

As of September 30, ~~2018~~2019, the GAAP fair value and the carrying value of our notes payable were $~~331~~351.38 million and $~~326~~347.45 million, respectively. The weighted-average discount rate applied to the future estimated debt payments, was approximately 54.1456%. Our notes payable have a weighted-average remaining term of 1.9 years.

The table below illustrates the impact on our estimated NAV per share if the discount rates our advisor used to value our notes payable were adjusted by 25 basis points, assuming all other factors remain unchanged. Additionally, the table below illustrates the impact on our estimated NAV per share if these discount rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged:

	~~Increase (Decrease) on the Estimated NAV per Share due to~~			Increase (Decrease) on the Estimated NAV per Share due to
	~~Decrease of 25 basis points~~			~~Increase~~Decrease of 25 basis points		~~Decrease of 5%~~		Increase of 25 basis points		~~Increase of 5%~~		Decrease of 5%		Increase of 5%
Discount rate	$	~~(0.05~~	)	$	(0.0504)	$	~~(0.05~~	)$	0.04	$	~~0.04~~	$	(0.03)	$	0.03

Other Assets and Liabilities

The carrying values of a majority of our other assets and liabilities are considered to equal their fair value due to their short maturities or liquid nature. Certain balances, such as straight-line rent receivables, lease intangible assets and liabilities, deferred financing costs, unamortized lease commissions and unamortized lease incentives, have been eliminated for the purpose of the valuation due to the fact that the value of those balances was already considered in the valuation of the related asset or liability. Our advisor has also excluded redeemable common stock as temporary equity does not represent a true liability to us and the shares that this amount represents are included in our total outstanding shares of common stock for purposes of determining our estimated NAV per share.

4855

Table of Contents

Limitations of Estimated NAV per Share

As mentioned above, we are providing this estimated NAV per share to assist broker dealers that participated in our initial public offering in meeting their customer account statement reporting obligations. This valuation was performed in accordance with the provisions of the IPA Valuation Guidelines. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated NAV per share of our common stock and this difference could be significant. The estimated NAV per share is not audited and does not represent the fair value of our assets less the fair value of our liabilities according to GAAP.

Accordingly, with respect to our estimated NAV per share, we can give no assurance that:

• a stockholder would be able to resell his or her shares at our estimated NAV per share;

• a stockholder would ultimately realize distributions per share equal to our estimated NAV per share upon liquidation of our assets and settlement of our liabilities or a sale of our company;

• our shares of common stock would trade at our estimated NAV per share on a national securities exchange;

• a third party would offer our estimated NAV per share in an arm’s-length transaction to purchase all or substantially all of our shares of common stock;

• another independent third-party appraiser or third-party valuation firm would agree with our estimated NAV per share; or

• the methodology used to determine our estimated NAV per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.

Further, ~~our~~the estimated NAV per share is based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of September 30, ~~2018~~2019, after giving effect to the Adjustments. As of September 30, ~~2018~~2019, there were 17,~~963~~934,~~199~~013 and 12,~~100~~255,~~736~~327 shares of Class A and Class T common stock issued and outstanding, respectively. We did not make any adjustments to our estimated NAV subsequent to September 30, 2018, including adjustments relating to the following, among others: (i) the issuance of common stock and the payment of related offering costs; (ii) net operating income earned and distributions declared; and (iii) the redemption of shares. The value of our shares will fluctuate over time in response to developments related to the ~~capital raised during our offering stage, future investments, the~~ performance of individual assets in our portfolio, the management of those assets, and in response to the real estate and finance markets. ~~Our~~The estimated NAV per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. ~~Our~~The estimated NAV per share does not take into account estimated disposition costs and fees for real estate properties that are not held for sale or under contract for sale, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations, or the impact of restrictions on the assumption of debt. orThe ~~swap~~estimated ~~breakage~~NAV per share does consider any participation or incentive fees that ~~may~~would be ~~incurred~~due ~~upon~~to ~~the~~our ~~termination~~advisor ofbased ~~certain~~on of our ~~swaps~~aggregate ~~prior~~net toasset ~~expiration.~~value, ~~The~~which ~~estimated~~would ~~NAV~~be ~~per~~payable ~~share~~in ~~does~~a ~~not~~hypothetical ~~take~~liquidation ~~into~~as ~~consideration~~of ~~acquisition-related~~the ~~costs~~valuation ~~and~~date ~~financing~~in ~~costs~~accordance ~~related~~with tothe ~~future~~terms ~~acquisitions~~of our advisory agreement. We ~~expect~~currently expects to utilize our advisor and/or an independent valuation firm to update ~~our~~the estimated NAV per share ~~within~~no 12later ~~months.~~than WeDecember ~~cannot assure our stockholders that our estimated NAV per share will increase or that it will not decrease~~2020.

Historical Estimated NAV per Share

The historical reported estimated NAV per share of our common stock approved by our board of directors is set forth below:

Estimated NAV per Share

~~Effective Date of Valuation~~

~~Filing with the Securities and Exchange Commission~~

Effective Date of Valuation

Filing with the Securities and Exchange Commission

$9.05

June 6, 2017

Current Report on Form 8-K, filed June 7, 2017

$9.65

December 6, 2018

Current Report on Form 8-K, filed December 11, 2018

$9.05

June 6, 2017

Current Report on Form 8-K, filed June 7, 2017

Distribution Information

We declare stock dividends and cash distributions when our board of directors determines we have sufficient cash flow from operations, investment activities and/or strategic financings. This policy reflects our focus on acquiring an investment portfolio with a total return profile that is composed of a combination of assets that have potential for long-term appreciation and/or stabilized cash flow from operations upon lease-up or other enhancement.

4956

Table of Contents

We currently expect our board of directors to authorize, declare and pay cash distributions on a monthly basis. We expect that we will fund these cash distributions from dividend, rental and other income on our investments. We may also utilize strategic refinancings to fund cash distributions for investments that have appreciated in value after our acquisition. Generally, our distribution policy is not to pay cash distributions from sources other than cash flow from operations, investment activities and strategic financings. However, we may fund cash distributions from any source and there are no limits to the amount of distributions that we may pay from any source, including proceeds from the issuance of securities in the future, other third party borrowings, advances from our advisor or sponsors or from our advisor’s deferral of its fees under the advisory agreement. Distributions paid from sources other than current or accumulated earnings and profits may constitute a return of capital. From time to time, we may generate taxable income greater than our taxable income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. In these situations we may pay distributions in excess of our cash flow from operations, investment activities and strategic financings to satisfy the REIT distribution requirement described above. In such an event, we would look first to other third party borrowings to fund these distributions.

As a REIT, we will generally have to hold our assets for two years in order to meet the safe harbor to avoid a 100% prohibited transactions tax, unless such assets are held through a TRS or other taxable corporation. At such time as we have assets that we have held for at least two years, we anticipate that we may authorize and declare distributions based on gains on asset sales, to the extent we close on the sale of one or more assets and the board of directors does not determine to reinvest the proceeds of such sales.

To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our 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 we meet the REIT qualification requirements, we generally will not be subject to federal income tax on the income that we distribute to our stockholders each year. In general, we anticipate making distributions to our stockholders of at least 100% of our REIT taxable income so that none of our income is subject to federal income tax. Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.

We have not established a minimum distribution level, and our charter does not require that we pay distributions to our stockholders. Distributions declared during ~~2018~~2019 and ~~2017~~2018, aggregated by quarter, are as follows (dollars in thousands, except per share amounts):

	2018
			2019
	~~1st Quarter~~		1st Quarter		~~2nd Quarter~~		~~3rd~~2nd Quarter		~~4th Quarter~~		3rd Quarter		~~Total~~		4th Quarter		Total
Total Distributions Declared	$	~~1,082~~	$	1,206	$	~~1,124~~	$	~~1,349~~724	$	~~1,452~~	$	724	$	~~5,007~~	$	725	$	3,379
Distributions Declared Per Class A Share	$	~~0.047~~	$	0.040	$	~~0.048~~	$	0.~~048~~024	$	~~0.048~~	$	0.024	$	~~0.191~~	$	0.024	$	0.112
Distributions Declared Per Class T Share	$	~~0.024~~	$	0.040	$	~~0.025~~	$	0.~~041~~024	$	~~0.048~~	$	0.024	$	~~0.138~~	$	0.024	$	0.112
	2017
			2018
	~~1st Quarter~~		1st Quarter		~~2nd Quarter~~		~~3rd~~2nd Quarter		~~4th Quarter~~		3rd Quarter		~~Total~~		4th Quarter		Total
Total Distributions Declared	$	~~852~~	$	1,082	$	~~960~~	$	1,~~035~~124	$	~~1,073~~	$	1,349	$	~~3,920~~	$	1,452	$	5,007
Distributions Declared Per Class A Share	$	~~0.047~~	$	0.047	$	~~0.048~~	$	0.048	$	~~0.048~~	$	0.048	$	~~0.191~~	$	0.048	$	0.191
Distributions Declared Per Class T Share	$	~~0.024~~	$	0.024	$	~~0.024~~	$	0.025	$	~~0.025~~	$	0.041	$	~~0.098~~	$	0.048	$	0.138

The tax composition of our cash distributions paid during the years ended December 31, ~~2018~~2019 and ~~2017~~2018 was as follows:

	2018		2017
				2019		2018
Ordinary Income	—	%	17	%—	%	—	%
Return of Capital	~~100~~	%	83	%100	%	100	%
Capital Gain	—	%	—	%—	%	—	%
Total	~~100~~	%	~~100~~	%100	%	100	%

5057

Table of Contents

Commencing March 2015, the Company’s board of directors has declared and issued stock dividends on shares of the Company’s common stock through December 31, ~~2018~~2019 as follows:

Year Ended December 31,

~~Amount Declared per Share Outstanding (1)~~

~~Total Shares Issued~~

Amount Declared per Share Outstanding (1)

Total Shares Issued

2015

~~0.100000 shares~~

~~765,604~~

0.100000 shares

765,604

2016

~~0.035003 shares~~

~~513,723~~

0.035003 shares

513,723

2017

~~0.020004 shares~~

~~493,463~~

0.020004 shares

493,463

2018

~~0.018337 shares~~

~~584,377~~

0.018337 shares

584,377

2019

—

_____________________

⁽¹⁾Amount declared per share outstanding includes one-time stock dividends, quarterly dividends and monthly dividends and assumes each share was issued and outstanding for the entire periods presented. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend.

Stock dividends are non-taxable to stockholders at the time of issuance. During our offering stage and through November 2018, our board of directors declared stock dividends on a set monthly basis based on monthly record dates. We currently do not expect our board of directors to declare additional monthly stock dividends.

For more information with respect to our distributions paid, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Distributions.”

Unregistered Sales of Equity Securities

During the year ended December 31, 2019, we did not sell any equity securities that were not registered under the Securities Act of 1933. During the year ended December 31, 2018, we sold the following equity securities that were not registered under the Securities Act of 1933. On February 13, 2018, we issued 10,935 of Class A shares of common stock for $9.15 per share (or an aggregate purchase price of $0.1 million) to a business associate of Keith D. Hall and Peter McMillan III. The shares were issued in private transactions exempt from the registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933. We did not pay selling commissions or dealer manager fees with respect to this sale. The purchase price reflects a $0.85 discount to the $10.00 per share offering price in our now-terminated initial public offering, reflecting that no selling commissions or dealer manager fees were paid on the sale.

Share Redemption Program

We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

Pursuant to the share redemption program there are several limitations on our ability to redeem shares:

• Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.

• During each calendar year, the share redemption program limits the number of shares we may redeem to those that we could purchase with the amount of the net proceeds from the issuance of shares under the dividend reinvestment plan during the prior calendar year. In ~~2019~~2020, the share redemption program also provides that in any calendar year, the last $0.5 million of net proceeds from the dividend reinvestment plan during the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” with any excess funds being available to redeem shares not requested in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” during the December redemption date in the current year. We may, however, increase or decrease the funding available for the redemption of shares pursuant to the program upon ten business days’ notice to our stockholders.

• During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.

• We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

Table of Contents

Pursuant to our share redemption program, redemptions made in connection with a stockholder’s death, qualifying disability, or determination of incompetence are made at a price per share equal to the most recent NAV per share as of the applicable redemption date. The price at which we redeem all other shares eligible for redemption is as follows:

• For those shares held by the redeeming stockholder for at least one year, 92.5% of our most recent estimated NAV per share as of the applicable redemption date;

~~• For those shares held by the redeeming stockholder for at least two years, 95.0% of our most recent estimated NAV per share as of the applicable redemption date;~~58

•Table ~~For those shares held by the redeeming stockholder for at least three years, 97.5%~~ of ~~our most recent estimated NAV per share as of the applicable redemption date; and~~Contents

• For those shares held by the redeeming stockholder for at least ~~four~~two years, ~~100~~95.0% of our most recent estimated NAV per share as of the applicable redemption date.;

•For those shares held by the redeeming stockholder for at least three years, 97.5% of our most recent estimated NAV per share as of the applicable redemption date; and

•For those shares held by the redeeming stockholder for at least four years, 100% of our most recent estimated NAV per share as of the applicable redemption date.

For purposes of determining the time period a redeeming stockholder has held each share, the time period begins as of the date the stockholder acquired the share; provided, that shares purchased by the redeeming stockholder pursuant to our dividend reinvestment plan and shares received as a stock dividend will be deemed to have been acquired on the same date as the initial share to which the dividend reinvestment plan shares or stock dividend shares relate. The date of the share’s original issuance by us is not determinative. In addition, as described above, the shares owned by a stockholder may be redeemed at different prices depending on how long the stockholder has held each share submitted for redemption.

We expect to update our estimated NAV per share annually.

The terms of our share redemption program with respect to redemptions sought upon a stockholder’s death, qualifying disability or determination of incompetence are as follows:

• There is no one-year holding requirement;

• Effective in January 2019, funds from our dividend reinvestment plan in an amount of $500,000 are reserved for redemption (during 2018, additional funds in an amount up to $500,000 were available for redemptions); and

• The redemption price is the estimated NAV of the shares, as determined by our board of directors.

Upon a transfer of shares any pending redemption requests with respect to such transferred shares will be canceled as of the date we accept the transfer. Stockholders wishing to continue to have a redemption request related to any transferred shares considered by us must resubmit their redemption request.

Our board may amend, suspend or terminate the share redemption program upon 10 business days’ notice to stockholders. We also may increase or decrease the funding available for the redemption of shares pursuant to the share redemption program upon 10 business days’ notice to stockholders.

~~During~~Effective beginning with the ~~year~~month ~~ended~~of ~~December 31,~~February ~~2018~~2020, we ~~fulfilled~~have suspended (a) redemptions requested under the share redemption ~~requests~~program in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”, until we and ~~redeemed~~POSOR ~~shares~~I ~~pursuant~~file towith the SEC a Registration Statement on Form S-4 containing a Joint Proxy Statement/Prospectus for the proposed Merger, and (b) all other redemptions under the share redemption program asuntil ~~follows:~~after the Merger closes.

Month	Total Number of Shares Redeemed	Average Price Paid Per Share (1)		Approximate Dollar Value of Shares Available ThatMay Yet Be Redeemed Under the Program
January 2018	72,262	$	8.82	(2)
February 2018	10,602	$	8.37	(2)
March 2018	11,025	$	8.57	(2)
April 2018	27,994	$	8.39	(2)
May 2018	36,198	$	8.53	(2)
June 2018	84,916	$	8.91	(2)
July 2018	32,689	$	9.05	(2)
August 2018	—	$	—	(2)
September 2018	—	$	—	(2)
October 2018	2,701	$	9.05	(2)
November 2018	—	$	—	(2)
December 2018	—	$	—	(2)
	278,387

Table of Contents

During the year ended December 31, 2019, we fulfilled redemption requests and redeemed shares pursuant to the share redemption program as follows:


Month	Total Number of Shares Redeemed	Average Price Paid Per Share⁽¹⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2019	260,234	$	9.50	⁽²⁾
February 2019	2,277	$	—	⁽²⁾
March 2019	—	$	—	⁽²⁾
April 2019	—	$	—	⁽²⁾
May 2019	23,534	$	9.65	⁽²⁾
June 2019	1,144	$	9.65	⁽²⁾
July 2019	—	$	—	⁽²⁾
August 2019	13,059	$	9.65	⁽²⁾
September 2019	7,056	$	9.65	⁽²⁾
October 2019	575	$	9.65	⁽²⁾
November 2019	—	$	—	⁽²⁾
December 2019	11,559	$	10.11	⁽²⁾
	319,438

_____________________

(1) Pursuant to the program, as amended, we redeem shares at the purchase prices described above. ~~All~~Redemptions ~~redemptions~~for ~~during~~January ~~2018~~2019 through November 2019 were processed based on our estimated NAV per share of $9.0565 as established by our board of directors on ~~June~~December 6, ~~2017~~2018. December 2019 redemptions were processed based on our estimated NAV per share of $10.25 as established by our board of directors on December 17, 2019.

(2) We limit the dollar value of shares that may be redeemed under the program as described above. During the year ended December 31, ~~2018~~2019, we redeemed $23.40 million of common stock. In ~~July~~January ~~2018~~2019, we exhausted all funds available for redemption of shares in ~~2018~~2019 in connection with redemption requests not made upon a stockholder's death, "qualifying disability", or determination of incompetence. As of December 31, ~~2018~~2019, we had $48.27 million outstanding and unfulfilled redemption requests representing ~~437~~863,~~842~~378 shares due to the limitations described above. We recorded $32.02 million of redeemable common stock payable on our balance sheet as of December 31, ~~2018~~2019, which represents the amount available to be redeemed in ~~2019~~2020 based on the net proceeds from the sale of shares under of distribution reinvestment plan as of December 31, ~~2018~~2019.

In addition to the redemptions under the share redemption program described above, during the year ended December 31, 2019, we repurchased 2,286 shares of our common stock at $8.89 per share for an aggregate price of approximately $20,000.

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 2019, 2018, 2017, 2016, ~~2015~~ and ~~2014~~2015 and for the years ended December 31, 2019, 2018, 2017, 2016, ~~2015~~ and ~~2014~~2015 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (in thousands, except share and per share amounts):

	~~As of December 31,~~		As of December 31,
	2018				2017			2016			2015				2014
			2019					2018					2017					2016		2015
Balance sheet data
Total real estate and real estate-related investments, net	$	~~518,836~~	$	503,617	$	~~533,940~~		$	~~320~~518,~~765~~836		$	~~113,345~~	$	533,940	$	~~43,374~~		$	320,765	$	113,345
Total assets	~~562,478~~		543,483		~~582,515~~			~~383~~562,~~214~~478			~~139,729~~		582,515		~~57,873~~			383,214		139,729
Total notes payable, net	~~326,543~~		325,995		~~328,351~~			~~208~~326,~~581~~543			~~60,836~~		328,351		~~25,341~~			208,581		60,836
Total liabilities	~~358,040~~		353,241		~~360,606~~			~~221~~358,~~125~~040			~~67,895~~		360,606		~~27,215~~			221,125		67,895
Redeemable common stock	—		—		~~2,611~~			~~2,121~~—			~~1,092~~		2,611		—			2,121		1,092
Total equity	~~204,438~~		190,242		~~219,298~~			~~159~~204,~~968~~438			~~70,742~~		219,298		~~30,658~~			159,968		70,742
	~~For the Years Ended December 31,~~		For the Years Ended December 31,
Operating data	~~2018~~		2019		~~2017~~			~~2016~~2018			~~2015~~		2017		~~2014~~			2016		2015
Total revenues	$	~~70,282~~	$	68,741	$	~~51,968~~		$	3170,~~320~~282		$	~~17,025~~	$	51,968	$	~~184~~		$	31,320	$	17,025
Class A Common Stock:
Net loss attributable to common stockholders	~~(13,729~~		(4,458)		~~(1,480~~		)	(513,~~421~~729)		)	~~(1,861~~		(1,480)		~~(2,132~~		)	(5,421)		(1,861)
Net loss per common share - basic and diluted	~~(0.77~~		(0.25)		~~(0.09~~		)	(0.4177)		)	~~(0.25~~		(0.09)		~~(0.64~~		)	(0.41)		(0.25)
Class T Common Stock:
Net loss attributable to common stockholders	~~(9,779~~		(3,041)		~~(1,792~~		)	(19,~~069~~779)		)	~~(195~~		(1,792)		~~(324~~		)	(1,069)		(195)
Net loss per common share - basic and diluted	~~(0.82~~		(0.25)		~~(0.18~~		)	(0.4582)		)	~~(0.38~~		(0.18)		~~(0.64~~		)	(0.45)		(0.38)
Other data
Cash flows provided by (used in) operating activities	$	4,615			$	8,829		$	704		$	434			$	(1,394	)
Cash flows (used in) provided by operating activities			$	(95)				$	4,615				$	8,829				$	704	$	434
Cash flows used in investing activities	(20,042		)		(203,399		)	(221,728		)	(69,467		)		(43,358		)
Cash flows provided by (used in) investing activities			5,398					(20,042)					(203,399)					(221,728)		(69,467)
Cash flows provided by financing activities	7,232				182,497			242,784			80,598				57,840
Cash flows (used in) provided by financing activities			(8,685)					7,232					182,497					242,784		80,598
Distributions declared	~~5,007~~		3,379		~~3,920~~			15,~~027~~007			—		3,920		—			1,027		—
Distributions declared per common share - Class A	$	~~0.191~~	$	0.112	$	~~0.191~~		$	0.~~202~~191		$	~~0.120~~	0.191		$	—		$	0.202	$	0.120
Distributions declared per common share - Class T	$	~~0.138~~	$	0.112	$	~~0.098~~		$	0.~~123~~138		$	—	$	0.098	$	—		$	0.123	$	—
Stock dividends declared per common share	~~0.018~~		—		~~0.020~~			0.~~035~~018			~~0.100~~		0.020		—			0.035		0.100
Weighted-average number of common shares outstanding, basic and diluted - Class A	~~17,775,503~~		17,949,301		~~16,096,216~~			1317,~~158~~775,~~129~~503			~~7,553,934~~		16,096,216		~~3,352,021~~			13,158,129		7,553,934
Weighted-average number of common shares outstanding, basic and diluted - Class T	~~11,864,178~~		12,241,271		~~9,797,325~~			211,~~377~~864,~~436~~178			~~509,329~~		9,797,325		~~509,329~~			2,377,436		509,329

Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the “Selected Financial Data” above and our accompanying consolidated financial statements and the notes thereto. Also, see “Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K.

Table of Contents

Overview

We were formed on February 6, 2013 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2014. On July 3, 2013, we commenced a private placement offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to offer a maximum of $105,000,000 of shares of common stock for sale to certain accredited investors, of which $5,000,000 of shares were offered pursuant to our dividend reinvestment plan. We ceased offering shares in our private offering on August 11, 2014. KBS Capital Markets Group LLC, an affiliate of our former advisor, served as the dealer manager of the offering pursuant to a dealer manager agreement and was responsible for marketing our shares in the offering.

We have used substantially all of the net proceeds from our offerings to invest in and manage a portfolio of opportunistic real estate, real estate-related loans, real estate equity securities and other real estate-related investments located in the United States and Europe. As of December 31, ~~2018~~2019, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, antwo ~~investment~~investments in an unconsolidated ~~entity~~entities and an investment in real estate equity securities. Additionally, as of December 31, ~~2018~~2019, we had entered into a consolidated joint venture to develop one office/retail property.

We sold 11,977,758 and 11,537,701 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of $228.6 million in our initial public primary offering. As of December 31, ~~2018~~2019, we had sold ~~602~~723,~~462~~641 and ~~225~~333,~~137~~841 shares of Class A and Class T common stock, respectively, under our dividend reinvestment plan for aggregate gross offering proceeds of $79.68 million. Also as of December 31, ~~2018~~2019, we had redeemed ~~443~~718,~~543~~962 and 63107,~~926~~945 shares of Class A and Class T common stock, respectively, for $47.4 million.

We have no employees and KBS Capital Advisors LLC (“KBS Capital Advisors”) has served as our external advisor since commencement of the private offering. As our advisor, KBS Capital Advisors manages our day-to-day operations and manages our portfolio of real estate properties and real estate-related investments. KBS Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. 62

Market Outlook - Real Estate and Real Estate Finance Markets

Volatility in global financial markets and changing political environments can cause fluctuations in the performance of the U.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Increases in the cost of financing due to higher interest rates may cause difficulty in refinancing debt obligations prior to or at maturity or at terms as favorable as the terms of existing indebtedness. Further, increases in interest rates would increase the amount of our debt payments on our variable rate debt to the extent the interest rates on such debt are not limited by interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.

Table of Contents

We have no employees and KBS Capital Advisors LLC (“KBS Capital Advisors”) had served as our external advisor since commencement of the private offering. On October 31, 2019, KBS Capital Advisors ceased to serve as our advisor or have any advisory responsibility to us immediately following the filing of our Quarterly Report on Form 10-Q for the period ending September 30, 2019 with the SEC. On November 1, 2019, we entered into a new advisory agreement with Pacific Oak Capital Advisors, LLC (“Pacific Oak Capital Advisors”). The new advisory agreement is effective as of November 1, 2019 through November 1, 2020; however we may terminate the advisory agreement without cause or penalty upon providing 30 days’ written notice and Pacific Oak Capital Advisors may terminate the advisory agreement without cause or penalty upon providing 90 days’ written notice. The terms of the advisory agreement are consistent with those of the advisory agreement that was previously in effect with KBS Capital Advisor. As our advisor, Pacific Oak Capital Advisors manages our day-to-day operations and managed our portfolio of real estate properties and real estate-related investments. Pacific Oak Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf.

Market Outlook - Real Estate and Real Estate Finance Markets

Liquidity and Capital Resources

Our principal demand for funds during the short and long-term is and will be for the payment of operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; capital commitments and development expenses under our joint venture agreements; and payments of distributions to stockholders.

To date, we have had ~~four~~five primary sources of capital for meeting our cash requirements:

• Proceeds from the primary portion of our initial public offering;

• Proceeds from our dividend reinvestment plan;

• Proceeds from the sale of real estate and the repayment of a real estate loan receivable;

• Debt financings; and

• Cash flow generated by our real estate investments.

We had sold 11,977,758 and 11,537,701 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of $228.6 million in our initial public offering. Additionally, we sold 3,619,851 shares of common stock in our private offering for gross offering proceeds of $32.2 million. We ceased offering shares of common stock in our initial public primary offering on July 31, 2018 and terminated our initial public primary offering on September 28, 2018.

To date, we have invested a significant amount of the proceeds from the primary public offering in real estate and do not anticipate making additional real estate acquisitions due to the termination of the primary portion of our initial public offering on July 31, 2018. We intend to use our cash on hand, cash flow generated by our real estate operations and proceeds from our dividend reinvestment plan as our primary sources of immediate and long-term liquidity.

As of December 31, 2018, we had invested in two hotel properties, four office properties, one apartment building, an investment in an unconsolidated entity and an investment in real estate equity securities. Additionally, as of December 31, 2018, we had entered into a consolidated joint venture to develop one retail property.63

Our office and apartment properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from office and apartment properties is primarily dependent upon the occupancy level of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of December 31, 2018, we owned four office properties that were 70% occupied and one apartment property that was 95% occupied.

Our hotel properties generate cash flow in the form of room, food, beverage and convention services, campground and other revenues, which are reduced by hotel expenses, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our hotel properties are primarily dependent upon the occupancy levels of our hotels, the average daily rates and how well we manage our expenditures. The following table provides summary information regarding our hotel properties as of December 31, 2018:

Property	Number of Rooms	Percentage Occupied for the Year Ended December 31, 2018	Average Daily Rate	Average Revenue per Available Room
Springmaid Beach Resort	452	60.6%	$157.47	$95.47
Q&C Hotel	196	77.8%	$158.92	$123.69

Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As of December 31, 2018, we had an investment in real estate equity securities outstanding with a total book value of $7.2 million.

As of December 31, 2018, we had mortgage debt obligations in the aggregate principal amount of $328.8 million, with a weighted-average remaining term of 1.8 years. As of December 31, 2018, an aggregate amount of $31.8 million was available under our mortgage loans for future disbursements to be used for capital improvement costs, tenant improvement costs, leasing commissions and expenses and operating/interest shortfall, subject to certain terms and conditions contained in the loan documents.

We expect to use our capital resources to make certain payments to our advisor in connection with the management of our assets and costs incurred by our advisor in providing services to us. Our currently effective advisory agreement expires August 12, 2019 and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of KBS Capital Advisors and our conflicts committee.

Table of Contents

As of December 31, 2019, we had invested in two hotel properties, three office properties, one apartment building, two investments in unconsolidated entities and an investment in real estate equity securities. Additionally, as of December 31, 2019, we had entered into a consolidated joint venture to develop one office/retail property.

Our office and apartment properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from office and apartment properties is primarily dependent upon the occupancy level of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of December 31, 2019, we owned three office properties that were 68% occupied and one apartment property that was 93% occupied.


		Percentage Occupied for the Year Ended			Average Daily Rate for the Year Ended			Average Revenue per Available Room for the Year Ended
Property	Number of Rooms	2019	2018	2019	2018	2019	2018
Springmaid Beach Resort	453	65.0%	60.6%	$138.06	$157.47	$89.80	$95.47
Q&C Hotel	196	73.3%	77.8%	$165.37	$158.92	$121.13	$123.69

Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As of December 31, 2019, we had an investment in real estate equity securities outstanding with a total book value of $9.9 million.

As of December 31, 2019, we had mortgage debt obligations in the aggregate principal amount of $329.6 million, with a weighted-average remaining term of 2.0 years. As of December 31, 2019, an aggregate amount of $47.2 million was available under our mortgage loans for future disbursements to be used for capital improvement costs, tenant improvement costs, leasing commissions and expenses and operating/interest shortfall, subject to certain terms and conditions contained in the loan documents.

We expect to use our capital resources to make certain payments to our advisor in connection with the management of our assets and costs incurred by our advisor in providing services to us. Our currently effective advisory agreement expires November 1, 2020 and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee.

Among the fees payable to our advisor is an asset management fee. We pay our advisor a monthly fee equal to the lesser of one-twelfth of (i) 1.0% of the cost of our investments and (ii) 2.0% of the sum of the cost of our investments, less any debt secured by or attributable to the investments. The cost of the real property investments is calculated as the amount paid or allocated to acquire the real property, including the cost of any subsequent development, construction or improvements to the property and including fees and expenses related thereto (but excluding acquisition fees paid or payable our advisor). The cost of the loans and any investments other than real property is calculated as the lesser of (x) the amount actually paid or allocated to acquire or fund the loan or other investment, including fees and expenses related thereto (but excluding acquisition fees paid or payable to our advisor) and (y) the outstanding principal amount of such loan or other investment, including fees and expenses related to the acquisition or funding of such investment (but excluding acquisition fees paid or payable to our advisor) as of the time of calculation. In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment.

We elected to be taxed and to operate as a REIT beginning with our taxable year ended December 31, 2014. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended December 31, 2018 did not exceed the charter imposed limitation.64

Table of Contents

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Total operating expenses for the four fiscal quarters ended December 31, 2019 did not exceed the charter imposed limitation.

Cash Flows from Operating Activities

We commenced operations on September 4, 2014 in connection with our first investment. As of December 31, ~~2018~~2019, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, antwo ~~investment~~investments in an unconsolidated ~~entity~~entities and an investment in real estate equity securities. Additionally, as of December 31, ~~2018~~2019, we had entered into a consolidated joint venture to develop one office/retail property. During the year ended December 31, ~~2018~~2019, net cash ~~provided~~used byin operating activities was $40.61 million. We expect that our cash flows from operating activities will generally increase in future years as a result of leasing additional space that is currently unoccupied and owning real estate equity securities acquired during ~~2018~~2019 for an entire period.

Cash Flows from Investing Activities

Net cash ~~used~~provided inby investing activities was $205.04 million for the year ended December 31, ~~2018~~2019 and primarily consisted of the following:

• $917.27 million ~~investment~~of indisposition of real estate ~~equity securities~~;

• $814.91 million of improvements to real estate;

• $5.71 million of ~~payments~~distribution ~~for~~of acapital ~~construction~~from ~~project~~unconsolidated joint venture; and

• $32.59 million of ~~cash~~investment ~~received~~ in ~~connection~~an ~~with~~unconsolidated ~~the~~joint ~~real estate loan receivable payoff; and~~venture.

• $0.2 million of proceeds from insurance claims.

Cash Flows from Financing Activities

Net cash ~~provided~~used byin financing activities was $78.27 million for the year ended December 31, ~~2018~~2019 and primarily consisted of the following:

• $152.54 million of net cash ~~provided~~used byin ~~offering~~debt ~~proceeds~~and ~~related~~other tofinancings ~~our~~as ~~initial~~a ~~public~~result ~~offering,~~of ~~net~~principal payments on notes payable of $179.4 million and payments of ~~commissions~~deferred financing costs of $3.2 million, ~~dealer~~partially ~~manager~~offset ~~fees~~by ~~and~~proceeds ~~stockholder~~from ~~servicing~~notes ~~fees~~payable of $1180.62 million;

• $3.50 million of ~~net~~ cash used infor ~~debt~~redemptions ~~and other financings as a result~~ of ~~principal~~common ~~payments on notes payable of $5.5 million and payments of deferred financing costs of $0.3 million, partially offset by proceeds from notes payable of $2.3 million~~stock;

• $21.49 million of ~~cash~~distributions ~~used~~to ~~for~~noncontrolling ~~redemptions of common stock~~interest;

• $1.94 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $32.02 million;

• $10.2 million of ~~payments~~noncontrolling ofinterest ~~other offering costs~~contributions; and

• $10.42 million of ~~noncontrolling~~principal ~~interest~~payments ~~contributions;~~on capital lease obligations.

•In $0order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio.5 ~~million~~Management remains vigilant in monitoring the risks inherent with the use of ~~distributions~~debt in our portfolio and is taking actions to ~~noncontrolling~~ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. We expect our debt financing will be 60% or less of the cost of our tangible assets (before deducting depreciation or other non-cash reserves). There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets (before deducting depreciation or other non-cash reserves); however, we may exceed that limit if a majority of the Conflicts Committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of December 31, 2019, our borrowings and other liabilities were approximately 60% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

~~• $0.2 million of principal payments on capital lease obligations.~~65

Table of Contents

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. We expect our debt financing will be 60% or less of the cost of our tangible assets (before deducting depreciation or other non-cash reserves). There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets (before deducting depreciation or other non-cash reserves); however, we may exceed that limit if a majority of the Conflicts Committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of December 31, 2018, our borrowings and other liabilities were approximately 60% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of December 31, ~~2018~~2019 (in thousands):

			~~Payments Due During the Years Ending December 31,~~				Payments Due During the Years Ending December 31,
Contractual Obligations	~~Total~~		~~2019~~Total		~~2020-2021~~		2020		~~2022-2023~~		~~Thereafter~~2021-2022		2023-2024		Thereafter
Outstanding debt obligations (1)	$	~~328,814~~	$	~~171~~329,~~022~~595	$	~~64,942~~	$	79,931	$	~~92,850~~	$	—249,664	$	—	$	—
Interest payments on outstanding debt obligations (2)	~~28,211~~		1628,~~116~~048		~~9,574~~		13,076		~~2,521~~		—14,972		—		—
Capital lease obligations	56,886		695		1,415				1,460		53,316
Finance lease obligations			56,251				740				1,670		885		52,956

_____________________

⁽¹⁾ Amounts include principal payments only.

(2) Projected interest payments are based on the outstanding principal amounts and interest rates in effect at December 31, ~~2018~~2019. We incurred interest expense of $1618.90 million, excluding amortization of deferred financing costs of $1.78 million and unrealized loss on interest rate cap of $~~23,000 and including interest capitalized of $3~~0.91 million for the year ended December 31, ~~2018~~2019.

Results of Operations

Overview

As of December 31, ~~2017 and 2018~~2019, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, ~~and~~ an investment in anreal ~~unconsolidated~~estate ~~entity.~~equity ~~Additionally,~~securities ~~as of December 31, 2017~~ and ~~2018,~~ we had entered into a consolidated joint venture to develop one office/retail property. AsWe ofalso ~~December 31, 2017, we had~~ invested in ~~one~~two ~~first~~investments ~~mortgage~~in ~~loan~~unconsolidated entities, ~~which~~with ~~was~~one ~~repaid~~investment inacquired ~~full~~during ~~on January 12, 2018. During~~ the year ended December 31, ~~2018, we invested in an investment in real estate equity securities~~2019. We funded the acquisitions of these investments with proceeds from our terminated offerings and debt financing. Our results of operations for the year ended December 31, ~~2018~~2019 are not indicative of those in future periods as we expect that our revenue and expenses related to our portfolio will increase in future periods as the occupancies at our properties stabilize as discussed below. Our investment objectives include acquiring properties with significant possibilities for short-term capital appreciation, such as non-stabilized properties, properties with moderate vacancies or near-term lease rollovers, poorly managed and positioned properties, properties owned by distressed sellers and built-to-suit properties. As of December 31, ~~2018~~2019, the occupancy in our properties has not been stabilized. However, due to the amount of near-term lease expirations, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our assets will increase, or that we will recognize a gain on the sale of our assets. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and improving our properties but decrease due to disposition activity.

As 57of December 31, 2018, we had invested in two hotel properties, four office properties, one apartment building, an investment in real estate equity securities and we had entered into a consolidated joint venture to develop one office/retail property. We also invested in an investment in an unconsolidated entity. We funded the acquisitions of these investments with proceeds from our terminated offerings and debt financing.

Table of Contents

Comparison of the year ended December 31, ~~2018~~2019 versus the year ended December 31, ~~2017~~2018

The following table provides summary information about our results of operations for the years ended December 31, ~~2018~~2019 and ~~2017~~2018 (dollar amounts in thousands):

	~~Years Ended December 31,~~		Years Ended December 31,					~~Increase (Decrease)~~			~~Percentage Change~~			~~$ Change Due to Acquisitions/Repayments (1)~~			~~$ Change Due to Investments Held Throughout Both Periods (2)~~	Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/Repayments (1)		$ Change Due to Investments Held Throughout Both Periods (2)
	2018				2017
			2019					2018
Hotel revenues	$	~~32,666~~	$	31,381	$	~~28,994~~		$	332,~~672~~666		13	%	$	$(1,285)	—		$	~~3,672~~(4)		%	$	—	$	(1,285)
Office revenues	~~29,941~~		28,830		~~15,607~~			1429,~~334~~941			92	%	(1,111)	~~14,385~~			~~(51~~	(4)	)	%	(215)		(896)
Apartment revenues	~~7,469~~		8,112		~~6,980~~			~~489~~7,469			7	%	643	—			~~489~~	9		%	—		643
Dividend income from real estate equity securities	~~196~~		418		—			196			~~n/a~~		222	~~196~~			—	113		%	—		222
Interest income from real estate loan receivable	10		—		~~387~~			~~(377~~10		)	~~(97~~	)%	(10)	~~(377~~		)	—	(100)		%	(10)		—
Hotel expenses	~~22,907~~		22,770		~~19,187~~			322,~~720~~907			19	%	(137)	—			~~3,720~~	(1)		%	—		(137)
Office expenses	~~12,322~~		13,705		~~5,372~~			612,~~950~~322			~~129~~	%	1,383	~~6,534~~			~~416~~	11		%	(19)		1,402
Apartment expenses	~~3,779~~		3,554		~~3,624~~			~~155~~3,779			4	%	(225)	—			~~155~~	(6)		%	—		(225)
Asset management fees to affiliate	~~3,985~~		4,093		~~2,775~~			13,~~210~~985			44	%	108	~~996~~			~~214~~	3		%	(38)		146
General and administrative expenses	~~2,866~~		3,475		~~3,199~~			~~(333~~2,866		)	~~(10~~	)%	609	~~n/a~~			~~n/a~~	21		%	n/a		n/a
Depreciation and amortization	~~20,405~~		20,236		~~14,429~~			520,~~976~~405			41	%	(169)	~~6,235~~			~~(259~~	(1)	)	%	(109)		(60)
Interest expense	~~14,663~~		19,876		~~8,814~~			514,~~849~~663			66	%	5,213	~~3,922~~			~~1,927~~	36		%	(11)		5,224
Impairment charges on real estate	~~14,745~~		—		—			14,745			~~n/a~~		(14,745)	—			~~14,745~~	(100)		%	—		(14,745)
Other interest income	~~367~~		305		~~514~~			~~(147~~367		)	~~(29~~	)%	(62)	~~n/a~~			~~n/a~~	(17)		%	n/a		n/a
Equity in income of unconsolidated entity	~~339~~		2,800		54			~~285~~339			~~528~~	%	2,461	—			~~285~~	726		%	—		2,461
Loss on real estate equity securities	(1,924		)		—			(1,924		)	n/a			(1,924		)	—
Gain (loss) on real estate equity securities			2,704					(1,924)					4,628					(241)		%	4,628		—
Casualty-related income, net	—				1,614			(1,614		)	(100	)%		—			(1,614		)
Gain on sale of real estate			4,178					—					4,178					n/a			4,178		—
Income tax benefit (expense)	9				(48		)	57			(119	)%		—			57

_____________________

(1) Represents the dollar amount increase (decrease) for the year ended December 31, ~~2018~~2019 compared to the year ended December 31, ~~2017~~2018 related to real estate and real estate-related investments acquired, repaid or ~~repaid~~disposed on or after January 1, ~~2017~~2018.

(2) Represents the dollar amount increase (decrease) for the year ended December 31, ~~2018~~2019 compared to the year ended December 31, ~~2017~~2018 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

Hotel revenues ~~increased~~decreased from $2932.07 million for the year ended December 31, ~~2017~~2018 to $3231.74 million for the year ended December 31, ~~2018~~2019 primarily due to ~~the~~a ~~impact~~decrease ofin ~~Hurricane~~hotel ~~Matthew~~room inrevenues ~~October~~collected ~~2016,~~as ~~the~~a result of ~~which~~a ~~placed~~decrease ~~certain~~in ~~rooms~~average daily rate at Springmaid Beach Resort ~~out~~and ofa ~~service~~decrease ~~during~~in occupancy at Q&C Hotel. The average daily rate at Springmaid Beach Resort decreased from $157.47 for the year ended December 31, ~~2017~~2018 to $138.06 for the year ended December 31, 2019. Springmaid Beach Resort occupancy increased from 60.6% for the year ended December 31, 2018 to 65.0% for the year ended December 31, 2019. Q&C Hotel occupancy decreased from 77.8% for the year ended December 31, 2018 to 73.3% for the year ended December 31, 2019. We expect hotel revenues to vary in future periods based on occupancy and room rates.

Office revenues ~~increased~~decreased from $1529.69 million for the year ended December 31, ~~2017~~2018 to $2928.98 million for the year ended December 31, ~~2018~~2019 primarily asdue to a ~~result~~decrease ofin average occupancy to 68.3% for the ~~growth~~year inended ~~our~~December 31, ~~real~~2019 ~~estate~~compared ~~portfolio~~to 70% for the year ended December 31, 2018 and the disposition of 2200 Paseo Verde. We expect office revenues to vary in future periods based on occupancy rates and rental rates of our office properties, but to decrease to the extent we dispose of properties.

Apartment revenues increased from $7.05 million for the year ended December 31, ~~2017~~2018 to $78.51 million for the year ended December 31, ~~2018~~2019 primarily due to ~~increased~~overall ~~rental~~increase ~~income~~in ~~collected~~rent asper ~~a result of increased occupancy~~unit. ~~The occupancy of our apartment property increased from 85% as of December 31, 2017 to 95% as of December 31, 2018.~~ We expect apartment revenues to vary in future periods depending on occupancy rates and rental rates.

Dividend income from real estate equity securities ~~was~~increased from $0.2 million for the year ended December 31, 2018 to $0.4 million for the year ended December 31, 2019 due to the acquisition of real estate equity securities. We expect dividend income from real estate equity securities to vary in future periods as a result of declaration of dividends and to the extent we buy or sell any securities.

~~Interest~~Hotel ~~income~~expenses ~~from~~remained ~~our~~consistent ~~real~~at ~~estate~~$22.9 ~~loan~~million ~~receivable~~for the years ended December 31, ~~recognized~~2018 ~~using~~and ~~the~~2019. ~~interest~~Office ~~method,~~expenses ~~decreased~~increased from $012.43 million for the year ended December 31, ~~2017~~2018 to $~~10,000~~13.7 million for ~~the~~ year ended December 31, ~~2018~~2019 primarily as a result of (i) approximately $1.2 million of 210 West 31st Street expenses incurred during the ~~real~~year ~~estate~~ended ~~loan~~December 31, ~~receivable~~2019, which were previously capitalized to building and improvements prior to the development being ~~repaid~~placed inon ~~full~~hold on ~~January 12~~October 1, 2018. We expect total expenses to vary in future periods based on occupancy rates.

Hotel expenses increased from $19.2 million for the year ended December 31, 2017 to $22.9 million for year ended December 31, 2018 primarily due to an increase in occupancy rates. Office expenses increased from $5.4 million for the year ended December 31, 2017 to $12.3 million for year ended December 31, 2018 primarily as a result of the growth in our real estate portfolio. We expect total expenses to vary in future periods based on occupancy rates.67

Table of Contents

Asset management fees to affiliate increased from $24.80 million for the year ended December 31, ~~2017~~2018 to $4.01 million for year ended December 31, ~~2018~~2019 primarily as a result of ~~growth~~improvements ofmade at our ~~real estate portfolio~~properties. We expect asset management fees to increase in future periods as a result of any improvements we make to our properties ~~and~~but asto adecrease ~~result~~to ofthe ~~owning~~extent ~~our~~we ~~investment~~dispose inof ~~real estate equity securities acquired in 2018 for an entire period~~properties. Approximately $~~22,000~~0.6 million of asset management fees incurred were payable as of December 31, ~~2018~~2019.

General and administrative expenses ~~decreased~~increased from $3.2.9 million for the year ended December 31, ~~2017~~2018 to $23.95 million for year ended December 31, ~~2018~~2019 primarily asdue ~~a result of professional fees incurred during the year ended December 31, 2017 related~~ to ~~the Hurricane Matthew insurance claim, as well as a foreign currency gain of $0.1 million on our foreign currency forward contract, which is included as~~ an ~~offset~~increase toin ~~general~~legal ~~and administrative expenses during the year ended December 31, 2018~~costs. We expect general and administrative expenses to fluctuate in future periods based on our legal expenses and investment and disposition activity.

Depreciation and amortization expenses ~~increased~~decreased from $1420.4 million for the year ended December 31, ~~2017~~2018 to $20.42 million for the year ended December 31, ~~2018~~2019 primarily due to ~~the~~disposition ~~growth~~ of ~~our~~2200 ~~real~~Paseo ~~estate portfolio and improvements to real estate, partially offset by the effect of fully amortized assets related to properties held throughout both periods~~Verde. We expect depreciation and amortization expenses to vary in future periods as a result of a decrease in amortization related to fully amortized tenant origination and absorption costs and increase as a result of improvements to real estate.

Interest expense increased from $814.87 million for the year ended December 31, ~~2017~~2018 to $1419.79 million for the year ended December 31, ~~2018~~2019, primarily ~~due~~as toa ~~increased~~result ~~borrowings~~of inapproximately ~~connection~~$3.8 ~~with~~million ~~our~~of ~~acquisition~~210 ~~activity~~West ~~and~~31st ~~increased~~Street ~~one-month~~interest ~~LIBOR~~expense ~~rates~~incurred during the year ended December 31, 2019, which was previously capitalized to building and improvements prior to the development being placed on hold on October 1, 2018. Excluded from interest expense was $3.9 million ~~and $4.1 million~~ of interest capitalized to building and improvements during the years ended December 31, 2018 ~~and 2017, respectively~~. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the availability and cost of debt financing. The increase in interest expense due to increases in LIBOR rates would be minimized somewhat to the extent rates are above the strike rates on our interest rate cap instruments.

During the year ended December 31, 2018, we recorded impairment charges in the aggregate of $14.7 million to write-down the carrying value of 210 West 31st Street, a development property located in New York, New York, to its estimated fair value of $54.9 million due to a change in the projected hold period and related decrease in projected cash flows. We purchased 210 West 31st Street for $48.0 million plus $1.8 million of closing costs. Since acquisition in December 2016, we have capitalized $6.8 million related to a ~~capital~~finance lease asset, $3.8 million in development costs and $9.2 million of other certain costs such as financing costs, real estate taxes and insurance costs that have been capitalized to building and improvements.

~~Loss~~During onthe ~~real~~year ~~estate~~ended ~~equity~~December 31, ~~securities~~2019, ~~was~~we recognized $12.98 million ~~during~~of ~~the~~equity ~~year~~income ~~ended~~from ~~December 31,~~unconsolidated ~~2018,~~entity ~~primarily~~ as a result of athe ~~decrease~~liquidation ~~in share price~~ of ~~our~~the ~~investment~~underlying inportfolio ~~real~~related ~~estate~~to ~~equity~~our ~~securities~~STAM investment.

~~Casualty-related~~Gain ~~income~~on real estate equity securities was $2.7 million during the year ended December 31, ~~net~~2019, primarily as a result of a increase in share price of our investment in real estate equity securities. Loss on real estate equity securities was $1.69 million ~~for~~during the year ended December 31, ~~2017~~2018, ~~which~~primarily ~~related~~as toa ~~the~~result ~~insurance~~of ~~claim~~a ~~settlement~~decrease in ~~connection~~share ~~with~~price of our investment in real estate equity securities We expect gain (loss) on real estate equity securities to fluctuate in future periods as a result of changes in the ~~impact~~share price of ~~Hurricane~~our ~~Matthew~~investment atin ~~the~~real ~~Springmaid~~estate ~~Beach~~equity ~~Resort~~securities.

Gain 59on sale of real estate was $4.2 million for the year ended December 31, 2019, due to the disposition of 2200 Paseo Verde.

For a discussion of the year ended December 31, 2018 compared to the year ended December 31, 2017, please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on March 8, 2019 and is incorporated herein by reference.

Table of Contents

Comparison of the year ended December 31, 2017 versus the year ended December 31, 2016

The following table provides summary information about our results of operations for the years ended December 31, 2017 and 2016 (dollar amounts in thousands):

	Years Ended December 31,				Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions(1)			$ Change Due to Investments Held Throughout Both Periods(2)
	2017		2016
Hotel revenues	$	28,994	$	24,807	$	4,187		17	%	$	—		$	4,187
Office revenues	15,607		5,224		10,383			199	%	10,398			(15		)
Apartment revenues	6,980		890		6,090			684	%	6,090			—
Interest income from real estate loans receivable	387		399		(12		)	(3	)%	—			(12		)
Hotel expenses	19,187		17,592		1,595			9	%	—			1,595
Office expenses	5,372		1,378		3,994			290	%	3,925			69
Apartment expenses	3,624		353		3,271			927	%	3,271			—
Asset management fees to affiliate	2,775		1,340		1,435			107	%	1,383			52
Real estate acquisition fees and expenses to affiliate	—		3,759		(3,759		)	(100	)%	(3,759		)	—
Real estate acquisition fees and expenses	—		946		(946		)	(100	)%	(946		)	—
General and administrative expenses	3,199		2,703		496			18	%	n/a			n/a
Depreciation and amortization	14,429		7,848		6,581			84	%	6,747			(166		)
Interest expense	8,814		3,797		5,017			132	%	4,992			25
Casualty-related income, net	1,614		1,394		220			16	%	—			220

_____________________

(1) Represents the dollar amount increase (decrease) for the year ended December 31, 2017 compared to the year ended December 31, 2016 related to real estate acquired on or after January 1, 2016.

(2) Represents the dollar amount increase (decrease) for the year ended December 31, 2017 compared to the year ended December 31, 2016 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

Hotel revenues increased from $24.8 million for the year ended December 31, 2016 to $29.0 million for the year ended December 31, 2017 primarily due to $5.8 million of business interruption insurance recovery, partially offset by the impact of Hurricane Matthew in October 2016, the result of which placed certain rooms at Springmaid Beach Resort out of service during the year ended December 31, 2017.

Office revenues increased from $5.2 million for the year ended December 31, 2016 to $15.6 million for the year ended December 31, 2017 primarily as a result of the growth in our real estate portfolio.

Apartment revenues increased from $0.9 million for the year ended December 31, 2016 to $7.0 million for the year ended December 31, 2017 as a result of owning the apartment property acquired in 2016 for an entire period.

Interest income from our real estate loan receivable, recognized using the interest method, remained consistent at approximately $0.4 million for the years ended December 31, 2017 and 2016.

Hotel expenses increased from $17.6 million for the year ended December 31, 2016 to $19.2 million for year ended December 31, 2017 primarily due to increased property taxes and increased sales and marketing costs in connection with the re-branding strategy of our hotel properties. Office expenses increased from $1.4 million for the year ended December 31, 2016 to $5.4 million for year ended December 31, 2017 primarily as a result of the growth in our real estate portfolio. Apartment expenses increased from $0.4 million for the year ended December 31, 2016 to $3.6 million as a result of owning the apartment property acquired in 2016 for an entire period.

Asset management fees to affiliate increased from $1.3 million for the year ended December 31, 2016 to $2.8 million for year ended December 31, 2017 primarily as a result of growth of our real estate portfolio.

Real estate acquisition fees and expenses to affiliate and non-affiliates were $4.7 million for the year ended December 31, 2016. During the year ended December 31, 2017, we did not acquire any investments accounted for as business combinations. We adopted ASU No. 2017-01 for the reporting period beginning January 1, 2017. As a result of the adoption of ASU No. 2017-01, our acquisitions of real estate properties beginning January 1, 2017 qualified as asset acquisitions as opposed to business combinations. Transaction costs associated with asset acquisitions are capitalized, while transaction costs associated with business combinations will continue to be expensed.

Table of Contents

Depreciation and amortization expenses increased from $7.8 million for the year ended December 31, 2016 to $14.4 million for the year ended December 31, 2017 primarily due to the growth of our real estate portfolio, partially offset by the effect of fully amortized assets related to properties held throughout both periods.

Interest expense increased from $3.8 million for the year ended December 31, 2016 to $8.8 million for the year ended December 31, 2017 primarily due to increased borrowings in connection with our acquisition activity. Excluded from interest expense was $4.1 million and $0.4 million of interest capitalized to building and improvements and capital lease obligations during the years ended December 31, 2017 and 2016, respectively.

Casualty-related income, net was $1.6 million for the year ended December 31, 2017 which related to the insurance claim settlement in connection with the impact of Hurricane Matthew at the Springmaid Beach Resort. Casualty-related income, net was $1.4 million for the year ended December 31, 2016 which related to property damages and insurance recoveries related to the impact of Hurricane Matthew at the Springmaid Beach Resort.

Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. In addition, we elected the option to exclude mark-to-market changes in value recognized on equity securities in the calculation of FFO. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses); adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Institute for Portfolio Alternatives (“IPA”) in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land.

Table of Contents

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs (to the extent that such costs have been recorded as operating expenses) from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, acquisition fees and expenses and mark-to-market adjustments included in net income are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:69

• Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

• Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate;

• Acquisition fees and expenses. Prior to our early adoption of ASU No. 2017-01 on January 1, 2017, acquisition fees and expenses related to the acquisition of real estate were generally expensed. Although these amounts reduce net income, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis. Additionally, acquisition fees and expenses have been funded from the proceeds from our offerings and debt financings and not from our operations. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance; and

• Mark to Market adjustments included in net income. These are fair value adjustments to derivative instruments. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect core operating performance.

Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain renovation projects. We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net income (loss), FFO and MFFO.

Table of Contents

~~Our~~Although ~~calculation~~MFFO ofincludes ~~FFO~~other adjustments, ~~which~~the weexclusion ~~believe~~of isstraight-line ~~consistent~~rent, ~~with~~ the ~~calculation~~amortization of ~~FFO~~above- asand ~~defined~~below-market byleases ~~NAREIT,~~and ismark-to-market ~~presented~~adjustments included in ~~the~~net ~~following~~income ~~table,~~are ~~along~~the ~~with~~most ~~our~~significant ~~calculations~~adjustments ~~of MFFO and Adjusted MFFO,~~ for the ~~years~~periods ~~ended December 31, 2018, 2017 and 2016 (in thousands)~~presented. NoWe ~~conclusions~~have orexcluded ~~comparisons~~these ~~should~~items bebased ~~made~~on ~~from~~ the ~~presentation~~following ofeconomic ~~these periods.~~considerations:

	For the Years Ended December 31,
	2018			2017			2016
Net loss attributable to common stockholders	$	(23,508	)	$	(3,272	)	$	(6,490	)
Depreciation of real estate assets	13,219			9,039			5,151
Amortization of lease-related costs	7,186			5,390			2,697
Impairment charges on real estate	14,745			—			—
Loss on real estate equity securities	1,924			—			—
Adjustments for noncontrolling interests (1)	(3,302		)	(758		)	(485		)
Adjustments for investment in unconsolidated entity (2)	(26		)	—			—
FFO attributable to common stockholders (3)	10,238			10,399			873
Straight-line rent and amortization of above- and below-market leases	(4,845		)	(2,802		)	(773		)
Amortization of discounts and closing costs	—			(58		)	(70		)
Unrealized (gain) loss on derivative instruments	(124		)	175			97
Real estate acquisition fees to affiliate	—			—			3,759
Real estate acquisition fees and expenses	—			—			946
Adjustments for noncontrolling interests (1)	(22		)	(21		)	(82		)
MFFO attributable to common stockholders (3)	5,247			7,693			4,750
Other capitalized operating expenses (4)	(998		)	(641		)	(180		)
Casualty-related income, net (5)	—			(1,614		)	(1,394		)
Adjustments for noncontrolling interests - consolidated entity (1)	—			161			154
Adjusted MFFO attributable to common stockholders (3)	$	4,249		$	5,599		$	3,330

•Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

•Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate; and

•Mark to Market adjustments included in net income. These are fair value adjustments to derivative instruments. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect core operating performance.

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the years ended December 31, 2019, 2018 and 2017 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.


	For the Years Ended December 31,
	2019		2018		2017
Net loss attributable to common stockholders	$	(7,499)	$	(23,508)	$	(3,272)
Depreciation of real estate assets	14,433		13,219		9,039
Amortization of lease-related costs	5,803		7,186		5,390
Gain on sale of real estate	(4,178)		—		—
Impairment charges on real estate	—		14,745		—
(Gain) loss on real estate equity securities	(2,704)		1,924		—
Adjustments for noncontrolling interests⁽¹⁾	(985)		(3,302)		(758)
Adjustments for investment in unconsolidated entity⁽²⁾	(2,800)		(26)		—
FFO attributable to common stockholders ⁽³⁾	2,070		10,238		10,399
Straight-line rent and amortization of above- and below-market leases	(3,221)		(4,845)		(2,802)
Loss on extinguishment of debt	105		—		—
Amortization of discounts and closing costs	—		—		(58)
Unrealized loss (gain) on derivative instruments	5		(124)		175


Adjustments for noncontrolling interests ⁽¹⁾	(25)		(22)		(21)
MFFO attributable to common stockholders ⁽³⁾	(1,066)		5,247		7,693
Other capitalized operating expenses ⁽⁴⁾	—		(998)		(641)
Casualty-related income, net ⁽⁵⁾	87		—		(1,614)
Adjustments for noncontrolling interests - consolidated entity ⁽¹⁾	(9)		—		161
Adjusted MFFO attributable to common stockholders ⁽³⁾	$	(988)	$	4,249	$	5,599

_____________________

⁽¹⁾ Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net income (loss) attributable to common stockholders to FFO, MFFO and Adjusted MFFO.

⁽²⁾ Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net (loss) income attributable to common stockholders to FFO for our equity investment in an unconsolidated entity.

⁽³⁾ FFO, MFFO and Adjusted MFFO includes $5.8 million of business interruption insurance recovery for the year ended December 31, 2017.

⁽⁴⁾ Reflects real estate taxes, property insurance and financing costs that are capitalized with respect to certain renovation projects but excluding development projects. During the time in which we are incurring costs necessary to bring these investments to their intended use, certain financing costs are capitalized in accordance with GAAP and not reflected in our net loss, FFO and MFFO.

(5) Reflects property damages and insurance recoveries related to the impact of Hurricane Matthew at the Springmaid Beach Resort. We exclude them from Adjusted MFFO to more appropriately present the ongoing operating ~~performance~~perfor,mance of our real estate investments on a comparative basis. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance.

Table of Contents

FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we continue to lease up vacant space and acquire additional assets. We expect FFO, MFFO and Adjusted MFFO to increase as a result of stabilizing occupancies at our properties.

Organization and Offering Costs

Our organization and offering costs (other than selling commissions, dealer manager fees and the stockholder servicing fee) were paid by our advisor, the dealer manager or their affiliates on our behalf or paid directly by us. These offering costs include all expenses incurred in connection with our offerings. Organization costs include all expenses incurred in connection with our formation, including but not limited to legal fees and other costs to incorporate.

We recorded $1.0 million of offering costs (other than selling commissions and dealer manager fees) related to our private offering, all of which were initially paid by our advisor or its affiliates on our behalf and subsequently reimbursed by us. In addition, we paid $1.9 million in selling commissions and dealer manager fees related to our private offering.

Table of Contents

During our initial public offering, pursuant to the advisory agreement and dealer manager agreement, we were obligated to reimburse our advisor, the dealer manager or their affiliates, as applicable, for organization and other offering costs paid by them on behalf of us, provided that no reimbursements made by us to our advisor or the dealer manager could cause total organization and offering expenses incurred by us in connection with our initial public offering (including selling commissions, dealer manager fees and the stockholder servicing fees) to exceed 15% of the aggregate gross proceeds from our initial public offering as of the date of reimbursement. In addition, our advisor and its affiliates reimbursed us to the extent that the organization and other offering expenses (which exclude selling commissions, dealer manager fees and stockholder servicing fees) paid directly or reimbursed by us in connection with the primary portion of our initial public offering, regardless of when incurred, exceeded 1.0% of gross offering proceeds from the primary portion of our initial public offering. Our advisor and its affiliates are responsible for any organization and other offering expenses related to the primary portion of our initial public offering to the extent they exceed 1.0% of gross proceeds from the primary portion of the public offering as of the termination of the primary portion of our initial public offering.

Through December 31, ~~2018~~2019, our advisor and its affiliates had incurred organization and other offering costs (which exclude selling commissions dealer manager fees and stockholder servicing fees) on our behalf in connection with our initial public offering of approximately $11.4 million. As of December 31, ~~2018~~2019, we had recorded $1416.54 million in selling commissions and dealer manager fees and $1.7 million of stockholder servicing fees. As of December 31, ~~2018~~2019, we had recorded $2.38 million of other organization and offering expenses, which amounts represent our maximum liability for organization and other offering costs as of December 31, ~~2018~~2019 based on the 1.0% limitation described above.

Distributions

From time to time during our operational stage we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from debt financing. Distributions declared, distributions paid and cash flow provided by operations during 2018 were as follows (in thousands, except per share amounts):71

	Distributions Declared (1)		Distributions Declared PerClass A Share(1) (2)		Distributions Declared PerClass T Share(1) (2)		Distributions Paid (3)						Cash Flows (Used in) Provided by Operations
Period							Cash		Reinvested		Total
First Quarter 2018	$	1,082	$	0.047	$	0.024	$	407	$	665	$	1,072	$	(1,928	)
Second Quarter 2018	1,124		0.048		0.025		435		691		1,126		4,494
Third Quarter 2018	1,349		0.048		0.041		480		770		1,250		3,037
Fourth Quarter 2018	1,452		0.048		0.048		539		902		1,441		(988		)
	$	5,007	$	0.191	$	0.138	$	1,861	$	3,028	$	4,889	$	4,615

Table of Contents

~~(1)~~From ~~Distributions~~time ~~for~~to ~~the~~time ~~period~~during ~~from~~our ~~January~~operational 1,stage ~~2018~~we ~~through~~may ~~November 30,~~not ~~2018~~pay ~~were~~distributions ~~based~~solely onfrom ~~daily~~our ~~record~~cash ~~dates~~flow ~~and~~from ~~were~~operating ~~calculated~~activities, atin awhich ~~rate~~case ofdistributions ~~(i)~~may ~~$0.00052548~~be ~~per~~paid ~~share~~in ~~per~~whole ~~day~~or ~~less~~in ~~(ii)~~part ~~the~~from ~~applicable~~debt ~~daily stockholder servicing fees accrued for and allocable to any class of common stock~~financing. Distributions ~~for~~declared, ~~December~~distributions ~~2018~~paid ~~were~~and ~~based~~cash onflow aprovided ~~single~~by ~~record~~operations ~~date~~during ~~and~~2019 were ~~calculated~~as atfollows a(in ~~rate~~thousands, ofexcept ~~$0.01598333~~ per share ~~on the outstanding shares of all classes of its common stock as of December 20, 2018.~~amounts):


	Distributions Declared ⁽¹⁾		Distributions Declared Per Class A Share ^{(1) (2)}		Distributions Declared Per Class T Share ^{(1) (2)}		Distributions Paid ⁽³⁾											Cash Flows (Used in) Provided by Operations
Period											Cash			Reinvested			Total
First Quarter 2019	$	1,206	$	0.040	$	0.040	$	550	$	899		$	1,449		$	(3,111)
Second Quarter 2019	724		0.024		0.024		276		448			724			2,899
Third Quarter 2019	724		0.024		0.024		285		439			724			2,065
Fourth Quarter 2019	725		0.024		0.024		292		432			724			(1,948)
	$	3,379	$	0.112	$	0.112	$	1,403	$	2,218		$	3,621		$	(95)

_____________________

⁽¹⁾ Distributions for the period from January 2019 through February 2019 were based on monthly record dates and were calculated at a rate of $0.01598333 per share per month. Distributions for March 2019 through December 2019 were based on the monthly record date and were calculated at a rate of $0.00799167 per share on the outstanding shares of all classes of its common stock as of monthly record dates.

⁽²⁾Assumes share was issued and outstanding each day that was a record date for distributions during the period presented.

⁽³⁾Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid on or about the first business day of the following month.

For the year ended December 31, ~~2018~~2019, we paid aggregate distributions of $43.96 million, including $1.94 million distributions paid in cash and $32.02 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the year ended December 31, ~~2018~~2019 was $237.5 million and cash flow ~~provided~~used byin operations was $40.61 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $3.86 million of ~~cash flow from current operating activities and $1.1 million of~~ prior period cash flow from operating activities in excess of distributions paid. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

Table of Contents

To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

In addition, from January 1, 2018 through November 30, 2018, our board of directors declared stock dividends for each month based on a single record date at the end of each month in an amount that would equal a 2% annualized stock dividend per share of common stock if paid each month for a year. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend.

Going forward we expect our board of directors to continue to authorize and declare monthly cash distributions. Cash distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. Our board of directors has not pre-established a percentage rate of return for cash distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.

We expect that we will fund these cash distributions from rental and other income on our real property investments and dividend income from real estate equity securities. We may also utilize strategic refinancings to fund cash distributions for investments that have appreciated in value after our acquisition. Generally, our distribution policy is not to pay cash distributions from sources other than cash flow from operations, investment activities and strategic financings. However, we may fund cash distributions from any source and there are no limits to the amount of distributions that we may pay from any source, including proceeds from our public offering or the proceeds from the issuance of securities in the future, other third party borrowings, advances from our advisor or sponsors or from our advisor’s deferral of its fees under the advisory agreement. Distributions paid from sources other than current or accumulated earnings and profits may constitute a return of capital. From time to time, we may generate taxable income greater than our net income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. In these situations we may make distributions in excess of our cash flow from operations, investment activities and strategic financings to satisfy the REIT distribution requirement. In such an event, we would look first to other third party borrowings to fund these distributions.

Critical Accounting Policies

Below is a discussion of the accounting policies that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

Table of Contents

Revenue Recognition

Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of our adoption. Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. We elected to apply this standard only to contracts that were not completed as of January 1, 2018.

Based on our evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by other operating income and tenant reimbursements for substantial services earned at our office properties and hotel revenues. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied.

Hotel Revenue

We recognize revenue for hotels as hotel revenue when earned. Revenues are recorded net of any sales or occupancy tax collected from our guests. Additionally, some of our hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is booked by us at the price we sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays us directly, revenue for the room is booked by us on a gross basis. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred. Hotel operating revenues are disaggregated in the real estate footnote into the categories of rooms revenue, food, beverage and convention services revenue, campground revenue and other revenue to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.

Table of Contents

Room revenue is generated through contracts with customers whereby the customer agrees to pay a daily rate for the right to use a hotel room. Our contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. We record contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future stay at our hotels. Advanced deposits for room revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits are recognized as revenue at the time of the guest’s stay. We note no significant judgments regarding the recognition of rooms revenue.

Food, beverage and convention revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate for restaurant dining services or convention services. Our contract performance obligations are fulfilled at the time that the meal is provided to the customer or when the convention facilities and related dining amenities are provided to the customer. We recognize food and beverage revenue upon the fulfillment of the contract with the customer. We record contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future banquet event at our hotels. Advanced deposits for food and beverage revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits for banquet services are recognized as revenue following the completion of the banquet services. We note no significant judgments regarding the recognition of food and beverage revenue.

Campground revenue is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured.

Office and Apartment Revenues

We recognize minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is reasonably assured and will record amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, we will determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

• whether the lease stipulates how a tenant improvement allowance may be spent;

• whether the amount of a tenant improvement allowance is in excess of market rates;

• whether the tenant or landlord retains legal title to the improvements at the end of the lease term;

• whether the tenant improvements are unique to the tenant or general purpose in nature; and

• whether the tenant improvements are expected to have any residual value at the end of the lease.

Table of Contents

We record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

We lease apartment units under operating leases with terms generally of one year or less. Generally, credit investigations will be performed for prospective residents and security deposits will be obtained. We recognize rental revenue, net of concessions, on a straight-line basis over the term of the lease, when collectibility is reasonably assured.

We make estimates of the collectibility of our tenant receivables related to base rents, including deferred rent, expense reimbursements and other revenue or income. We will specifically analyze accounts receivable, deferred rents receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, we will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectibility of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, we will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

Real Estate Equity Securities

Our real estate equity securities are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Upon adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings.

Table of Contents

Dividend income from real estate equity securities is recognized on an accrual basis based on eligible shares as of the ex-dividend date.

Real Estate

Depreciation and Amortization

Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs will include all costs that do not extend the useful life of the real estate asset. We consider the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements will be capitalized and amortized over the shorter of the tenant’s lease term or expected useful life. We anticipate the estimated useful lives of our assets by class to be generally as follows:


Land			N/A
Buildings			25-40 years
Building improvements			10-25 years
Tenant improvements			Shorter of lease term or expected useful life
Tenant origination and absorption costs			Remaining term of related leases, including below-market renewal periods
Real estate subsidies & tax abatements			Remaining term of agreement
Furniture, fixtures & equipment			3-12 years

Real Estate Acquisition Valuation

As a result of our adoption of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, acquisitions of real estate beginning January 1, 2017 could qualify as asset acquisitions (as opposed to business combinations). We record the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination or an asset acquisition. If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, then the set is not a business. For purposes of this test, land and buildings can be combined along with the intangible assets for any in-place leases and accordingly, most acquisitions of investment properties would not meet the definition of a business and would be accounted for as an asset acquisition. To be considered a business, a set must include an input and a substantive process that together significantly contributes to the ability to create an output. All assets acquired and liabilities assumed in a business combination are measured at their acquisition date fair values. For asset acquisitions, the cost of the acquisition is allocated to individual assets and liabilities on a relative fair value basis. Acquisition costs associated with business combinations are expensed as incurred. Acquisition costs associated with asset acquisitions are capitalized.

Table of Contents

Intangible assets include the value of in place leases, which represents the estimated value of the net cash flows of the in place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease up. Acquired in place lease values are amortized to expense over the average remaining non-cancelable terms of the respective in place leases, including any below-market renewal periods. Intangible assets also include the estimated value of subsidy receipts for apartments, which are recorded at a discounted present value based on estimated collectibility and are amortized on a straight-line basis over the period the amounts are expected to be collected.

We assess the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows will be based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases and for the initial term plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods.

We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease up periods.

Table of Contents

We amortize the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable term of the leases.

Subsequent to the acquisition of a property, we may incur and capitalize costs necessary to get the property ready for its intended use. During that time, certain costs such as legal fees, real estate taxes and insurance and financing costs are also capitalized.

Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment.

Impairment of Real Estate and Related Intangible Assets and Liabilities

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets and liabilities may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets and liabilities may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the real estate and related intangible assets and liabilities through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets and liabilities, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets and liabilities.

Projecting future cash flows involves estimating expected future operating income and expenses related to the real estate and its related intangible assets and liabilities as well as market and other trends. Using inappropriate assumptions to estimate cash flows could result in incorrect fair values of the real estate and its related intangible assets and liabilities and could result in the overstatement of the carrying values of our real estate and related intangible assets and liabilities and an overstatement of our net income.

Construction in Progress

Direct investments in undeveloped land or development properties without leases in place at the time of acquisition are accounted for as an asset acquisition and not as a business combination. Acquisition fees and expenses are capitalized into the cost basis of an asset acquisition. Additionally, during the time in which we are incurring costs necessary to bring these investments to their intended use, certain costs such as legal fees, real estate taxes and insurance and financing costs are also capitalized. Once construction in progress is substantially completed, the amounts capitalized to construction in progress are transferred to land and buildings and improvements and are depreciated over their respective useful lives.

Table of Contents

Derivative Instruments

We enter into derivative instruments for risk management purposes to hedge our exposure to cash flow variability caused by changing interest rates on our variable rate notes payable. We record these derivative instruments at fair value on the accompanying consolidated balance sheets. The changes in fair value for derivative instruments that are not designated as a hedge or that do not meet the hedge accounting criteria are recorded as a component of interest expense on the accompanying consolidated statements of operations. Derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) and consolidated statements of equity.

With respect to derivative instruments designated as a hedge, we will formally document all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivative instruments that are part of a hedging relationship to specific forecasted transactions or recognized obligations on the consolidated balance sheets. We also assess and document, both at the hedging instrument’s inception and on a quarterly basis thereafter, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the respective hedged items. When we determine that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, we discontinue hedge accounting prospectively and reclassify amounts recorded in accumulated other comprehensive income (loss) to earnings.

Table of Contents

The termination of a cash flow hedge prior to the maturity date may result in a net derivative instrument gain or loss that continues to be reported in accumulated other comprehensive income (loss) and is reclassified into earnings over the period of the original forecasted hedged transaction (i.e., LIBOR based debt service payments) unless it is probable that the original forecasted hedged transaction will not occur by the end of the originally specified time period (as documented at the inception of the hedging relationship) or within an additional two-month period of time thereafter. If it is probable that the hedged forecasted transaction will not occur either by the end of the originally specified time period or within the additional two-month period of time, that derivative instrument gain or loss reported in accumulated other comprehensive income (loss) shall be reclassified into earnings immediately.

Fair Value Measurements

Under GAAP, we are required to measure certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

• Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

• Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and

• Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

When available, we will utilize quoted market prices from an independent source to determine fair value and will classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we will use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and will establish a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we will measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach.

Table of Contents

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

We consider the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on current information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with our estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid ask spread or significant increase in the bid ask spread, (vii) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information is released publicly (for example, a principal to principal market).

We consider the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (iv) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.

Table of Contents

Income Taxes

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

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Cash Distributions Paid

On January 2, ~~2019~~2020, we paid distributions of $0.52 million related to a monthly ~~cash~~ distribution in the amount of $0.~~01598333~~00799167 per share on the outstanding shares of all classes of our common stock as of December ~~20,~~ ~~2018. On February 4~~19, 2019~~, we paid distributions of $0~~.5 million related to a monthly cash distribution in the amount of $0.01598333 per share on the outstanding shares of all classes of our common stock as of January 18, 2019. On March 1, 2019, we paid distributions of $0.5 million related to a monthly cash distribution in the amount of $0.01598333 per share on the outstanding shares of all classes of our common stock as of February 18, 2019.

~~Distributions~~Proposed ~~Declared~~Merger

On ~~March 7~~February 19, ~~2019~~2020, ~~our~~we, ~~board~~Pacific Oak Strategic Opportunity REIT, Inc. (“POSOR I”), and Pacific Oak SOR II, LLC, an indirect subsidiary of ~~directors~~POSOR ~~declared~~I ~~monthly~~(“Merger ~~cash~~Sub”), ~~distributions~~entered ininto an Agreement and Plan of Merger (the ~~amount~~“Merger Agreement”). Subject to the terms and conditions of $0the Merger Agreement, we will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger (the “Surviving Entity”), such that following the Merger, the Surviving Entity will continue as an indirect subsidiary of POSOR I.~~00799167~~ ~~per~~In ~~share~~accordance onwith the ~~outstanding~~applicable ~~shares~~provisions of ~~all~~the ~~classes~~Maryland General Corporation Law, the separate existence of our ~~common~~company ~~stock~~shall ascease. At the effective time of ~~March 18,~~the ~~2019~~Merger and ~~April 18,~~subject ~~2019~~to the terms and conditions of the Merger Agreement, ~~which~~each weissued ~~expect~~and outstanding share of our common stock will be converted into the right to ~~pay~~receive in0.9643 ~~April~~shares ~~2019~~of ~~and~~POSOR ~~May~~I ~~2019~~common stock. The combined company after the Merger will retain the name “Pacific Oak Strategic Opportunity REIT, ~~respectively~~Inc.” ~~Investors~~The ~~may~~Merger ~~choose~~is intended to ~~receive~~qualify ~~cash~~as ~~distributions~~a or“reorganization” ~~purchase~~under, ~~additional~~and ~~shares~~within ~~through~~the ~~our~~meaning ~~dividend~~of, ~~reinvestment~~Section ~~plan~~368(a) of the Internal Revenue Code of 1986, as amended. See “Proposed Merger” in Item Part I, Item 1 of this Annual Report on Form 10-K for more information.

COVID-19

The recent global outbreak of COVID-19 (more commonly known as the Coronavirus) has significantly disrupted economic markets and impacted commercial activity worldwide, including the US, and the prolonged economic impact is uncertain. Customers and potential customers of the properties we own could be adversely affected by the disruption to business caused by the global outbreak of the Coronavirus. This could lead to similar negative impacts on our business.

Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the financing of our real estate investment portfolio and operations. We are also exposed to the effects of foreign currency changes in the Euro with respect to our €2.1 million participating loan facility. Foreign currency exchange rate risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes and foreign currency changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.

The 70table below summarizes the outstanding principal balance and the weighted average interest rates for our notes payable for each category as of December 31, 2019 based on the maturity dates and the notional amount and average interest strike rates of our derivative instrument as of December 31, 2019 based on maturity date (dollars in thousands):

Table of Contents


	Maturity Date																				Total Value or Notional Amount
	2020			2021			2022			2023		2024		Thereafter					Fair Value
Assets
Derivative instruments
Interest rate caps, notional amount	$	34,125		$	142,950		$	—		$	—	$	—	$	—	$	177,075		$	—
Average interest strike rate ⁽¹⁾	3.0		%	3.7		%	—			—		—		—		3.6		%
Liabilities
Notes Payable, principal outstanding
Variable rate	$	78,208		$	73,862		$	177,525		$	—	$	—	$	—	$	329,595		$	330,687
Average interest rate ⁽²⁾	4.5		%	3.9		%	4.3		%	—		—		—		4.3		%

The table below summarizes the outstanding principal balance and the weighted average interest rates for our notes payable for each category as of December 31, 2018 based on the maturity dates and the notional amount and average interest strike rates of our derivative instrument as of December 31, 2018 based on maturity date (dollars in thousands):

	Maturity Date															Total Value orNotional Amount
	2019			2020			2021		2022			2023		Thereafter					Fair Value
Assets
Derivative instruments
Interest rate caps, notional amount	$	107,235		$	—		$	—	$	—		$	—	$	—	$	107,235		$	6
Average interest strike rate (1)	3.0		%	—			—		—			—		—		3.0		%
Liabilities
Notes Payable, principal outstanding
Variable rate	$	170,972		$	63,342		$	—	$	94,500		$	—	$	—	$	328,814		$	329,588
Average interest rate (2)	5.8		%	5.0		%	—		4.1		%	—		—		5.2		%
Foreign currency forward contract, notional amount	$	—		$	—		$	2,100	$	—		$	—	$	—	$	2,100		$	68
Strike rate - USD - EUR	—			—			1.3		—			—		—		1.3

_____________________

⁽¹⁾The average interest strike rate represents the weighted-average cap on one-month LIBOR on the applicable notional amounts.

(2) Average interest rate is the weighted-average interest rate. Weighted-average interest rate as of December 31, ~~2018~~2019 is calculated as the actual interest rate in effect at December 31, ~~2018~~2019 (consisting of the contractual interest rate), using interest rate indices at December 31, ~~2018~~2019, where applicable.

Movements in interest rates on variable rate debt would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of December 31, ~~2018~~2019, we were exposed to market risks related to fluctuations in interest rates on $~~328~~329.86 million of variable rate debt outstanding. As of December 31, ~~2018~~2019, we have also entered into ~~three~~four interest rate cap agreements with an aggregate notional value of $~~107~~177.21 million, which effectively cap one-month LIBOR at a range of 3.00%-4.00%. The weighted-average remaining term of the interest rate caps is 01.85 years. Based on interest rates as of December 31, ~~2018~~2019, if interest rates were 100 basis points higher or lower during the 12 months ending December 31, 2019, interest expense on our variable rate debt would increase or decrease, respectively, by $23.73 million and $3.3 million, respectively.

The weighted-average interest rate of our variable rate debt as of December 31, ~~2018~~2019 was 54.23%. The weighted-average interest rate represents the actual interest rate in effect as of December 31, ~~2018~~2019 (consisting of the contractual interest rate and the effect of interest rate caps, if applicable), using interest rate indices as of December 31, ~~2018~~2019 where applicable.

We are exposed to financial market risk with respect to our real estate equity securities. Financial market risk is the risk that we will incur economic losses due to adverse changes in our real estate equity security prices. Our exposure to changes in real estate equity security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market prices of a real estate equity security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. In addition, amounts realized in the sale of a particular security may be affected by the relative quantity of the real estate equity security being sold. We do not currently engage in derivative or other hedging transactions to manage our real estate equity security price risk. As of December 31, 2018, we owned real estate equity securities with a book value of $7.2 million. Based solely on the prices of real estate equity securities for the three months ended December 31, 2018, if prices were to increase or decrease by 10%, our net income would increase or decrease, respectively, by approximately $0.7 million.78

Table of Contents

We are exposed to financial market risk with respect to our real estate equity securities. Financial market risk is the risk that we will incur economic losses due to adverse changes in our real estate equity security prices. Our exposure to changes in real estate equity security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market prices of a real estate equity security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. In addition, amounts realized in the sale of a particular security may be affected by the relative quantity of the real estate equity security being sold. We do not currently engage in derivative or other hedging transactions to manage our real estate equity security price risk. As of December 31, 2019, we owned real estate equity securities with a book value of $9.9 million. Based solely on the prices of real estate equity securities as of December 31, 2019, if prices were to increase or decrease by 10%, our net income would increase or decrease, respectively, by approximately $1.0 million.

For a discussion of the interest rate risks related to the current capital and credit markets, see Part I, Item 1A, “Risk Factors.”

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index to Financial Statements at page F-1 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Table of Contents

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act.

In connection with the preparation of our Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2018~~2019. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

Based on its assessment, our management believes that, as of December 31, ~~2018~~2019, our internal control over financial reporting was effective based on those criteria. There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

On November 1, 2019, we entered into an advisory agreement with a new external advisor, Pacific Oak Capital Advisors, LLC, and as a result, all processes have been affected by this change. In most cases, the accounting functions are the same but performed by new personnel. Effective November 1, 2019, Michael A. Bender was appointed to serve as our Executive Vice President, Treasurer, Secretary and Chief Financial Officer-Elect and on November 8, 2019 became Chief Financial Officer. The new external advisor has transitioned most accounting functions to a service provider during our last fiscal quarter, and this resulted in a change to our processes and control environment. There were no other changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

As of the year ended December 31, ~~2018~~2019, all items required to be disclosed under Form 8-K were reported under Form 8-K.

7279

Table of Contents

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We have provided below certain information about our executive officers and directors.

Name

~~Position(s)~~

Age*

Position(s)

Age*

Keith D. Hall

~~Chief Executive Officer and Director~~

Chief Executive Officer and Director

Peter McMillan III

~~Chairman of the Board, President and Director~~

Chairman of the Board, President and Director

Jeffrey K. Waldvogel

Chief Financial Officer, Treasurer and Secretary

Michael A. Bender

Chief Financial Officer, Treasurer and Secretary

Stacie K. Yamane

Chief Accounting Officer

John P. Joliet

Independent Director

John P. Joliet

Independent Director

Laurent Degryse

Independent Director

Laurent Degryse

Independent Director

Kenneth G. Yee

Independent Director

Kenneth G. Yee

Independent Director

_____________________

* As of March 1, ~~2019~~2020.

Keith D. Hall is our Chief Executive Officer and one of our directors, positions he has held since ~~our~~February ~~formation~~2013 inand ~~February~~October ~~2013~~2008, respectively. He is also the Chief Executive Officer and a director of ~~KBS~~Pacific Oak Strategic Opportunity REIT, positions he has held since December 2008 and October 2008, respectively. He ~~was~~is a former Executive Vice President of KBS REIT III, ~~from~~KBS ~~June~~REIT ~~2005~~III ~~until~~and ~~its~~KBS ~~liquidation~~Growth in& ~~December~~Income ~~2018,~~REIT. ~~and~~Mr. ~~previously~~Hall ~~served~~was as Executive Vice President ~~for~~of KBS ~~REIT~~Real IIEstate Investment Trust, Inc (“KBS REIT I”) from ~~August~~June ~~2007~~2005 ~~through~~until ~~August~~its liquidation in December 2018,. ~~KBS~~Mr. ~~REIT~~Hall ~~III,~~owns ~~from~~and ~~January~~controls ~~2010~~a ~~through~~50% ~~July~~interest ~~2018,~~in ~~and~~Pacific ~~KBS~~Oak ~~Growth~~Holding, &which ~~Income~~is ~~REIT~~the ~~from~~sole ~~January~~owner ~~2015~~of ~~through~~our ~~July~~current ~~2017~~advisor. Mr. Hall also owns and controls a 50% interest in GKP Holding LLC. GKP Holding owns a 33 1/3% interest in KBS Holdings LLC, which is the sole owner of our former advisor (KBS Capital Advisors) and our former dealer manager (KBS Capital Markets Group). KBS Holdings is a sponsor of our company, and is or was a sponsor of KBS REIT I, KBS REIT II, KBS REIT III, KBS ~~Strategic~~Legacy ~~Opportunity~~Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), Pacific Oak Strategic Opportunity REIT and KBS Growth & Income REIT, which were formed in ~~2013~~2008, 2005, 2007, 2009, ~~2008~~2009, ~~2009~~2008 and 2015, respectively. Mr. Hall is also a member of the investment committee formed by our advisor to evaluate and recommend new investment opportunities for us.

~~In 2018~~ Mr. Hall, ~~together~~is ~~Mr.~~affiliated ~~McMillan,~~with ~~founded~~Willowbrook ~~Pacific Oaks~~ Capital Group, aLLC, ~~real~~an ~~estate~~asset management company~~, and its family of companies~~. Mr. Hall is ~~affiliated~~also ~~with~~a ~~Willowbrook~~founder of Pacific Oak Capital Group, ~~LLC,~~a anreal estate asset management company formed in 2018, and its family of companies. Prior to commencing his affiliation with Willowbrook in 2000, Mr. Hall was a Managing Director at CS First Boston, where he managed the distribution strategy and business development for the Principal Transaction Group’s $18.0 billion real estate securities portfolio. Mr. Hall’s two primary business unit responsibilities were Mezzanine Lending and Commercial Real Estate Development. Before joining CS First Boston in 1996, he served as a Director in the Real Estate Products Group at Nomura Securities, with responsibility for the company’s $6.0 billion annual pipeline of fixed-income, commercial mortgage-backed securities. During the 1980s, Mr. Hall was a Senior Vice President in the High Yield Department of Drexel Burnham Lambert’s Beverly Hills office, where he was responsible for distribution of the group’s high-yield real estate securities. Mr. Hall received a Bachelor of Arts Degree with honors in Finance from California State University, Sacramento.

Our board of directors has concluded that Mr. Hall is qualified to serve as one of our directors for reasons including his expertise in the real estate finance markets and his expertise with real estate-related investments. With over 30 years of experience investing in and managing real estate-related investments, Mr. Hall has the depth and breadth of experience to implement our business strategy. As ~~our Chief Executive Officer and as~~ an executive officer and principal of our advisor, Mr. Hall is able to direct ~~our~~the board of directors to the critical issues facing our company.

Peter 73McMillan III is our President, the Chairman of the Board and one of our directors, positions he has held since February 2013. He is also President, Chairman of the Board and a director of Pacific Oak Strategic Opportunity REIT, positions he has held since December 2008. Mr. McMillan has previously served as an Executive Vice President, the Treasurer and Secretary and a director of KBS Growth & Income REIT and KBS REIT III. From June 2005 until its liquidation in December 2018, Mr. McMillan was Executive Vice President, Treasurer, Secretary and a director of KBS REIT I. From August 2007 through August 2018 he served as Executive Vice President, Treasurer and Secretary of KBS REIT II and from August 2007 through February 2019 he was also a director of KBS REIT II. From August 2009 until its liquidation in December 2018, Mr. McMillan was Executive Vice President of KBS Legacy Partners Apartment REIT. Mr. McMillan owns and controls a 50% interest in Pacific Oak Holding, which is the sole owner of our current advisor. Mr. McMillan also owns and controls a 50% interest in GKP Holding LLC. GKP Holding owns a 33 1/3% interest in KBS Holdings LLC, which is the sole owner of our former advisor (KBS Capital Advisors) and our former dealer manager (KBS Capital Markets Group). KBS Holdings is a sponsor of our company, and is or was a sponsor of KBS REIT I, KBS REIT II, KBS REIT III, Pacific Oak Strategic Opportunity REIT II, KBS Legacy Partners Apartment REIT and KBS Growth & Income REIT, which were formed in 2008, 2005, 2007, 2009, 2009, 2013 and 2015, respectively. Mr. McMillan is also a member of the investment committee formed by our advisor to evaluate and authorize new investment opportunities for us.

Table of Contents

~~Peter~~Mr. McMillan ~~III~~ is ~~our~~a ~~President,~~Partner ~~the~~and ~~Chairman~~co-owner of ~~the~~Temescal ~~Board~~Canyon ~~and~~Partners ~~one~~LP, ofan ~~our~~investment ~~directors,~~advisor ~~positions~~formed hein ~~has~~2013 ~~held~~to ~~since~~manage ~~our~~a ~~formation~~multi-strategy inhedge ~~February~~fund ~~2013~~on behalf of investors. HeMr. McMillan is also ~~President,~~a ~~Chairman~~founder of ~~the~~Pacific ~~Board~~Oak ~~and~~Capital Group, a ~~director~~real ofestate ~~KBS~~asset ~~Strategic~~management ~~Opportunity~~company ~~REIT,~~formed ~~positions~~in he2018, ~~has~~and ~~held~~its ~~since~~family ~~December~~of ~~2008~~companies. HeMr. ~~has~~McMillan is also ~~served~~a asco-founder anand ~~Executive~~the ~~Vice~~Managing ~~President~~Partner of Willowbrook Capital Group, ~~Treasurer~~LLC, ~~Secretary~~an ~~and~~asset amanagement ~~director~~company. ofIn ~~various~~addition, ~~KBS-sponsored~~since ~~programs~~November as2017, ~~follows: KBS~~Mr. ~~REIT~~McMillan Ihas ~~(from~~served ~~June~~as ~~2005~~Chairman ~~through~~and ~~its~~a ~~liquidation~~director infor ~~December~~Keppel ~~2018);~~Pacific ~~KBS~~Oak-US REIT ~~III~~Management (Pte. ~~from~~Ltd., ~~January~~which ~~2010~~is ~~through~~the ~~July~~Manager ~~2018);~~of ~~and~~Keppel ~~KBS~~Pacific ~~Growth~~Oak &US ~~Income~~ REIT. ~~(from~~Prior ~~January~~to ~~2015~~forming ~~through~~Willowbrook ~~February~~in ~~2017)~~2000, Mr. ~~From~~ ~~August~~McMillan ~~2007 through August 2018 he~~ served as an Executive Vice President, ~~Treasurer~~ and ~~Secretary~~Chief Investment Officer of ~~KBS~~SunAmerica ~~REIT~~Investments, IIInc., ~~and~~which ~~from~~was ~~August~~later ~~2007~~acquired ~~through~~by ~~February~~AIG. ~~2019~~As heChief ~~was~~Investment ~~also~~Officer, ahe ~~director~~was ofresponsible ~~KBS~~for ~~REIT~~over II$75. ~~From~~0 ~~August~~billion ~~2009~~in ~~through~~assets, ~~its~~including ~~liquidation~~residential inand ~~December~~commercial ~~2018~~mortgage-backed ~~Mr.~~securities, ~~McMillan~~public ~~was~~and ~~Executive~~private ~~Vice~~investment ~~President~~grade ofand ~~KBS~~non-investment ~~Legacy~~grade ~~Partners~~corporate ~~Apartment~~bonds ~~REIT.~~and ~~Mr.~~commercial ~~McMillan~~mortgage ~~owns~~loans and ~~controls~~real aestate ~~50%~~investments. ~~interest~~Before injoining ~~GKP~~SunAmerica ~~Holding~~in ~~LLC.~~1989, ~~GKP~~he ~~Holding~~served ~~owns~~as aAssistant 33Vice ~~1/3%~~President ~~interest~~for inAetna ~~KBS~~Life ~~Holdings~~Insurance ~~LLC,~~and ~~which~~Annuity isCompany ~~the~~with ~~sole~~responsibility ~~owner~~for ofthe ~~our~~company’s ~~advisor~~$6.0 ~~and~~billion ~~our~~fixed ~~dealer~~income ~~manager~~portfolios. ~~KBS~~Mr. ~~Holdings~~McMillan isreceived ahis ~~sponsor~~Master of ~~our~~Business ~~company,~~Administration ~~and~~in isFinance orfrom ~~was~~the aWharton ~~sponsor~~Graduate School of ~~KBS~~Business ~~REIT~~at I,the ~~KBS~~University ~~REIT~~of ~~II,~~Pennsylvania ~~KBS~~and ~~REIT~~his ~~III,~~Bachelor ~~KBS~~of ~~Strategic~~Arts ~~Opportunity~~Degree ~~REIT,~~with ~~KBS~~honors ~~Legacy~~in ~~Partners~~Economics ~~Apartment~~from ~~REIT~~Clark ~~and~~University. ~~KBS~~Mr. ~~Growth~~McMillan &is ~~Income~~a ~~REIT,~~member ~~which~~of ~~were~~the ~~formed~~board inof ~~2013,~~directors ~~2005,~~of ~~2007,~~TCW ~~2009~~Funds, ~~2008,~~Inc. ~~2009~~ and ~~2015~~TCW Strategic Income Fund, ~~respectively~~Inc., ~~Mr.~~and ~~McMillan~~ is ~~also~~ a member of the ~~investment~~board ~~committee~~of ~~formed~~trustees byof ~~our~~Metropolitan ~~advisor~~West ~~to evaluate and recommend new investment opportunities for us~~Funds.

InOur ~~2018~~board ~~Mr.~~of ~~McMillan,~~directors ~~together~~has ~~Mr.~~concluded ~~Hall,~~that ~~founded Pacific Oaks Capital Group, a real estate management company, and its family of companies.~~ Mr. McMillan is aqualified ~~Partner and co-owner of Temescal Canyon Partners LP, an investment advisor formed in 2013~~ to ~~manage~~serve aas ~~multi-strategy~~one ~~hedge fund on behalf~~ of ~~investors.~~our ~~Mr.~~directors ~~McMillan is also a co-founder~~ and the ~~Managing~~Chairman ~~Partner~~ of ~~Willowbrook~~the ~~Capital~~Board ~~Group,~~for ~~LLC,~~reasons anincluding ~~asset~~his ~~management~~expertise ~~company.~~in Inreal ~~addition,~~estate ~~since~~finance ~~November 2017, Mr. McMillan has served as Chairman~~ and awith ~~director~~real ~~for Keppel~~estate-~~KBS~~related ~~US REIT Management Pte~~investments. ~~Ltd.,~~With ~~which~~over is30 ~~the~~years ~~manager~~ of ~~Keppel-KBS~~experience USinvesting ~~REIT.~~in ~~Prior~~and tomanaging ~~forming~~real ~~Willowbrook~~estate-related indebt ~~2000~~investments, Mr. McMillan ~~served~~offers asinsights anand ~~Executive~~perspective ~~Vice~~with ~~President~~respect ~~and~~to ~~Chief~~our ~~Investment~~real ~~Officer~~estate-related ofinvestment ~~SunAmerica~~portfolio ~~Investments,~~as ~~Inc.,~~well ~~which~~as ~~was~~our ~~later~~real ~~acquired~~estate ~~by AIG~~portfolio. As ~~Chief~~one ~~Investment~~of ~~Officer,~~our heexecutive ~~was~~officers ~~responsible~~and ~~for~~a ~~over~~principal ~~$75.0~~of ~~billion~~our ~~in assets~~advisor, ~~including~~Mr. ~~residential~~McMillan ~~and~~is ~~commercial~~also ~~mortgage-backed~~able ~~securities,~~to ~~public~~direct ~~and~~our ~~private~~board ~~investment~~of ~~grade~~directors ~~and~~to ~~non-investment~~the ~~grade~~critical ~~corporate~~issues ~~bonds~~facing ~~and~~our ~~commercial mortgage loans and real estate investments~~company. ~~Before joining SunAmerica in 1989~~Further, hehis ~~served~~experiences as ~~Assistant~~a ~~Vice~~director ~~President~~of ~~for~~Pacific ~~Aetna~~Oak ~~Life~~Strategic ~~Insurance~~Opportunity ~~and~~REIT ~~Annuity~~II, ~~Company~~TCW ~~with~~Mutual ~~responsibility~~Funds, ~~for~~and ~~the~~Metropolitan ~~company’s~~West ~~$6.0~~Funds ~~billion~~and ~~fixed~~as ~~income~~a ~~portfolios.~~former ~~Mr.~~director ~~McMillan received his Master~~ of ~~Business~~KBS ~~Administration~~REIT inI, ~~Finance~~KBS ~~from~~REIT ~~the~~II, ~~Wharton~~KBS ~~Graduate~~REIT ~~School~~III, ofKBS ~~Business~~Growth at& ~~the~~Income ~~University~~REIT, ofTCW ~~Pennsylvania~~Alternative Funds and ~~his~~Steinway ~~Bachelor~~Musical ofInstruments, ~~Arts Degree with honors in Economics from Clark University~~Inc. ~~Mr.~~provide ~~McMillan~~him iswith aan ~~member~~understanding of the ~~board~~requirements of ~~directors~~serving ofon ~~TCW~~a ~~Funds,~~public ~~Inc.~~company board and ~~TCW~~qualify ~~Strategic~~him ~~Income~~to ~~Fund,~~serve ~~Inc.,~~as ~~and~~the ischairman ~~a member~~ of ~~the~~our board of ~~trustees of Metropolitan West Funds~~directors.

~~Our~~Michael ~~board~~A. ofBender ~~directors~~ has ~~concluded~~served ~~that~~as ~~Mr. McMillan~~our isExecutive ~~qualified~~Vice toPresident, ~~serve~~Chief asFinancial ~~one~~Officer, ofTreasurer ~~our~~and ~~directors~~Secretary ~~and~~since ~~the~~November ~~Chairman~~2019. ofMr. ~~the~~Bender ~~Board~~has ~~for~~also ~~reasons~~served ~~including~~in ~~his~~the ~~expertise~~same inroles ~~real~~for ~~estate~~Pacific ~~finance~~Oak ~~and~~Strategic ~~with~~Opportunity ~~real~~REIT ~~estate-related~~since ~~investments~~November 2019. ~~With~~Mr. ~~over~~Bender ~~30 years~~has ofserved ~~experience~~as ~~investing~~Chief inFinancial ~~and~~Officer ~~managing~~of ~~real~~Pacific ~~estate-related~~Oak ~~debt~~Capital ~~investments,~~Advisors Mrsince July 2019. ~~McMillan~~ ~~offers~~Prior ~~insights~~to ~~and~~joining ~~perspective~~our ~~with~~advisor ~~respect~~in to2019, ~~our~~Mr. ~~real~~Bender ~~estate~~was self-~~related~~employed ~~investment~~as ~~portfolio~~a asprivate ~~well~~consultant asprimarily ~~our~~engaged in commercial real estate ~~portfolio.~~finance Asfrom ~~one~~January of2017 ~~our~~to ~~executive~~July ~~officers~~2019. ~~and~~From aJanuary ~~principal~~2016 ofto ~~our~~January ~~advisor~~2017, Mr. ~~McMillan~~ isBender ~~also~~served ~~able~~as toChief ~~direct~~Financial ~~our~~Officer ~~board~~for ofKamal ~~directors~~Osman toJanjoom ~~the~~Group ~~critical~~LLC, ~~issues~~a ~~facing~~Dubai-based ~~our~~retail company. ~~Further,~~focused ~~his~~in ~~experiences~~the asMiddle aEast, ~~director~~where ofhe ~~KBS~~was ~~Strategic~~responsible ~~Opportunity~~for ~~REIT,~~all ~~TCW~~aspects ~~Mutual~~of ~~Funds~~accounting, ~~TCW~~reporting, ~~Alternative~~control, ~~Funds~~corporate ~~and~~finance ~~Metropolitan West Funds~~ and astreasury. aFrom ~~former~~October ~~director~~2007 ofto ~~KBS~~January ~~REIT I~~2016, ~~KBS~~Mr. ~~REIT~~Bender ~~II,~~was ~~KBS~~Chief ~~REIT~~Financial ~~III,~~Officer ~~KBS~~and ~~Growth~~Chief &Accounting ~~Income~~Officer ~~REIT~~for ~~and~~Spirit ~~Steinway~~Realty ~~Musical Instruments~~Capital, Inc., ~~provide~~a ~~him~~NYSE-traded ~~with~~commercial anproperty ~~understanding~~REIT. ofDuring ~~the~~his ~~requirements~~eight ofyears ~~serving~~at onSpirit aRealty ~~public~~Capital, ~~company~~Mr. ~~board~~Bender ~~and~~was ~~qualify~~in ~~him~~charge toof ~~serve~~accounting, asreporting, ~~the~~control, ~~chairman~~corporate offinance ~~our~~and ~~board of directors~~treasury.

Before joining Spirit Realty Capital, Inc. in 2007, Mr. Bender held positions including Assistant Corporate Controller for Allied Waste, Inc., Vice President of Global External Reporting for American Express Corporation, Chief Financial Officer for FINOVA Realty Capital and senior manager for Deloitte & Touche, LLP. Mr. Bender earned a Bachelor of Science Degree in Accounting and a Master of Business Administration from Arizona State University. He is a Certified Public Accountant.

John P. Joliet is one of our independent directors, a position he has held since August 2017. He has been a Partner at American Discovery Capital, an independent merchant banking firm focused on principal investments in leading family-owned and middle-market companies in selected high-growth sectors, since he founded the company in 2016. Prior to founding American Discovery Capital Mr. Joliet was a Partner and Managing Director at Moelis & Company where he was responsible for leading the firm’s global investment banking activities in the Enterprise Software sector. Prior to joining Moelis &Co., Mr. Joliet spent ten years at UBS Investment Bank where he was a Managing Director and Global Head of Software Investment Banking, as well as the Head of the Los Angeles office. Mr. Joliet began his investment banking career with Donaldson, Lufkin & Jenrette (“DLJ”), and remained with DLJ until its sale to Credit Suisse in 2000. Before he began his investment banking career, Mr. Joliet spent four years as a consultant with Coopers & Lybrand in Boston, London UK, and Chicago, and was licensed as a Certified Public Accountant.

Mr. Joliet studied at the University of Pennsylvania’s Wharton School and the Ross School of Business at the University of Michigan,where he earned a Bachelor of Business Administration. He earned a Master of Business Administration, with honors, from the University of Chicago’s Booth School of Business.

Our board of directors has concluded that Mr. Joliet is qualified to serve as one of our independent directors for reasons including his nearly 25 years as an investment banker and corporate finance consultant. With his strong back ground in mergers and acquisitions and capital markets, he is well-positioned to advise the board with respect to strategic alternatives.

7481

Table of Contents

Laurent Degryse is one of our independent directors, a position he has held since April 2014. Mr. Degryse has been involved in the real estate development industry for over 20 years with a focus on real estate activities in Belgium. For the past five years he has been self-employed and engaged in real estate development and venture capital activities. In 2002, Mr. Degryse founded Urbis Development, a real estate development company located in Luxembourg, and served as its Managing Director until, in 2008, it created a joint venture with another real estate company, Herpain SA, and became Herpain Urbis.

From December 2007 through December 2015, he has served as the Managing Director of Hunza Ventures and Managing Partner of Hunza Management, affiliated venture capital companies based in Luxemburg that invest in technology and life science projects. In connection with his position at Hunza Ventures, he serves as a member of the supervisory board of Hunza Ventures II SCA SICAR, a fund raised by Hunza Ventures that is investing and raising capital for venture investments; and from December 2007 through June 2012 he served as a member of the supervisory board of Hunza Ventures SCA SPF, a fund that raised and fully invested €15 million in 14 venture investments. Mr. Degryse also manages his own portfolio of investments in Europe, Asia and the United States.

In addition, Mr. Degryse has served as the chairman of the board of SoftKinetic International SA from 2008 to 2015. He was a director of Herpain Urbis Retail (from 2008 to 2015) and a director of Herpain Urbis (from 2007 to 2013) and Herpain Enterprise (from 2008 to 2013). Herpain Urbis Retail, Herpain Urbis and Herpain Enterprise are related companies with expertise in real estate development and construction for office, residential and commercial real estate in Belgium. In addition, from March 2007 through March 2012 he served as a member of the supervisory board of Urbis SCA. Mr. Degryse iswas a member of the board of trustees and member of the finance and the audit committee of MOCA, the Museum of Contemporary Art in Los Angeles, California. Mr. Degryse is a graduate of the Solvay Business School at the University of Brussels, Belgium where he received a Master in Business Engineering.

Our board of directors has concluded that Mr. Degryse is qualified to serve as one of our independent directors for reasons including his expertise in the real estate development business. With over 20 years of experience in the real estate industry, with a particular focus on investments in Belgium, Mr. Degryse offers insights and perspective with respect to our investment portfolio and our focus on European investment opportunities.

Kenneth G. Yee is one of our independent directors and is the ~~chairman~~Chairman of the ~~audit~~Audit ~~committee~~Committee, positions he has held since April 2017 and May 2017, respectively. He is also an independent director and ~~chairman~~Chairman of the ~~audit~~Audit ~~committee~~Committee of ~~KBS~~Pacific Oak Strategic Opportunity REIT, positions he has held since April 2017 and May 2017, respectively. Since 2000, Mr. Yee has been the President and Chief Executive Officer of Ridgecrest Capital, Inc., a real estate financial advisory services and structured finance firm. Mr. Yee previously served in the same positions for Ridgecrest Capital, Inc. from 1992 to 1997. From 2007 to June 2011, Mr. Yee was also the managing director of Cappello Capital Corp., where he was responsible for sourcing, evaluating, structuring and placing transactions relating to domestic and international real estate equity and debt, and small and middle market corporate capital raising and mergers and acquisitions. Mr. Yee served as Senior Vice President of Acquisitions for Imperial Credit Commercial Mortgage Investment Corp from 1998 to 1999. From 1990 to 1991, Mr. Yee served as Vice President and Controller for Secured Capital Corp. (now known as Eastdil Secured LLC, formerly a division of Wells Fargo), a real estate advisory and investment banking firm. Prior to that, he was a Vice President at Drexel Burnham Lambert from 1987 to 1990. From 1986 to 1987, Mr. Yee was an associate consultant for Kenneth Leventhal & Company, a real estate consulting and public accounting firm. Mr. Yee was a financial analyst with Deseret Pacific Mortgage from 1985 to 1986 and he was a senior accountant with Ernst & Whinney, a public accounting firm, from 1982 to 1985.

Mr. Yee received Bachelor of Science in Business Administration, Master of Business Administration and Master of Business Taxation degrees from the University of Southern California. He also received a Master of Science in Real Estate Development degree from the Massachusetts Institute of Technology and a Juris Doctor degree from the University of California, Los Angeles. Mr. Yee is a Chartered Financial Analyst, a Certified Public Accountant, a licensed attorney and a licensed real estate broker.

Our board of directors has concluded that Mr. Yee is qualified to serve as one of our independent directors ~~and the chairman of the audit committee~~ for reasons including his expertise with respect to real estate equity and debt transactions and accounting matters. With ~~almost~~more than 25 years of experience with real estate equity and debt transactions, Mr. Yee is well-positioned to advise ~~our~~the board with respect to potential investment opportunities and investment management. In addition, with over 30 years of experience as a Certified Public Accountant, Mr. Yee provides our board of directors with substantial expertise regarding real estate accounting and financial reporting matters.

7582

Table of Contents

Jeffrey K. Waldvogel is our Chief Financial Officer, Treasurer and Secretary, positions he has held since June 2015. He is also the Chief Financial Officer of our advisor, KBS REIT II and KBS REIT III, positions he has held for each of these entities since June 2015. In August 2018 and July 2018, he was elected Secretary and Treasurer of KBS REIT II and KBS REIT III, respectively. He is also the Chief Financial Officer, Treasurer and Secretary of KBS Strategic Opportunity REIT, positions he has held since June 2015. He is also the Chief Financial Officer, Treasurer and Secretary of KBS Growth & Income REIT, positions he has held since June 2015, April 2017 and April 2017, respectively. He was Chief Financial Officer of KRS REIT I from June 2015 until its liquidation in December 2018. He was the Chief Financial Officer, Treasurer and Secretary of KBS Legacy Partners Apartment REIT from June 2015 until its liquidation in December 2018. Mr. Waldvogel is a member of the investment committee formed by our advisor to evaluate and recommend new investment opportunities for us.

Mr. Waldvogel has been employed by an affiliate of our advisor since November 2010. With respect to the KBS-sponsored REITs advised by KBS Capital Advisors, he served as the Director of Finance and Reporting from July 2012 to June 2015 and as the VP Controller Technical Accounting from November 2010 to July 2012. In these roles Mr. Waldvogel was responsible for overseeing internal and external financial reporting, valuation analysis, financial analysis, REIT compliance, debt compliance and reporting, and technical accounting.

Prior to joining an affiliate of our advisor in 2010, Mr. Waldvogel was an audit senior manager at Ernst & Young LLP. During his eight years at Ernst & Young LLP, where he worked from October 2002 to October 2010, Mr. Waldvogel performed or supervised various auditing engagements, including the audit of financial statements presented in accordance with GAAP, as well as financial statements prepared on a tax basis. These auditing engagements were for clients in a variety of industries, with a significant focus on clients in the real estate industry.

In April 2002, Mr. Waldvogel received a Master of Accountancy Degree and Bachelor of Science from Brigham Young University in Provo, Utah. Mr. Waldvogel is a Certified Public Accountant (California).

Stacie K. Yamane is our Chief Accounting Officer, a position she has held since our formation in February 2013. Ms. Yamane is also the Chief Accounting Officer, Portfolio Accounting of our advisor and Chief Accounting Officer of KBS REIT II, KBS REIT III, KBS Strategic Opportunity REIT and KBS Growth & Income REIT, positions she has held for these entities since October 2008, October 2008, January 2010, August 2009 and January 2015, respectively. From July 2007 to December 2008, Ms. Yamane served as the Chief Financial Officer of KBS REIT II; from October 2004 to October 2008, she served as Fund Controller of our advisor; from June 2005 to December 2008 and October 2008 through its liquidation in December 2018, she served as Chief Financial Officer and Chief Accounting Officer, respectively, of KBS REIT I.

Ms. Yamane also serves as Senior Vice President/Controller, Portfolio Accounting for KBS Realty Advisors LLC, a position she has held since 2004. She served as a Vice President/Portfolio Accounting with KBS-affiliated investment advisors from 1995 to 2004. At KBS Realty Advisors, from 2004 through 2015, Ms. Yamane was responsible for client accounting/reporting for two real estate portfolios. These portfolios consisted of industrial, office and retail properties as well as land parcels. Ms. Yamane worked closely with portfolio managers, asset managers, property managers and clients to ensure the completion of timely and accurate accounting, budgeting and financial reporting. In addition, she assisted in the supervision and management of KBS Realty Advisors’ accounting department.

Prior to joining an affiliate of our advisor in 1995, Ms. Yamane was an audit manager at Kenneth Leventhal & Company, a CPA firm specializing in real estate. During her eight years at Kenneth Leventhal & Company, Ms. Yamane performed or supervised a variety of auditing, accounting and consulting engagements including the audit of financial statements presented in accordance with GAAP, as well as financial statements presented on a cash and tax basis, the valuation of asset portfolios and the review and analysis of internal control systems. Her experiences with various KBS-affiliated entities and Kenneth Leventhal & Company give her almost 30 years of real estate experience.

Ms. Yamane received a Bachelor of Arts Degree in Business Administration with a dual concentration in Accounting and Management Information Systems from California State University, Fullerton. She is a Certified Public Accountant (inactive California).

The Audit Committee

Our board of directors has established an audit committee. The audit committee’s function is to assist our board of directors in fulfilling its responsibilities by overseeing (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditors’ qualifications and independence, and (iv) the performance of the independent auditors and our internal audit function. The members of the audit committee are Kenneth G. Yee (chairman), Laurent Degryse and John P. Joliet. All of the members of the audit committee are “independent” as defined by the New York Stock Exchange. All members of the audit committee have significant financial and/or accounting experience, and our board of directors has determined that all members of the audit committee satisfy the SEC’s requirements for an “audit committee financial expert.”

Table of Contents

Code of Conduct and Ethics

We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer, principal financial officer and principal accounting officer. Our Code of Conduct and Ethics can be found at http://www.~~kbssorii~~pacificoakcmg.com/offering/reit-ii.

Section 16(a) Beneficial Ownership Reporting Compliance

Under U.S. securities laws, directors, executive officers, and any persons beneficially owning more than 10% of our common stock are required to report their initial ownership of the common stock and most changes in that ownership to the SEC. The SEC has designated specific due dates for these reports, and we are required to identify in this proxy statement those persons who did not file these reports when due. Based solely on our review of copies of the reports filed with the SEC and written representations of our directors and executive officers, we believe all persons subject to the Section 16 reporting requirements filed the reports on a timely basis in 2018.

ITEM 11. EXECUTIVE COMPENSATION

Compensation of Executive Officers

Our conflicts committee, which is composed of all of our independent directors, discharges our board of directors’ responsibilities relating to the compensation of our executives. However, we currently do not have any paid employees and our executive officers do not receive ~~any~~ compensation directly from us for services rendered to us. Our executive officers are officers and/or employees of, or hold an indirect ownership interest in, our advisor, and/or its affiliates, and our executive officers are compensated by these entities, in part, for their services to us ~~or our subsidiaries~~. See Part III, Item 13, “~~Report~~Certain ofRelationships ~~The~~and ~~Conflicts~~Related ~~Committee~~Transactions -and ~~Certain~~Director ~~Transactions~~Independence ~~with~~–Report ~~Related~~of ~~Persons~~the Conflicts Committee” for a discussion of the fees paid to our advisor and its affiliates.

Compensation of Directors

If a director is also one of our executive officers, we do not pay any compensation to that person for services rendered as a director. The amount and form of compensation payable to our independent directors for their service to us is determined by our conflicts committee, based upon recommendations from our advisor. Two of our executive officers, Messrs. Hall and McMillan, manage and control our advisor, and through our advisor, they are involved in recommending and setting the compensation to be paid to our independent directors.

We have provided below certain information regarding compensation earned by or paid to our directors during fiscal year ~~2018~~2019.

Name	~~Fees Earned in 2018 or Paid in Cash (1)~~		~~All~~Fees ~~Other~~Earned ~~Compensation~~in 2019 or Paid in Cash		~~Total~~		All Other Compensation		Total
John P. Joliet	$	~~85,833~~	$	—133,333	$	~~85,833~~	$	—	$	133,333
Laurent Degryse	~~93,333~~		—149,333		~~93,333~~		—		149,333
Kenneth G. Yee	~~93,333~~		—97,333		~~93,333~~		—		97,333
Peter McMillan (2)	—		—		—		—		—
Keith D. Hall (2)	—		—		—		—		—

_____________________

(1) Fees Earned in ~~2018~~2019 or Paid in Cash include meeting fees earned in: (i) ~~2017~~2018 but paid or reimbursed in ~~2018~~2019 as follows: Mr. Degryse $610,333, Mr. Yee $311,333 and Mr. Joliet $59,333; and (ii) ~~2018~~2019 and paid or to be paid in ~~2019~~2020 as follows: Mr. Degryse $103,333, Mr. Yee $113,333 and Mr. Joliet $93,333.

⁽²⁾Directors who are also our executive officers do not receive compensation for services rendered as a director.

Cash Compensation

We will compensate each of our independent directors with an annual retainer of $40,000. In addition, we will pay independent directors for attending board and committee meetings as follows:

• $2,500 in cash for each board meeting attended;

• $2,500 in cash for each committee meeting attended, except that the committee chairman is paid $3,000 for each committee meeting attended;

• $2,000 in cash for each teleconference board meeting attended; and

• $2,000 in cash for each teleconference committee meeting attended, except that the committee chairman is paid $3,000 for each teleconference committee meeting attended.

All directors will receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at board of directors meetings and committee meetings.

7783

Table of Contents

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Stock Ownership

The following table shows, as of March 1, ~~2019~~2020, the amount of our Class A common stock and Class T common stock beneficially owned (unless otherwise indicated) by (i) any person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of each of our Class A common stock and Class T common stock, (ii) our directors, (iii) our executive officers, and (iv) all of our directors and executive officers as a group.

Name and Address of Beneficial Owner of Class A and Class T Shares, as indicated (1)	Amount and Nature of Beneficial Ownership of Class A Shares		Percent of all Class A Shares		Amount and Nature of Beneficial Ownership of Class T Shares	Percent of all Class T Shares
Name and Address of Beneficial Owner of Class A and Class T Shares, as indicated				Amount and Nature of Beneficial Ownership of Class A Shares				Percent of all Class A Shares		Amount and Nature of Beneficial Ownership of Class T Shares		Percent of all Class T Shares
Keith D. Hall, Chief Executive Officer and Director	~~333,769~~	~~(2)(3)~~	~~1.9%~~	334,535	—	—%(1)(2)	1.9%		—		—%
Peter McMillan III, Chairman of the Board, President and Director	~~333,769~~	~~(2)(3)~~	~~1.9%~~	334,535	—	—%(1)(2)	1.9%		—		—%
Jeffrey K. Waldvogel, Chief Financial Officer, Treasurer and Secretary	—		—		—	—%
Michael A. Bender, Chief Financial Officer, Treasurer and Secretary				—			—		—		—%
Stacie K. Yamane, Chief Accounting Officer	—		—		—	—%
John P. Joliet, Independent Director				—			—		—		—%
John P. Joliet, Independent Director	—		—		—	—%
Laurent Degryse, Independent Director				—			—		—		—%
Laurent Degryse, Independent Director	—		—		—	—%
Kenneth G. Yee, Independent Director				—			—		—		—%
Kenneth G. Yee, Independent Director	—		—		—	—%
All directors and executive officers as a group				334,535		(1)(2)	1.9%		—		—%
All directors and executive officers as a group	333,769	(2)(3)	1.9%		—	—%

_____________________

(1) Includes 25,785 Class A shares owned by KBS Capital Advisors, which is indirectly owned and controlled by Keith D. Hall and Peter McMillan III. None of the shares are pledged as security. The address of this beneficial owner is 800 Newport Center Drive, Suite 700, Newport Beach, California 92660.

(2) Includes 25307,~~785~~984 Class A shares owned by ~~KBS~~Willowbrook Capital ~~Advisors~~Group, ~~which~~an isentity ~~indirectly~~ owned and controlled by Keith D. Hall and Peter McMillan III. None of the shares are pledged as security. The address of this beneficial owner is 11150 Santa Monica Blvd., Suite 400, Los Angeles, California 90025.

(3) Includes 307,984 Class A shares owned by Willowbrook Capital Group, an entity owned and controlled by Keith D. Hall and Peter McMillan III. None of the shares are pledged as security.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Director Independence

A majority of our board of directors, Messrs. Degryse, Joliet, and Yee, meet the independence criteria as specified in our charter, as set forth on Appendix A attached hereto. In addition, and although our shares are not listed for trading on any national securities exchange, a majority of our directors, and all of the members of the audit committee and the conflicts committee, are “independent” as defined by the New York Stock Exchange. The New York Stock Exchange standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, our board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). Our board of directors has affirmatively determined that Kenneth G. Yee, John P. Joliet and Laurent Degryse each satisfies the New York Stock Exchange independence standards. Kenneth G. Yee also serves as independent director of ~~KBS~~POSOR ~~Strategic Opportunity REIT~~I. None of these directors has ever served as (or is related to) an employee of ours or any of our predecessors or acquired companies or received or earned any compensation from us or any such entities except for compensation directly related to service as a director of us. Therefore, we believe that all of these directors are independent directors.

Report of the Conflicts Committee

Review of Our Policies

The conflicts committee has reviewed

Filing Compare · Pacific Oak Strategic Opportunity REIT II, Inc.